Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets as of June 30, 2019 and 2018	62
Consolidated Statements of Operations for each of the three years in the period ended June 30, 2019	63
Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30, 2019	64
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended June 30, 2019	65
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2019	66
Notes to Consolidated Financial Statements	67
Report of Independent Registered Public Accounting Firm	116

KLA CORPORATION

(formerly known as KLA-TENCOR CORPORATION)

Consolidated Balance Sheets

	As of June 30,
(In thousands, except par value)	2019				2018
ASSETS
Current assets:
Cash and cash equivalents	$	1,015,994			$	1,404,382
Marketable securities	723,391				1,475,936
Accounts receivable, net	990,113				651,678
Inventories	1,262,500				931,845
Other current assets	323,077				85,159
Total current assets	4,315,075				4,549,000
Land, property and equipment, net	448,799				286,306
Goodwill	2,211,858				354,698
Deferred income taxes	206,141				193,200
Purchased intangible assets, net	1,560,670				19,333
Other non-current assets	265,973				236,082
Total assets	$	9,008,516			$	5,638,619
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	202,416			$	169,354
Deferred system revenue	282,348				—
Deferred service revenue	206,669				69,255
Deferred system profit	—				279,581
Current portion of long-term debt	249,999				—
Other current liabilities	827,054				696,080
Total current liabilities	1,768,486				1,214,270
Non-current liabilities:
Long-term debt	3,173,383				2,237,402
Deferred tax liabilities	702,285				1,197
Deferred service revenue	98,772				71,997
Other non-current liabilities	587,897				493,242
Total liabilities	6,330,823				4,018,108
Commitments and contingencies (Notes 14 and 15)
Stockholders’ equity:
Preferred stock, $0.001 par value, 1,000 shares authorized, none outstanding	—				—
Common stock, $0.001 par value, 500,000 shares authorized, 276,202 and 262,718 shares issued, 159,475 and 156,048 shares outstanding, as of June 30, 2019 and June 30, 2018, respectively	159				156
Capital in excess of par value	2,017,153				617,843
Retained earnings	714,825				1,056,445
Accumulated other comprehensive income (loss)	(73,029		)		(53,933		)
Total KLA stockholders’ equity	2,659,108				1,620,511
Non-controlling interest in consolidated subsidiaries	18,585				—
Total stockholders’ equity	2,677,693				1,620,511
Total liabilities and stockholders’ equity	$	9,008,516			$	5,638,619

See accompanying notes to Consolidated Financial Statements.

KLA CORPORATION

(formerly known as KLA-TENCOR CORPORATION)

Consolidated Statements of Operations

	Year ended June 30,
(In thousands, except per share amounts)	2019				2018				2017
Revenues:
Product	$	3,392,243			$	3,160,671			$	2,703,934
Service	1,176,661				876,030				776,080
Total revenues	4,568,904				4,036,701				3,480,014
Costs and expenses:
Costs of revenues	1,869,377				1,446,041				1,286,215
Research and development	711,030				608,531				526,688
Selling, general and administrative	599,124				442,304				388,211
Interest expense	124,604				114,376				122,476
Other expense (income), net	(31,462		)		(30,482		)		(16,822		)
Income before income taxes	1,296,231				1,455,931				1,173,246
Provision for income taxes	121,214				653,666				247,170
Net income	1,175,017				802,265				926,076
Less: Net loss attributable to non-controlling interest	(600		)		—				—
Net income attributable to KLA	$	1,175,617			$	802,265			$	926,076
Net income per share attributable to KLA
Basic	$	7.53			$	5.13			$	5.92
Diluted	$	7.49			$	5.10			$	5.88
Weighted-average number of shares:
Basic	156,053				156,346				156,468
Diluted	156,949				157,378				157,481

See accompanying notes to Consolidated Financial Statements.

KLA CORPORATION

(formerly known as KLA-TENCOR CORPORATION)

Consolidated Statements of Comprehensive Income

	Year ended June 30,
(In thousands)	2019				2018				2017
Net income	$	1,175,017			$	802,265			$	926,076
Other comprehensive income (loss):
Currency translation adjustments:
Change in currency translation adjustments	(5,190		)		1,358				2,332
Change in income tax benefit or expense	117				(678		)		(562		)
Net change related to currency translation adjustments	(5,073		)		680				1,770
Cash flow hedges:
Change in net unrealized gains or losses	(9,119		)		(1,934		)		10,138
Reclassification adjustments for net gains or losses included in net income	(4,018		)		(3,846		)		(3,222		)
Change in income tax benefit or expense	2,033				2,491				(2,470		)
Net change related to cash flow hedges	(11,104		)		(3,289		)		4,446
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans	(1,824		)		7,162				(1,534		)
Available-for-sale securities:
Change in net unrealized gains or losses	11,664				(9,697		)		(8,568		)
Reclassification adjustments for net gains or losses included in net income	1,294				209				(191		)
Change in income tax benefit or expense	(3,208		)		2,325				1,439
Net change related to available-for-sale securities	9,750				(7,163		)		(7,320		)
Other comprehensive loss	(8,251		)		(2,610		)		(2,638		)
Comprehensive loss attributable to non-controlling interest	(600		)		—				—
Total comprehensive income attributable to KLA	$	1,167,366			$	799,655			$	923,438

See accompanying notes to Consolidated Financial Statements.

KLA CORPORATION

(formerly known as KLA-TENCOR CORPORATION)

Consolidated Statements of Stockholders’ Equity

	Common Stock and Capital in Excess of Par Value							Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total KLA Stockholders’ Equity				Non-Controlling Interest				Total Stockholders’ Equity
(In thousands, except per share amounts)	Shares			Amount
Balances as of June 30, 2016	155,995			$	452,974			$	284,825			$	(48,685	)		$	689,114			$	—			$	689,114
Net income	—			—				926,076				—				926,076				—				926,076
Other comprehensive loss	—			—				—				(2,638		)		(2,638		)		—				(2,638		)
Net issuance under employee stock plans	1,088			26,132				—				—				26,132				—				26,132
Repurchase of common stock	(243	)		(766		)		(24,236		)		—				(25,002		)		—				(25,002		)
Cash dividends ($2.14 per share) and dividend equivalents declared	—			—				(338,208		)		—				(338,208		)		—				(338,208		)
Stock-based compensation expense	—			50,943				—				—				50,943				—				50,943
Balances as of June 30, 2017	156,840			529,283				848,457				(51,323		)		1,326,417				—				1,326,417
Net income	—			—				802,265				—				802,265				—				802,265
Other comprehensive loss	—			—				—				(2,610		)		(2,610		)		—				(2,610		)
Net issuance under employee stock plans	1,168			32,687				—				—				32,687				—				32,687
Repurchase of common stock	(1,960	)		(6,755		)		(196,414		)		—				(203,169		)		—				(203,169		)
Cash dividends ($2.52 per share) and dividend equivalents declared	—			—				(397,863		)		—				(397,863		)		—				(397,863		)
Stock-based compensation expense	—			62,784				—				—				62,784				—				62,784
Balances as of June 30, 2018	156,048			617,999				1,056,445				(53,933		)		1,620,511				—				1,620,511
Adoption of ASC 606	—			—				(21,215		)		75				(21,140		)		—				(21,140		)
Reclassification of stranded tax effects	—			—				10,920				(10,920		)		—				—				—
Balance as of July 1, 2018	156,048			617,999				1,046,150				(64,778		)		1,599,371				—				1,599,371
Net income attributable to KLA	—			—				1,175,617				—				1,175,617				—				1,175,617
Net loss attributable to non-controlling interest	—			—				—				—				—				(600		)		(600		)
Other comprehensive loss	—			—				—				(8,251		)		(8,251		)		—				(8,251		)
Assumption of stock-based compensation plan awards in connection with the acquisition of Orbotech	—			13,281				—				—				13,281				—				13,281
Common stock issued upon the acquisition of Orbotech	12,292			1,330,786				—				—				1,330,786				—				1,330,786
Net issuance under employee stock plans	1,342			27,321				—				—				27,321				—				27,321
Repurchase of common stock	(10,207	)		(66,269		)		(1,036,933		)		—				(1,103,202		)		—				(1,103,202		)
Cash dividends ($3.00 per share) and dividend equivalents declared	—			—				(470,009		)		—				(470,009		)		—				(470,009		)
Non-controlling interest in connection with the acquisition of Orbotech	—			—				—				—				—				19,185				19,185
Stock-based compensation expense	—			94,194				—				—				94,194				—				94,194
Balances as of June 30, 2019	159,475			$	2,017,312			$	714,825			$	(73,029	)		$	2,659,108			$	18,585			$	2,677,693

See accompanying notes to Consolidated Financial Statements.

KLA CORPORATION

(formerly known as KLA-TENCOR CORPORATION)

Consolidated Statements of Cash Flows

	Year Ended June 30,
(In thousands)	2019				2018				2017
Cash flows from operating activities:
Net income	$	1,175,017			$	802,265			$	926,076
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	233,224				62,684				57,836
Loss (gains) on unrealized foreign exchange and other	4,051				9,886				(4,173		)
Stock-based compensation expense	94,194				62,784				50,943
Deferred income taxes	(27,511		)		98,760				4,007
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:
Accounts receivable	(146,151		)		(76,033		)		39,750
Inventories	(59,561		)		(179,605		)		(46,549		)
Other assets	(47,123		)		(41,748		)		(25,961		)
Accounts payable	(21,627		)		21,778				39,968
Deferred system revenue	(15,674		)		—				—
Deferred service revenue	15,064				—				—
Deferred system profit	—				99,457				6,310
Other liabilities	(51,271		)		368,892				31,458
Net cash provided by operating activities	1,152,632				1,229,120				1,079,665
Cash flows from investing activities:
Acquisition of non-marketable securities	(630		)		(3,377		)		(3,430		)
Business acquisitions, net of cash acquired	(1,818,283		)		(17,403		)		(28,560		)
Capital expenditures	(130,498		)		(66,947		)		(38,594		)
Proceeds from sale of assets	—				—				2,947
Purchases of available-for-sale securities	(81,533		)		(466,330		)		(1,626,983		)
Proceeds from sale of available-for-sale securities	256,395				233,259				434,873
Proceeds from maturity of available-for-sale securities	589,324				608,446				699,293
Purchases of trading securities	(81,022		)		(77,922		)		(97,525		)
Proceeds from sale of trading securities	85,265				81,892				97,093
Net cash (used in) provided by investing activities	(1,180,982		)		291,618				(560,886		)
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs	1,183,785				—				—
Proceeds from revolving credit facility, net of debt issuance costs	900,000				248,693				—
Repayment of debt	(902,474		)		(946,250		)		(130,000		)
Common stock repurchases	(1,095,202		)		(203,169		)		(25,002		)
Payment of dividends to stockholders	(472,263		)		(402,065		)		(343,993		)
Issuance of common stock	64,828				61,444				45,359
Tax withholding payments related to vested and released restricted stock units	(37,517		)		(28,756		)		(19,169		)
Payment of contingent consideration payable	(1,162		)		—				—
Net cash used in financing activities	(360,005		)		(1,270,103		)		(472,805		)
Effect of exchange rate changes on cash and cash equivalents	(33		)		696				(1,411		)
Net (decrease) increase in cash and cash equivalents	(388,388		)		251,331				44,563
Cash and cash equivalents at beginning of period	1,404,382				1,153,051				1,108,488
Cash and cash equivalents at end of period	$	1,015,994			$	1,404,382			$	1,153,051
Supplemental cash flow disclosures:
Income taxes paid, net	$	180,470			$	253,128			$	234,053
Interest paid	$	107,073			$	114,238			$	119,998
Non-cash activities:
Issuance of common stock for the acquisition of Orbotech - financing activities	$	1,330,786			$	—			$	—
Contingent consideration payable - financing activities	$	6,905			$	—			$	—
Dividends payable - financing activities	$	7,340			$	9,571			$	13,772
Business acquisition holdback amounts - investing activities	$	440			$	—			$	5,318
Unsettled common stock repurchase - financing activities	$	8,000			$	—			$	—
Accrued purchase of land, property and equipment - investing activities	$	6,353			$	7,418			$	3,299

See accompanying notes to Consolidated Financial Statements.

KLA CORPORATION

Notes to Consolidated Financial Statements

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

Description of Business and Principles of Consolidation. On July 15, 2019, we changed our corporate name from “KLA-Tencor Corporation” to “KLA Corporation”. For purposes of this report, “KLA,” the “Company,” “we,” “our,” “us,” or similar references mean KLA Corporation, and its majority-owned subsidiaries unless the context requires otherwise. We are a supplier of process equipment, process control equipment, and data analytics products for a broad range of industries, including semiconductors, printed circuit boards and displays. We provide advanced process control and process-enabling solutions for manufacturing and testing wafers and reticles, integrated circuits (“IC” or “chip”), packaging, light emitting diodes, power devices, compound semiconductor devices, microelectromechanical systems, data storage, printed circuit boards and flat and flexible panel displays, as well as general materials research. Our comprehensive portfolio of inspection, metrology and data analytics products, and related services, helps integrated circuit manufacturers achieve target yield throughout the entire semiconductor fabrication process, from research and development to final volume production. We develop and sell advanced vacuum deposition and etching process tools, which are used by a broad range of specialty semiconductor customers. We enable electronic device manufacturers to inspect, test and measure printed circuit boards (“PCBs”) and flat panel displays (“FPDs) and ICs to verify their quality, pattern the desired electronic circuitry on the relevant substrate and perform three-dimensional shaping of materialized circuits on multiple surfaces. Our advanced products, coupled with our unique yield management services, allow us to deliver the solutions our semiconductor, printed circuit board and display customers need to achieve their productivity goals, by significantly reducing their risks and costs. Headquartered in Milpitas, California, we have subsidiaries both in the United States and in key markets throughout the world.

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

Acquisition of Orbotech, Ltd. On February 20, 2019 (the “Closing Date” or “Acquisition Date”), we completed the acquisition of Orbotech, Ltd. (“Orbotech”) for $38.86 in cash and 0.25 of a share of our common stock in exchange for each ordinary share of Orbotech for a total consideration of $3.26 billion. The acquisition of Orbotech is referred to as the “Orbotech Acquisition”. The Orbotech Acquisition was accounted for by applying the acquisition method of accounting for business combinations. The Consolidated Financial Statements in this report include the financial results of Orbotech prospectively from the Acquisition Date. For additional details, refer to Note 6 “Business Combinations.”

Subsequent to the Orbotech Acquisition, we changed our organizational structure, resulting in four reportable segments: Semiconductor Process Control; Specialty Semiconductor Process; PCB, Display and Component Inspection; and Other. Prior period results have been recast to conform to the current presentation. For additional information, refer to Note 17, “Segment Reporting and Geographic Information.”

Comparability. Effective on the first day of fiscal 2019, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASC 606”). Prior periods were not retrospectively restated, and accordingly, the Consolidated Balance Sheets as of June 30, 2018, and the Consolidated Statements of Operations for the year ended June 30, 2018 were prepared using accounting standards that were different from those in effect for the year ended June 30, 2019.

Certain reclassifications have been made to the prior year’s Consolidated Financial Statements to conform to the current year presentation. The reclassifications did not have material effects on the prior year’s Consolidated Balance Sheets, Statements of Operations, Comprehensive Income and Cash Flows.

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

Cash Equivalents and Marketable Securities. All highly liquid debt instruments with original or remaining maturities of less than three months at the date of purchase are considered to be cash equivalents. Marketable securities are generally classified as available-for-sale for use in current operations, if required, and are reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss).” All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are recorded in earnings in the period of occurrence. The specific identification method is used to determine the realized gains and losses on investments. For all investments in debt and equity securities, we assess whether the

impairment is other than temporary. If the fair value of a debt security is less than its amortized cost basis, an impairment is considered other than temporary if (i) we have the intent to sell the security or it is more likely than not that we will be required to sell the security before recovery of its entire amortized cost basis, or (ii) we do not expect to recover the entire amortized cost of the security. If an impairment is considered other than temporary based on condition (i), the entire difference between the amortized cost and the fair value of the security is recognized in earnings. If an impairment is considered other than temporary based on condition (ii), the amount representing credit losses, defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security, will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income (loss). We evaluate both qualitative and quantitative factors such as duration and severity of the unrealized losses, credit ratings, default and loss rates of the underlying collateral, structure and credit enhancements to determine if a credit loss may exist.

Non-Marketable Equity Securities. We acquire certain non-marketable equity investments for the promotion of business and strategic objectives. Non-marketable equity securities do not give us the ability to exercise significant influence over the investees and are accounted for at cost, less impairment, plus or minus observable price changes for identical or similar securities of the same issuer. Non-marketable equity securities are included in “Other non-current assets” on the balance sheet. Non-marketable equity securities are subject to a periodic impairment review; however, since there are no open-market valuations, the impairment analysis requires significant judgment. This analysis includes assessment of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, financing transactions subsequent to the acquisition of the investment, the likelihood of obtaining subsequent rounds of financing and the impact of any relevant contractual equity preferences held by us or the others.

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

Inventories. Inventories are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less costs of completion, disposal and transportation. Demonstration units are stated at their manufacturing cost and written down to their net realizable value. We review and set standard costs at current manufacturing costs in order to approximate actual costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of forecasted spending over projected volumes, adjusted for excess capacity. Abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and spoilage are recognized as current period charges. We write down product inventory based on forecasted demand and technological obsolescence and service spare parts inventory based on forecasted usage. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values.

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

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

Asset Category	Range of Useful Lives
Buildings	30 to 50 years
Leasehold improvements	Shorter of 15 years or lease term
Machinery and equipment	2 to 10 years
Office furniture and fixtures	7 years

Construction-in-process assets are not depreciated until the assets are placed in service. Depreciation expense for the fiscal years ended June 30, 2019, 2018 and 2017 was $72.6 million, $53.3 million and $49.1 million, respectively.

Goodwill and Purchased Intangible Assets. Effective May 1, 2019, with the change in our reportable segments, we have determined there are now six reporting units, to which goodwill is allocated using an acquisition accounting method. We assess goodwill for impairment annually as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We perform either a qualitative or quantitative analysis when testing a reporting unit’s goodwill for impairment. A qualitative goodwill impairment test is performed when the fair value of a reporting unit historically has significantly exceeded the carrying value of its net assets and based on current operations is expected to continue to do so. Otherwise, we are required to conduct a quantitative impairment test for each reporting unit and estimates the fair value of each reporting unit using a combination of a discounted cash flow analysis and a market approach based on market multiples. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded for the difference. We performed our annual qualitative assessment of the goodwill by reporting unit during the third quarter of the fiscal year ended June 30, 2019 and concluded that there was no impairment. In addition, as a result of the Orbotech Acquisition, during the fourth quarter of the fiscal year ended June 30, 2019 we updated our organizational structure and performed a qualitative assessment of the goodwill for our reporting units, which were impacted by the organizational change, and concluded that there were no impairment indicators affecting the valuation of goodwill subsequent to our annual impairment test. The next annual evaluation of the goodwill by reporting unit will be performed in the third quarter of the fiscal year ending June 30, 2020.

Long-lived purchased intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. See Note 7, “Goodwill and Purchased Intangible Assets” for additional details.

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

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

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

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

The following customers each accounted for more than 10% of total revenues primarily in Semiconductor Process Control segment for the indicated periods:

Year ended June 30,
2019		2018		2017
Taiwan Semiconductor Manufacturing Company Limited		Samsung Electronics Co., Ltd.		Samsung Electronics Co., Ltd.
				Taiwan Semiconductor Manufacturing Company Limited

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

As of June 30,
2019		2018
Taiwan Semiconductor Manufacturing Company Limited		Samsung Electronics Co., Ltd.
		Taiwan Semiconductor Manufacturing Company Limited
		SK Hynix, Inc.

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

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

Derivative Financial Instruments. We use financial instruments, such as forward exchange contracts and currency options, to hedge a portion of, but not all, existing and forecasted foreign currency denominated transactions. The purpose of our foreign currency program is to manage the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The effect of exchange rate changes on forward exchange contracts is expected to offset the effect of exchange rate changes on the underlying hedged items. We also use 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. We believe these financial instruments do not subject us to speculative risk that would otherwise result from changes in currency exchange rates or interest rates. All of our derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments adjusted for risk of counterparty non-performance.

For derivative instruments designated and qualifying as cash flow hedges of forecasted foreign currency denominated transactions or debt financing expected to occur within twelve to eighteen months, the effective portion of the gains or losses is reported in accumulated other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. In the second quarter of our fiscal year ending June 30, 2019, we early adopted the new accounting guidance for hedge accounting. Prior to adopting this new accounting guidance, time value was excluded from the assessment of effectiveness for derivative instruments designated as cash flow hedges. Time value was amortized on a mark-to-market basis and recognized in earnings over the life of the derivative contract. For derivative contracts executed after adopting the new accounting guidance, the election to include time value for the assessment of effectiveness is made on all forward contracts designated as cash flow hedges. The change in fair value of the derivative are recorded in OCI until the hedged transaction is recognized in earnings. The assessment effectiveness of options contracts designated as cash flow hedges continue to exclude time value after adopting the new accounting guidance. The initial value of the component excluded from the assessment of effectiveness are recognized in earnings over the life of the derivative contracts. Any difference between change in the fair value of the excluded components and the amounts recognized in earnings are recorded in OCI. For derivative instruments that are not designated as a cash flow hedge, gains and losses are recognized in other expense (income), net. We use foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivative instruments are largely offset by the changes in the fair value of the assets or liabilities being hedged.

Revenue Recognition. We primarily derive revenue from the sale of process control and yield management solutions for the semiconductor and related nanoelectronics industries, maintenance and support of all these products, installation and training services and the sale of spare parts. Our solutions provide a comprehensive portfolio of inspection, metrology and data analytics products, which are accompanied by a flexible portfolio of services to enable our customers to maintain the performance and productivity of the solutions purchased. The acquisition of Orbotech enabled us to broaden our portfolio to include the yield enhancement and production solutions used by manufacturers of printed circuit boards, flat panel displays, advanced packaging, micro-electro-mechanical systems and other electronic components.

Our solutions are generally not sold with a right of return, nor have we experienced significant returns from or refunds to our customers.

We account for a contract with a customer when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectibility of consideration is probable.

Our revenues are measured based on consideration stipulated in the arrangement with each customer, net of any sales incentives and amounts collected on behalf of third parties, such as sales taxes. The revenues are recognized as separate performance obligations that are satisfied by transferring control of the product or service to the customer.

Our arrangements with our customers include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. A product or service is considered distinct if it is separately identifiable from other deliverables in the arrangement and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

The transaction consideration, including any sales incentives, is allocated between separate performance obligations of an arrangement based on the stand-alone selling prices (“SSP”) for each distinct product or service. Management considers a variety of factors to determine the SSP, such as, historical standalone sales of products and services, discounting strategies and other observable data.

From time to time, our contracts are modified to account for additional, or to change existing, performance obligations. Our contract modifications are generally accounted for prospectively.

Product Revenue

We recognize revenue from product sales at a point in time when we have satisfied our performance obligation by transferring control of the product to the customer. We use judgment to evaluate whether the control has transferred by considering several indicators, including:

•	whether we have a present right to payment;

•	the customer has legal title;

•	the customer has physical possession;

•	the customer has significant risk and rewards of ownership; and

•

the customer has accepted the product, or whether customer acceptance is considered a formality based on history of acceptance of similar products (for example, when the customer has previously accepted the same tool, with the same specifications, and when we can objectively demonstrate that the tool meets all of the required acceptance criteria, and when the installation of the system is deemed perfunctory).

Not all of the indicators need to be met for us to conclude that control has transferred to the customer. In circumstances in which revenue is recognized prior to the product acceptance, the portion of revenue associated with our performance obligations to install product is deferred and recognized upon acceptance.

We enter into volume purchase agreements with some of our customers. We adjust the transaction consideration for estimated credits earned by our customers for such incentives. These credits are estimated based upon the forecasted and actual product sales for any given period and agreed-upon incentive rate. The estimate is updated at each reporting period.

We offer perpetual and term licenses for defects and data analysis software. The primary difference between perpetual and term licenses is the duration over which the customer can benefit from the use of the software, while the functionality and the features of the software are the same. With the acquisition of Orbotech we offer computer-aided manufacturing and engineering software solutions for the printed circuit boards production. Software is generally bundled with post-contract customer support (“PCS”), which includes unspecified software updates that are made available throughout the entire term of the arrangement. Revenue from software licenses is recognized at a point in time, when the software is made available to the customer. Revenue from PCS is deferred at contract inception and recognized ratably over the service period, or as services are performed.

Services and Spare Parts Revenue

The majority of product sales include a standard 6 to 12-month warranty that is not separately paid for by the customers. The customers may also purchase extended warranty for periods beyond the initial year as part of the initial product sale. We have concluded that the standard 12-month warranty as well as any extended warranty periods included in the initial product sales are separate performance obligations. The estimated fair value of warranty services is deferred and recognized ratably as revenue over the warranty period, as the customer simultaneously receives and consumes the benefits of warranty services provided by us.

Additionally, we offer product maintenance and support services, which the customer may purchase separately from the standard and extended warranty offered as part of the initial product sale. Revenue from separately negotiated maintenance and support service contracts is also recognized over time based on the terms of the applicable service period. Revenue from services performed in the absence of a maintenance contract, including training revenue, is recognized when the related services are performed. We also sell spare parts, revenue from which is recognized when control over the spare parts is transferred to the customer.

Installation services include connecting and validating configuration of the product. In addition, several testing protocols are completed to confirm the equipment is performing to customer specifications. Revenues from product installation are deferred and recognized at a point in time, once installation is complete.

Significant Judgments

Our contracts with our customers often include promises to transfer multiple products and services. Each product and service is generally capable of being distinct within the context of the contract and represents a separate performance obligation. Determining the SSP for each distinct performance obligation and allocation of consideration from an arrangement to the individual performance obligations and the appropriate timing of revenue recognition are significant judgments with respect to these arrangements. We typically estimate the SSP of products and services based on observable transactions when the products and services are sold on a standalone basis and those prices fall within a reasonable range. We typically have more than one SSP for individual products and services due to the stratification of these products by customers and circumstances. In these instances, we use information such as the size of the customer, geographic region, as well as customization of the products in determining the SSP. In instances where the SSP is not directly observable, we determine the SSP using information that includes market conditions, entity-specific factors, including discounting strategies, information about the customer or class of customer that is reasonably available and other observable inputs. While changes in the allocation of SSP between performance obligations will not affect the amount of total revenue recognized for a particular contract, any material changes could impact the timing of revenue recognition, which could have a material effect on our financial position and result of operations.

Although the products are generally not sold with a right of return, we may provide other credits or sales incentives, which are accounted for either as variable consideration or material right, depending on the specific terms and conditions of the arrangement. These credits and incentives are estimated at contract inception and updated at the end of each reporting period if and when additional information becomes available.

As outlined above, we use judgments to evaluate whether or not the customer has obtained control of the product and considers the several indicators in evaluating whether or not control has transferred to the customer. Not all of the indicators need to be met for us to conclude that control has transferred to the customer.

Contract Assets/Liabilities

The timing of revenue recognition, billings and cash collections may result in accounts receivable, contract assets, and contract liabilities (deferred revenue) on our Consolidated Balance Sheets. A receivable is recorded in the period we deliver products or provide services when we have an unconditional right to payment. Contract assets primarily relate to the value of products and services transferred to the customer for which the right to payment is not just dependent on the passage of time. Contract assets are transferred to receivable when rights to payment become unconditional.

A contract liability is recognized when we receive payment or have an unconditional right to payment in advance of the satisfaction of performance. The contract liabilities represent (1) deferred product revenue related to the value of products that have been shipped and billed to customers and for which the control has not been transferred to the customers, and (2) deferred service revenue, which is recorded when we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring services to the customer under the terms of a contract. Deferred service revenue typically results from warranty services, and maintenance and other service contracts.

Contract assets and liabilities related to rights and obligations in a contract are recorded net in the Consolidated Balance Sheets. Upon the adoption of ASC 606, deferred costs of revenue are included in other current assets while under the legacy guidance deferred costs of revenue was included in deferred system profit.

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

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

Accounting for Stock-Based Compensation Plans. We account for stock-based awards granted to employees for services based on the fair value of those awards. The fair value of stock-based awards is measured at the grant date and is recognized as expense over the employee’s requisite service period. The fair value for restricted stock units granted without “dividend equivalent” rights is determined using the closing price of our common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on the restricted stock units. The fair value for restricted stock units granted with “dividend equivalent” rights is determined using the closing price of our common stock on the grant date. The award holder is not entitled to receive payments under dividend equivalent rights unless the associated restricted stock unit award vests (i.e., the award holder is entitled to receive credits, payable in cash or shares of common stock, equal to the cash dividends that would have been received on the shares of our common stock underlying the restricted stock units had the shares been issued and outstanding on the dividend record date, but such dividend equivalents are only paid subject to the recipient satisfying the vesting requirements of the underlying award). Compensation expense for restricted stock units with performance metrics is calculated based upon expected achievement of the metrics specified in the grant, or when a grant contains a market condition, the grant date fair value using a Monte Carlo simulation. The Monte Carlo simulation incorporates estimates of the potential outcomes of the market condition on the grant date fair value of each award. Additionally, we estimate forfeitures based on historical experience and revise those estimates in subsequent periods if actual forfeitures differ from the estimated amounts. The fair value is determined using a Black-Scholes valuation model for purchase rights under our Employee Stock Purchase Plan. The Black-Scholes option-pricing model requires the input of assumptions, including the option’s expected term and the expected price volatility of the underlying stock. The expected stock price volatility assumption is based on the market-based historical implied volatility from traded options of our common stock.

Accounting for Cash-Based Long-Term Incentive Compensation. Cash-based long-term incentive (“Cash LTI”) awards issued to employees under our Cash LTI program vests 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 and adjusted for the impact of estimated forfeitures.

Accounting for Non-qualified Deferred Compensation Plan. We have a non-qualified deferred compensation plan (known as “Executive Deferred Savings Plan”) under which certain executives and non-employee directors may defer a portion of their compensation. Participants are credited with returns based on their allocation of their account balances among measurement funds. We control the investment of these funds, and the participants remain general creditors of ours. We invest these funds in certain mutual funds and such investments are classified as trading securities in the Consolidated Balance Sheets. Investments in trading securities are measured at fair value in the statement of financial position. Unrealized holding gains and losses for trading securities are included in earnings. Distributions from the Executive Deferred Savings Plan commence following a participant’s retirement or termination of employment or on a specified date allowed per the Executive Deferred Savings Plan provisions, except in cases where such distributions are required to be delayed in order to avoid a prohibited distribution under Internal Revenue Code Section 409A. Participants can generally elect the distributions to be paid in lump sum or quarterly cash payments over a scheduled period for up to 15 years and are allowed to make subsequent changes to their existing elections as permissible under the Executive Deferred Savings Plan provisions. The liability associated with the Executive Deferred Savings Plan is included as a component of other current liabilities in the Consolidated Balance Sheets. Changes in the Executive Deferred Savings Plan liability is recorded in selling, general and administrative expense in the Consolidated Statements of Operations. The expense associated with changes in the liability included in selling, general and administrative expense was $13.6 million, $19.9 million and $20.9 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively. We also have a deferred compensation asset that corresponds to the liability under the Executive Deferred Savings Plan and it is included as a component of other non-current assets in the Consolidated Balance Sheets. Changes in the Executive Deferred Savings Plan assets are recorded as gains (losses), net in selling, general and administrative expense in the Consolidated Statements of Operations. The amount of net gains included in selling, general and administrative expense were $14.7 million, $19.5 million and $20.8 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

Income Taxes. 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. 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 its calculation of the transition tax liability.

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

On a quarterly basis, we provide for income taxes based upon an estimated annual effective income tax rate. The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of our tax planning strategies. We carefully monitor the changes in many factors and adjust our effective income tax rate on a timely basis. If actual results differ from these estimates, this could have a material effect on our financial condition and results of operations.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In accordance with the authoritative guidance on accounting for uncertainty in income taxes, we recognize liabilities for uncertain tax positions based on the two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained in audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

We record income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the U.S. Our effective tax rate would be adversely affected if we change our intent or if such undistributed earnings are needed for U.S. operations because we would be required to provide or pay income taxes on some or all of these undistributed earnings.

Global Intangible Low-Taxed Income. The Tax Cuts and Jobs Act (the “Act”) includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate in general. As a result, our deferred tax assets and liabilities were being evaluated to determine if the deferred tax assets and liabilities should be recognized for the basis differences expected to reverse as a result of GILTI provisions that are effective for us after the fiscal year ending June 30, 2018, or should the tax on GILTI provisions be recognized as period costs in each year incurred. We elected to account for GILTI as a component of current period tax expense starting from the first quarter of the fiscal year ending June 30, 2019.

Business Combinations. Accounting for business combinations requires management to make significant estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the acquisition date. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain acquired intangible assets include, but are not limited to future expected cash flows including revenue growth rate assumptions from product sales, customer contracts and acquired technologies, expected costs to develop in-process research and development into commercially viable products, estimated cash flows from the projects when completed, including assumptions associated with the technology migration curve, estimated royalty rates used in valuing technology related intangible assets, and discount rates. The discount rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results.

We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these net tangible and intangible assets acquired is recorded as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which will not exceed one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of the purchase price of our acquisitions, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations.

The fair value of IPR&D is initially capitalized as an intangible asset with an indefinite life and assessed for impairment thereafter whenever events or changes in circumstances indicate that the carrying value of the IPR&D assets may not be recoverable. Impairment of IPR&D is recorded to research and development expenses. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized to costs of revenues over the asset’s estimated useful life.

Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

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

Contingencies and Litigation. We are subject to the possibility of losses from various contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We accrue a liability and recognize as expense the estimated costs expected to be incurred to defend or settle asserted and unasserted claims existing as of the balance sheet date. See Note 14, “Commitments and Contingencies” and Note 15, “Litigation and Other Legal Matters” for additional details.

Recent Accounting Pronouncements

Recently Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, which supersedes the guidance in ASC 605, Revenue Recognition (“ASC 605”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASC 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted the ASC 606 as of July 1, 2018 in our first quarter of our fiscal year ending June 30, 2019, using the modified retrospective transition approach. For additional detail, refer to Note 2 “Revenue.”

In January 2016, the FASB issued an accounting standard update that changes the accounting for financial instruments primarily related to equity investments (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee), financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a prospective basis and the adoption had no material impact on our Consolidated Financial Statements.

In August 2016, the FASB issued an accounting standard update intended to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a retrospective basis and the adoption had no material impact on our Consolidated Financial Statements.

In October 2016, the FASB issued an accounting standard update to recognize the income tax consequences of intra-entity transfers of assets other than inventory when they occur. This eliminates the exception to postpone recognition until the asset has been sold to an outside party. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a modified retrospective basis and the adoption had no material impact on our Consolidated Financial Statements.

In January 2017, the FASB issued an accounting standard on clarifying the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a prospective basis and the adoption had no material impact on our Consolidated Financial Statements.

In January 2017, the FASB issued an accounting standard update to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test, which requires an entity to determine the fair value of assets and liabilities similar to what is required in a purchase price allocation. Under the update, goodwill impairment will be calculated as the amount by which a reporting unit’s carrying value exceeds our fair value. We early adopted this update in the first quarter of our fiscal year ending June 30, 2019 on a prospective basis and the adoption had no material impact on our Consolidated Financial Statements.

In March 2017, the FASB issued an accounting standard update that changes the statements of operations classification of net periodic benefit cost related to defined benefit pension and/or other post-retirement benefit plans. Under the update, employers will present the service cost component of net periodic benefit cost in the same statements of operations line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit costs separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a retrospective basis and the adoption had no material impact on our Consolidated Financial Statements.

In May 2017, the FASB issued an accounting standard update regarding stock compensation that provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in order to reduce diversity in practice and reduce complexity. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a prospective basis and the adoption had no material impact on our Consolidated Financial Statements.

In August 2017, the FASB issued an accounting standard update to hedge accounting to better align 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. We early adopted this update in the second quarter of our fiscal year ending June 30, 2019 under the modified retrospective approach. The cumulative effect adjustment for the elimination of the ineffectiveness was not material to our Consolidated Financial Statements. The presentation and disclosure have been amended on a prospective basis, as required by this update.

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 (“AOCI”) to retained earnings. We early adopted this update in the first quarter of our fiscal year ending June 30, 2019 and applied this update in the period of adoption. As a result of the adoption, we made a reclassification from AOCI to beginning retained earnings of approximately $10.9 million related to the stranded tax effects.

Updates Not Yet Effective

In February 2016, the FASB issued an accounting standard update, Leases (Topic 842), (“ASC 842”) which supersedes the lease recognition requirements in Leases (Topic 840), (“ASC 840”). ASC 842 establishes a right- of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases. Consistent with ASC 840, leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new guidance will be effective for us starting in the first quarter of our fiscal year ending June 30, 2020. ASC 842 requires a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued an accounting standard update which amends ASC 842 and offers an additional (and optional) transition method by which entities may elect not to recast the comparative periods presented in financial statements in the period of adoption. This ASU has the same transition requirements and effective date as ASC 842. We will adopt ASC 842 using the optional adoption method and thereby not adjust comparative financial statements. Consequently, our reporting for the comparative periods presented in the year of adoption would continue to be in accordance with ASC 840, including the disclosure requirements of ASC 840. We currently plan to apply the package of practical expedients to leases that commenced before the effective date whereby we will elect to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. We have enhanced system functionality to enable the preparation and reporting of financial information and are evaluating related processes and internal controls. We expect the most significant impact upon the adoption of this standard to be the recognition of ROU assets and lease liabilities on our Consolidated Balance Sheets. We do not expect the adoption of this standard will have a significant impact on our Consolidated Statements of Operations or Cash Flows.

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

In August 2018, the FASB issued an accounting standard update which modifies the existing accounting standards for fair value measurement disclosure. This update eliminates the disclosure of the amount of and reasons for transfers between level 1 and level 2 of the fair value hierarchy, and the policy for timing of transfers between levels. This standard update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Consolidated Financial Statements.

In August 2018, the FASB issued an accounting standard update to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. Some of the changes include adding a disclosure requirement for significant gains and losses related to changes in the benefit obligation for the period and removing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This standard update is effective for us beginning in the first quarter of the fiscal year ending June 30, 2021, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Consolidated Financial Statements.

In August 2018, the FASB issued an accounting standard update to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance clarifies which costs should be capitalized including the cost to acquire the license and the related implementation costs. This standard update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, with an option to be adopted either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Consolidated Financial Statements.

NOTE 2 — REVENUE

New Revenue Accounting Standard

Method and Impact of Adoption

At the beginning of the fiscal year 2019, we adopted ASC 606 using the modified retrospective transition approach for all contracts completed and not completed as of the date of adoption. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with ASC 605. A cumulative effect of applying ASC 606 was recorded to the beginning retained earnings to reflect the impact of all existing arrangements under ASC 606.

The cumulative effect of applying ASC 606 represents a net decrease to retained earnings of $21.0 million as of July 1, 2018, which primarily related to the following:

•

A decrease of approximately $97.0 million in retained earnings related to the deferral of estimated fair value of the warranty services provided with our products for which revenue will be recognized in future periods under ASC 606. Further, upon adoption of ASC 606, we recognize the standard warranty for a majority of products as a separate performance obligation, while in prior periods, we accounted for the estimated warranty cost as a charge to costs of revenues when revenue was recognized. This was partially offset by an increase in retained earnings of approximately $37.0 million related to reversal of standard warranty expense, which was charged to costs of revenues in prior periods.

•	An increase in retained earnings of approximately $26.0 million due to a change in the timing of transfer of control over products to the customers.

Under ASC 606, revenue is recognized earlier than it would have been recognized under legacy guidance primarily due to our assessment of timing of transfer of control. Additionally, we render standard warranty coverage on our products for 12 months, providing labor and parts necessary to repair and maintain the products during the warranty period. Prior to adoption of ASC 606, we accounted for the estimated warranty cost as a charge to costs of sales when revenue was recognized. Upon adoption of ASC 606, the standard warranty for the majority of products is recognized as a separate performance obligation in service revenue.

Consistent with our policy, revenue on the majority of Orbotech’s contracts is recognized upon delivery because this represents the point in time at which control is transferred to the customers. Revenues derived from performance obligations such as warranty and service contracts are recognized over the period of the service.

The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our Consolidated Balance Sheets as follows:

As of June 30, 2019 (In thousands)	As Reported Under ASC 606				Prior to Adoption of ASC 606				Effect of Changes
ASSETS
Accounts receivable, net	$	990,113			$	1,097,098			$	(106,985	)
Other current assets	323,077				158,342				164,735
Deferred income taxes	206,141				195,537				10,604
LIABILITIES
Deferred system revenue	$	282,348			$	—			$	282,348
Deferred service revenue	206,669				114,874				91,795
Deferred system profit	—				382,085				(382,085		)
Other current liabilities	827,054				853,253				(26,199		)
Deferred service revenue, non-current	98,772				88,289				10,483
STOCKHOLDERS’ EQUITY
Retained earnings	$	714,825			$	622,989			$	91,836
Accumulated other comprehensive income (loss)	(73,029		)		(73,205		)		176

The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our Consolidated Statements of Operations as follows:

Year ended June 30, 2019 (In thousands, except per share amounts)	As Reported Under ASC 606				Prior to Adoption of ASC 606				Effect of Changes
Revenues:
Product	$	3,392,243			$	3,356,837			$	35,406
Service	1,176,661				1,029,796				146,865
Costs and expenses:
Costs of revenues	1,869,377				1,819,060				50,317
Other expense (income), net	(31,462		)		(30,989		)		(473		)
Provision for income taxes	121,214				101,838				19,376
Net income attributable to KLA	1,175,617				1,062,566				113,051
Net income per share attributable to KLA
Basic	$	7.53			$	6.81			$	0.72
Diluted	$	7.49			$	6.77			$	0.72

Contract Balances

	As of				As of
(In thousands, except for percentage)	June 30, 2019				July 1, 2018				$ Change				% Change
Accounts receivable, net	$	990,113			$	635,878			$	354,235			56	%
Contract assets	$	94,015			$	14,727			$	79,288			538	%
Contract liabilities	$	587,789			$	556,691			$	31,098			6	%

Our payment terms and conditions vary by contract type, although terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of shipment, with the remainder payable within 30 days of acceptance.

The change in contract assets during the fiscal year ended June 30, 2019 was mainly due to an increase in contract assets of $76.3 million from the Orbotech Acquisition in the third quarter of fiscal year 2019 and $16.8 million of revenue recognized in excess of the amounts billed to the customers, partially offset by $14.7 million of contract assets reclassified to net accounts receivable as our right to consideration for these contract assets became unconditional. Contract assets are included in other current assets on our Consolidated Balance Sheets.

During the fiscal year ended June 30, 2019, we recognized revenue of $461.3 million that was included in contract liabilities as of July 1, 2018. This was partially offset by an increase in contract liabilities of $43.2 million from the Orbotech Acquisition in the third quarter of fiscal year 2019, and the value of products and services billed to customers for which control of the products and service has not transferred to the customers. Contract liabilities are included in current and non-current liabilities on our Consolidated Balance Sheets.

Remaining Performance Obligations

As of June 30, 2019, we had $1.84 billion of remaining performance obligations, which represents our obligation to deliver products and services, and consists primarily of sales orders where written customer requests have been received. We expect to recognize approximately 5% to 15% of these performance obligations as revenue beyond the next twelve months, subject to risk of delays, pushouts, and cancellation by the customer, usually with limited or no penalties.

Refer to Note 17 “Segment Reporting and Geographic Information” for information related to revenue by geographic region as well as significant product and service offerings.

Practical expedients

We apply the following practical expedients:

•	We account for shipping and handling costs as activities to fulfill the promise to transfer the goods, instead of a promised service to our customer.

•	We have elected to not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less.

•	We have elected to expense costs to obtain a contract as incurred because the expected amortization period is one year or less.

•	We have elected to reflect the aggregate effect of all modifications that occurred before July 1, 2018 in determining the transaction price, identifying the satisfied and unsatisfied performance obligations, and allocating the transaction price to the performance obligations.

NOTE 3 — FAIR VALUE MEASUREMENTS

Our financial assets and liabilities are measured and recorded at fair value, except for our debt and certain equity investments in privately-held companies. Prior to July 1, 2018, the equity investments were generally accounted for under the cost method of accounting and were periodically assessed for other-than-temporary impairment when an event or circumstance indicated that an other-than-temporary decline in value may have occurred. Effective July 1, 2018, equity investments without a readily available fair value are accounted for using the measurement alternative. The measurement alternative is calculated as cost minus impairment, if any, plus or minus changes resulting from observable price changes.

Our non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.

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

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

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

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

As of June 30, 2019, the types of instruments valued based on quoted market prices in active markets included money market funds, certain U.S. Treasury securities and U.S. Government agency securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

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

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

The fair value of deferred payments and contingent consideration payable, the majority of which were recorded in connection with business combinations during the fiscal year ended June 30, 2019, were classified as Level 3 and estimated using significant inputs that were not observable in the market. See Note 6 “Business Combinations” for additional information.

Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis as of the date indicated below were presented on our Consolidated Balance Sheets as follow

As of June 30, 2019 (In thousands)	Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Little or No Market Activity Inputs (Level 3)
Assets
Cash equivalents:
Corporate debt securities	$	10,988			$	—			$	10,988			$	—
Money market funds and other	352,708				352,708				—				—
U.S. Government agency securities	27,994				—				27,994				—
U.S. Treasury securities	55,858				—				55,858				—
Marketable securities:
Corporate debt securities	422,089				—				422,089				—
Municipal securities	1,913				—				1,913
Sovereign securities	5,994				—				5,994				—
U.S. Government agency securities	131,224				131,224				—				—
U.S. Treasury securities	151,838				151,838				—				—
Total cash equivalents and marketable securities(1)	1,160,606				635,770				524,836				—
Other current assets:
Derivative assets	2,557				—				2,557				—
Other non-current assets:
Executive Deferred Savings Plan	207,581				158,021				49,560				—
Total financial assets(1)	$	1,370,744			$	793,791			$	576,953			$	—
Liabilities
Derivative liabilities	$	(3,334	)		$	—			$	(3,334	)		$	—
Deferred payments	(8,800		)		—				—				(8,800		)
Contingent consideration payable	(14,005		)		—				—				(14,005		)
Total financial liabilities	$	(26,139	)		$	—			$	(3,334	)		$	(22,805	)

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(1)	Excludes cash of $479.8 million held in operating accounts and time deposits of $99.0 million as of June 30, 2019.

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

As of June 30, 2018 (In thousands)	Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)
Assets
Cash equivalents:
Corporate debt securities	$	4,995			$	—			$	4,995
Money market funds and other	863,115				863,115				—
U.S. Government agency securities	7,675				—				7,675
U.S. Treasury securities	1,996				—				1,996
Marketable securities:
Corporate debt securities	735,408				—				735,408
Sovereign securities	17,142				—				17,142
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
Other current assets:
Derivative assets	5,385				—				5,385
Other non-current assets:
Executive Deferred Savings Plan	197,213				143,580				53,633
Total financial assets(1)	$	2,554,605			$	1,670,770			$	883,835
Liabilities
Derivative liabilities	$	(6,828	)		$	—			$	(6,828	)
Total financial liabilities	$	(6,828	)		$	—			$	(6,828	)

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(1)	Excludes cash of $473.8 million held in operating accounts and time deposits of $54.5 million as of June 30, 2018.

There were no transfers between Level 1 and Level 2 fair value measurements during the fiscal year ended June 30, 2019 or 2018. We did not have any assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of June 30, 2018. See Note 8 “Debt” for disclosure of the fair value of our Senior Notes.

NOTE 4 — FINANCIAL STATEMENT COMPONENTS

Consolidated Balance Sheets

	As of June 30,
(In thousands)	2019				2018
Accounts receivable, net:
Accounts receivable, gross	$	1,002,114			$	663,317
Allowance for doubtful accounts	(12,001		)		(11,639		)
	$	990,113			$	651,678
Inventories:
Customer service parts	$	328,515			$	253,639
Raw materials	444,627				331,065
Work-in-process	285,191				280,208
Finished goods	204,167				66,933
	$	1,262,500			$	931,845
Other current assets:
Contract assets	$	94,015			$	—
Deferred costs of revenue(1)	70,721				—
Prepaid expenses	88,387				47,088
Prepaid income and other taxes	51,889				23,452
Other current assets	18,065				14,619
	$	323,077			$	85,159
Land, property and equipment, net:
Land	$	67,883			$	40,599
Buildings and leasehold improvements	402,678				335,647
Machinery and equipment	669,316				577,077
Office furniture and fixtures	28,282				22,171
Construction-in-process	26,029				9,180
	1,194,188				984,674
Less: accumulated depreciation	(745,389		)		(698,368		)
	$	448,799			$	286,306
Other non-current assets:
Executive Deferred Savings Plan	$	207,581			$	197,213
Other non-current assets	58,392				38,869
	$	265,973			$	236,082
Other current liabilities:
Executive Deferred Savings Plan	$	208,926			$	199,505
Compensation and benefits	226,462				173,774
Other accrued expenses	196,177				123,869
Customer credits and advances	133,677				116,440
Warranty	6,470				42,258
Income taxes payable	23,350				23,287
Interest payable	31,992				16,947
	$	827,054			$	696,080
Other non-current liabilities:
Pension liabilities	$	79,622			$	66,786
Income taxes payable	392,266				371,665
Other non-current liabilities	116,009				54,791
	$	587,897			$	493,242

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(1)	Deferred costs of revenue were previously included under deferred system profit prior to the adoption of ASC 606.

Accumulated Other Comprehensive Income (Loss)

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

(In thousands)	Currency Translation Adjustments				Unrealized Gains (Losses) on Available-for-Sale Securities				Unrealized Gains (Losses) on Cash Flow Hedges				Unrealized Gains (Losses) on Defined Benefit Plans				Total
Balance as of June 30, 2019	$	(44,041	)		$	(1,616	)		$	(8,725	)		$	(18,647	)		$	(73,029	)
Balance as of June 30, 2018	$	(29,974	)		$	(11,032	)		$	1,932			$	(14,859	)		$	(53,933	)

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

		Location in the Consolidated Statements of Operations		Year ended June 30,
Accumulated OCI Components			2019				2018
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contracts(1)		Revenues		$	4,329			$	955
		Costs of revenues and operating expenses		(739		)		2,137
		Interest expense		424				754
		Other expense (income), net		4				—
		Net gains reclassified from accumulated OCI		$	4,018			$	3,846
Unrealized gains (losses) on available-for-sale securities		Other expense (income), net		$	(1,294	)		$	(209	)

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(1)	Reflects the adoption of the new accounting guidance for hedge accounting in the second quarter of fiscal year 2019. For additional details, refer to Note 16, “Derivative Instruments and Hedging Activities.”

The amounts reclassified out of accumulated OCI related to our defined benefit pension plans, which were recognized as a component of net periodic cost for the fiscal years ended June 30, 2019 and 2018 were $1.1 million and $1.8 million, respectively. For additional details, refer to Note 12, “Employee Benefit Plans.”

Consolidated Statements of Operations

The following table shows other expense (income), net for the indicated periods:

	Year ended June 30,
(In thousands)	2019				2018				2017
Other expense (income), net:
Interest income	$	(40,367	)		$	(36,869	)		$	(23,270	)
Foreign exchange (gains) losses, net	(322		)		708				641
Net realized losses (gains) on sale of investments	1,294				209				(191		)
Other	7,933				5,470				5,998
	$	(31,462	)		$	(30,482	)		$	(16,822	)

NOTE 5 — MARKETABLE SECURITIES

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

As of June 30, 2019 (In thousands)	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Corporate debt securities	$	433,518			$	141			$	(582	)		$	433,077
Money market funds and other	352,708				—				—				352,708
Municipal securities	1,910				3				—				1,913
Sovereign securities	6,001				1				(8		)		5,994
U.S. Government agency securities	159,454				5				(241		)		159,218
U.S. Treasury securities	208,058				39				(401		)		207,696
Subtotal	1,161,649				189				(1,232		)		1,160,606
Add: Time deposits(1)	99,006				—				—				99,006
Less: Cash equivalents	536,206				17				(2		)		536,221
Marketable securities	$	724,449			$	172			$	(1,230	)		$	723,391
As of June 30, 2018 (In thousands)	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Corporate debt securities	$	747,763			$	148			$	(7,508	)		$	740,403
Money market funds and other	863,115				—				—				863,115
Sovereign securities	17,293				—				(151		)		17,142
U.S. Government agency securities	326,508				16				(2,827		)		323,697
U.S. Treasury securities	411,329				3				(3,682		)		407,650
Subtotal	2,366,008				167				(14,168		)		2,352,007
Add: Time deposits(1)	54,537				—				—				54,537
Less: Cash equivalents	930,608				—				—				930,608
Marketable securities	$	1,489,937			$	167			$	(14,168	)		$	1,475,936

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(1)	Time deposits excluded from fair value measurements.

Our investment portfolio consists of both corporate and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. Most of our unrealized losses are due to changes in market interest rates, and bond yields. We believe that we have the ability to realize the full value of all of these investments upon maturity. As of June 30, 2019, we had 246 investments in an unrealized loss position. The following table summarizes the fair value and gross unrealized losses of our investments that were in an unrealized loss position as of the date indicated below, the majority of which were in a continuous loss position for 12 months or more:

As of June 30, 2019 (In thousands)	Fair Value				Gross Unrealized Losses
Corporate debt securities	$	321,972			$	(580	)
Sovereign securities	1,999				(8		)
U.S. Government agency securities	126,694				(241		)
U.S. Treasury securities	142,796				(401		)
Total	$	593,461			$	(1,230	)

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

As of June 30, 2019 (In thousands)	Amortized Cost				Fair Value
Due within one year	$	554,039			$	553,048
Due after one year through three years	170,410				170,343
	$	724,449			$	723,391

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Realized gains on available for sale securities were immaterial for the fiscal years ended June 30, 2019, 2018 and 2017. Realized losses on available for sale securities were $1.4 million for the fiscal year ended June 30, 2019 and were immaterial for the fiscal years ended June 30, 2018 and 2017.

NOTE 6 - BUSINESS COMBINATIONS

Orbotech Acquisition

On February 20, 2019, we completed the acquisition of Orbotech for total purchase consideration of approximately $3.26 billion which was paid in part by cash of $1.90 billion, in part by KLA common stock with a fair value of $1.32 billion and the balance by the assumption of stock options and RSUs. Orbotech is a global supplier of yield-enhancing and process-enabling solutions for the manufacture of electronics products. KLA acquired Orbotech to extend and enhance its portfolio of products to address market opportunities in the printed circuit board, flat panel display, advanced packaging and semiconductor manufacturing areas.

Preliminary Purchase Price Allocation

The aggregate purchase consideration has been preliminarily allocated as follows (in thousands):

Purchase Price
Cash for outstanding Orbotech shares(1)	$	1,901,948
Fair value of KLA common stock issued for outstanding Orbotech shares(2)	1,324,657
Cash for Orbotech equity awards(3)	9,543
Fair value of KLA common stock issued to settle Orbotech equity awards(4)	6,129
Stock options and RSUs assumed(5)	13,281
Total purchase consideration	3,255,558
Less: cash acquired	(215,640		)
Total purchase consideration, net of cash acquired	$	3,039,918
Allocation
Accounts receivable, net	$	200,517
Inventories	329,491
Contract assets	63,181
Other current assets	73,557
Property, plant and equipment	102,086
Goodwill	1,811,760
Intangible assets	1,553,570
Other non-current assets	73,179
Accounts payable	(53,015		)
Accrued liabilities	(179,624		)
Other current liabilities(6)	(69,860		)
Deferred tax liabilities(7)	(777,838		)
Other non-current liabilities(6)	(67,901		)
Non-controlling interest	(19,185		)
	$	3,039,918

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(1)	Represents the total cash paid to settle 48.9 million outstanding Orbotech shares as of February 20, 2019 at $38.86 per Orbotech share.

(2)	Represents the fair value of 12.2 million shares of our common stock issued to settle 48.9 million outstanding Orbotech shares. KLA issued 0.25 shares for each Orbotech share. The fair value of KLA’s common stock was $108.26 per share on the Acquisition Date.

(3)	Represents primarily cash consideration for the settlement of the vested stock options and restricted stock units for which services were rendered by the employees of Orbotech prior to the closing, and a small portion for the settlement of fractional shares.

(4)	Represents the fair value of share of 56,614 shares of KLA common stock issued to settle the vested Orbotech stock options. The fair value of KLA’s common stock was $108.26 per share on the Acquisition Date.

(5)	Represents the fair value of the assumed stock options and RSUs to the extent those related to services provided by the employee of Orbotech prior to closing. Also refer to Note 9, “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” for additional information about assumed stock options and RSUs.

(6)

On December 24, 2018, Orbotech, as part of its strategy to invest in the high growth area of the software business within the Printed Circuit Boards (“PCB”) industry, acquired the remaining 50% shares of Frontline, which was prior to that accounted as an equity investee, from Mentor Graphics Development Services (Israel) Ltd. Orbotech acquired all of the joint venture interests it did not previously own for $85.0 million in cash on hand and agreed to pay an additional $10.0 million in cash over four years plus a cash earn-out of not less than $5.0 million and up to $20.0 million. The earn out amounts are based on revenues from a Frontline product currently under development. As of both February 20, 2019 and June 30, 2019, the estimated fair market values of the four-year cash payment was $8.8 million and the earn-out was $7.1 million. As of both February 20, 2019 and June 30, 2019, these amounts have been included in current and non-current liabilities at $4.3 million and $11.6 million, respectively.

(7)	Primarily related to tax impact on the future amortization of intangible assets acquired and inventory fair value adjustments.

During the fourth quarter of the fiscal year ended June 30, 2019, we recorded measurement period adjustments to reflect facts and circumstances in existence as of the Acquisition Date. These adjustments primarily related to the valuation of acquired intangible assets of $75.5 million, trade accounts receivable of $21.5 million, non-controlling interest of $17.4 million, other immaterial adjustments of $6.1 million, and related impacts on the deferred income tax liabilities of $47.5 million with resulting to corresponding increase to goodwill of $38.2 million.

KLA allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of their estimated fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management at the time of the Orbotech Acquisition and are subject to change during the measurement period which is not expected to exceed one year. The primary tasks that are required to be completed include discovery and the remeasurement of unknown uncertain tax positions that existed at the acquisition date, adjustments to the deferred tax liabilities for unremitted earnings, validation of synergies expected to be derived from the acquisition of Orbotech, recoverability of certain acquired assets and reallocation of certain acquired intangible assets between jurisdictions based on the outcome of ongoing tax audits, including any related tax impacts. Any adjustments to our preliminary purchase price allocation identified during the measurement period will be recognized in the period in which the adjustments are determined and recorded against goodwill.

The operating results of Orbotech have been included in our Consolidated Financial Statements for the fiscal year ended June 30, 2019 from the Acquisition Date. The goodwill was primarily attributable to the assembled workforce of Orbotech, planned growth in new markets and synergies expected to be achieved from the combined operations of KLA and Orbotech. None of the goodwill is deductible for income tax purposes. Goodwill arising from the Orbotech Acquisition has been allocated to the Specialty Semiconductor Process; and the PCB and Display reporting units during the fiscal year ended June 30, 2019. For additional details, refer to Note 7 “Goodwill and Purchased Intangible Assets.”

Intangible Assets

The estimated fair value and weighted average useful life of the Orbotech intangible assets are as follows:

(In thousands)	Fair Value				Weighted Average Useful Lives
Existing technology(1)	$	1,008,000			8
Customer-related assets(2)	227,000				8
Backlog(3)	37,500				1
Trade name(4)	91,500				7
Off market leases (5)	2,070				7
Total identified finite-lived intangible assets	1,366,070
In-process research and development(6)	187,500				N/A
Total identified intangible assets	$	1,553,570

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(1)

Existing technology was identified from the products of Orbotech and its fair value was determined using the Relief-from-Royalty Method under the income approach, which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset. The discount rate used was determined at the time of measurement based on an analysis of the implied internal rate of return of the transaction, weighted average cost of capital and weighted average return on assets. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.

(2)

Customer contracts and related relationships represent the fair value of the existing relationships with the Orbotech customers and its fair value was determined using the Multi-Period Excess Earning Method which involves isolating the net earnings attributable to the asset being measured based on present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. The economic useful life was determined based on historical customer attrition rates.

(3)

Backlog primarily relates to the dollar value of purchase arrangements with customers, effective, as of a given point in time, that are based on mutually agreed terms which, in some cases, may still be subject to completion of written documentation and may be changed or cancelled by the customer, often without penalty. Orbotech’s backlog consists of these arrangements with assigned shipment dates expected, in most cases, within three to twelve months. The fair value was determined using the Multi-Period Excess Earning Method. The economic useful life is based on the time to fulfill the outstanding order backlog obligation.

(4)	Trade name primarily relates to the “Orbotech” trade name. The fair value was determined by applying the Relief-From-Royalty method under the income approach. The economic useful life was determined based on the expected life of the trade name.

(5)	The favorable/unfavorable components of the acquired leases were determined using the Income Approach which involves present valuing the difference in future cash flows between the contracted lease payments and the rent payable to a market participant over the lease terms. The economic useful life is based on the remaining lease term.

(6)	The fair value of in-process research and development (“IPR&D”) was determined using the relief-from-royalty method under the income approach, which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset.

We believe the amounts of purchased intangible assets recorded above represent the fair values of and approximate the amounts a market participant would pay for, these intangible assets as of the acquisition date.

Our Consolidated Statements of Operations for the fiscal year ended June 30, 2019 included revenue of $388.9 million and a net loss of $61.6 million from Orbotech.

Other Fiscal 2019 Acquisitions

During the three months ended March 31, 2019, we acquired three privately-held companies primarily to expand our products and services offerings for an aggregate purchase price of $118.3 million, including a post-closing working capital adjustment, and the fair value of the promise to pay additional consideration of up to $13.0 million contingent on the achievement of certain milestones. As of June 30, 2019, the estimated fair value of the additional consideration was $5.1 million, which is classified as a current liability on the Consolidated Balance Sheets.

During the three months ended September 30, 2018 we acquired two privately-held companies for an aggregate purchase price of $15.4 million, including the fair value of the promise to pay total additional consideration of up to $6.0 million contingent on the achievement of certain milestones. As of June 30, 2019, the estimated fair value of the additional consideration was $1.8 million, which is classified as a current liability on the Consolidated Balance Sheets.

None of these acquisitions were individually material to our Consolidated Financial Statements.

The aggregate purchase price of the other fiscal 2019 acquisitions was allocated on a preliminary basis as follows:

(In thousands)	Fair Value
Net tangible assets (including Cash and cash equivalents of $2.6 million)	$	13,214
Identifiable intangible assets	75,130
Goodwill	45,380
Total	$	133,724

The goodwill was primarily attributable to the assembled workforce, and planned growth in new markets. A portion of the goodwill is deductible for income tax purposes. Our Consolidated Statements of Operations for the fiscal year ended June 30, 2019 included revenues of $9.7 million, respectively, and net losses of $3.5 million from these privately-held companies.

KLA, in the aggregate for the Orbotech and other fiscal 2019 acquisitions, incurred approximately $40.2 million of acquisition-related costs, which are primarily included within selling, general and administrative expenses in our Consolidated Statements of Operations.

Fiscal 2018 Acquisition

In the fiscal year ended June 30, 2018, we acquired a product line from Keysight Technologies, Inc., a related party, for a total purchase consideration of $12.1 million, of which $5.2 million was allocated to goodwill based on the fair value at the acquisition date. Goodwill recognized was deductible for income tax purposes. See Note 18 “Related Party Transactions” for additional details.

Supplemental Unaudited Pro Forma Information:

The following unaudited pro forma financial information summarizes the combined results of operations for KLA, Orbotech, and the three acquisitions completed in the third quarter of fiscal 2019 as if the companies were combined as of the beginning of fiscal 2018. The unaudited pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, the purchase accounting effect on inventory acquired, the purchase accounting effect on deferred revenue, interest expense and amortization of debt issuance costs associated with the Senior Notes financing, and transaction costs.

The table below reflects the impact of material and nonrecurring adjustments to the unaudited pro forma results for the fiscal year ended June 30, 2019 and 2018 that are directly attributable to the acquisitions:

	Year ended June 30,
Non-recurring Adjustments (In thousands)	2019				2018
Decrease to revenue as a result of deferred revenue fair value adjustment	$	—			$	5,349
Increase to expense as a result of inventory fair value adjustment	$	1,029			$	85,778
(Decrease)/increase to expense as a result of transaction costs	$	(64,343	)		$	64,343
Increase to expense as a result of compensation costs	$	7,201			$	39,888

The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisitions actually occurred at the beginning of fiscal year 2018 or of the results of our future operations of the combined businesses.

	Pro Forma
	Year ended June 30,
(In thousands)	2019				2018
Revenues	$	5,154,823			$	5,079,654
Net income attributable to KLA	$	1,288,467			$	608,542

We have not included pro forma results of operations for the acquisition of privately-held companies completed in the first quarter of fiscal 2019 herein as they were not material to us on either an individual or in aggregate. We included the results of operations of each acquisition in our Consolidated Statements of Operations from the date of each acquisition.

NOTE 7 — GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in the current and prior business combinations. Following the update of the organizational structure during the fiscal year 2019, as described in Note 17, “Segment Reporting and Geographic Information”, we have four reportable segments and six reporting units. To reflect our new segment structure, goodwill arising from the Orbotech Acquisition has been allocated to the Specialty Semiconductor Process; and the PCB and Display reporting units using an acquisition accounting method. The following table presents goodwill carrying value and the movements during the fiscal years ended June 30, 2019 and 2018(1):

(In thousands)		Wafer Inspection				Patterning				GSS				SPC Others				Wafer Inspection and Patterning				Specialty Semiconductor Process				PCB and Display				Component Inspection				Total
Balance as of June 30, 2017		$	281,095			$	53,255			$	2,856			$	12,320			$	—			$	—			$	—			$	—			$	349,526
Acquired goodwill		—				—				5,163				—				—				—				—				—				5,163
Foreign currency adjustment		(90		)		—				20				79				—				—				—				—				9
Balance as of June 30, 2018		281,005				53,255				8,039				12,399				—				—				—				—				354,698
Acquired goodwill		—				26,362				17,869				1,176				—				821,842				989,918				—				1,857,167
Reallocation due to change in segments		(281,005		)		(79,617		)		—				(13,575		)		360,622				—				—				13,575				—
Foreign currency and other adjustments						—				—				—				(7		)		—				—				—				(7		)
Balance as of June 30, 2019		$	—			$	—			$	25,908			$	—			$	360,615			$	821,842			$	989,918			$	13,575			$	2,211,858

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(1)	No goodwill was assigned to the Other reporting unit, and accordingly not disclosed in the table above.

Goodwill is net of accumulated impairment losses of $277.6 million, which were recorded prior to the fiscal year ended June 30, 2014. As of June 30, 2019, all of accumulated impairment losses were included in the Wafer Inspection and Patterning reporting unit. As of June 30, 2018 and 2017, approximately $1.0 million and $276.6 million of accumulated impairment losses were included in the Wafer Inspection reporting unit and the Patterning reporting unit, respectively.

The change in goodwill during the fiscal year ended June 30, 2019 is due to $1.81 billion related to the acquisition of Orbotech and $45.4 million related to the acquisition of the privately-held companies during the period. For additional details, refer to Note 6 “Business Combinations”.

We performed a qualitative assessment of the goodwill for our reporting units during the three months ended March 31, 2019. Based on this assessment we concluded that it was more likely than not that the fair value of each of the reporting units exceeded its carrying amount. As a result of our determination based on our qualitative assessment, it was not necessary to perform the quantitative goodwill impairment test at this time. In assessing the qualitative factors, we considered the impact of key factors, including changes in the industry and competitive environment, market capitalization, stock price, earnings multiples, budgeted-to-actual revenue performance from prior year, gross margin and cash flows from operating activities. In addition, subsequent to the update of the organizational structure, we performed a qualitative assessment of the goodwill for our reporting units, which were impacted by the organizational change, and concluded that there were no impairment indicators identified.

Based on our assessment, goodwill in the reporting units was not impaired as of June 30, 2019 and 2018. The next annual assessment of goodwill by reporting unit is scheduled to be performed in the third quarter of the fiscal year ending June 30, 2020.

Purchased Intangible Assets

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

(In thousands)			As of June 30, 2019												As of June 30, 2018
Category	Range of Useful Lives (in years)		Gross Carrying Amount				Accumulated Amortization and Impairment				Net Amount				Gross Carrying Amount				Accumulated Amortization and Impairment				Net Amount
Existing technology	4-8		$	1,224,629			$	196,582			$	1,028,047			$	160,859			$	144,202			$	16,657
Trade name/trademark	4-7		114,573				25,052				89,521				20,993				20,060				933
Customer relationships	4-9		297,250				66,471				230,779				56,680				55,136				1,544
Backlog and other	<1- 9		43,969				19,146				24,823				660				461				199
Intangible assets subject to amortization			1,680,421				307,251				1,373,170				239,192				219,859				19,333
In-process research and development			187,500				—				187,500				—				—				—
Total			$	1,867,921			$	307,251			$	1,560,670			$	239,192			$	219,859			$	19,333

Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The change in the gross carrying amounts of intangible assets is due to the acquisition of Orbotech and other privately-held companies. For additional details, refer to Note 6 “Business Combinations.”

Amortization expense for purchased intangible assets for the periods indicated below was as follows:

	Year ended June 30,
(In thousands)	2019				2018
Amortization expense- Cost of revenues	$	52,387			$	4,095
Amortization expense- Selling, general and administrative	34,992				535
Amortization expense- Research and development	13				—
Total	$	87,392			$	4,630

Based on the purchased intangible assets gross carrying amount recorded as of June 30, 2019, the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:

Fiscal year ending June 30:	Amortization (In thousands)
2020	$	206,293
2021	186,609
2022	185,159
2023	184,060
2024	182,113
Thereafter	428,936
Total	$	1,373,170

NOTE 8 — DEBT

The following table summarizes our debt as of June 30, 2019 and June 30, 2018:

	As of June 30, 2019							As of June 30, 2018
	Amount (In thousands)				Effective Interest Rate			Amount (In thousands)				Effective Interest Rate
Fixed-rate 3.375% Senior Notes due on November 1, 2019	250,000				3.377	%		250,000				3.377	%
Fixed-rate 4.125% Senior Notes due on November 1, 2021	500,000				4.128	%		500,000				4.128	%
Fixed-rate 4.650% Senior Notes due on November 1, 2024	1,250,000				4.682	%		1,250,000				4.682	%
Fixed-rate 5.650% Senior Notes due on November 1, 2034	250,000				5.670	%		250,000				5.670	%
Fixed-rate 4.100% Senior Notes due on March 15, 2029	800,000				4.159	%		—				—	%
Fixed-rate 5.000% Senior Notes due on March 15, 2049	400,000				5.047	%		—				—	%
Total	3,450,000							2,250,000
Unamortized discount	(8,738		)					(2,523		)
Unamortized debt issuance costs	(17,880		)					(10,075		)
Total	$	3,423,382						$	2,237,402
Reported as:
Current portion of long-term debt	$	249,999						$	—
Long-term debt	3,173,383							2,237,402
Total	$	3,423,382						$	2,237,402

As of June 30, 2019, future principal payments for the long-term debt are $250.0 million in fiscal year 2020; $500.0 million in fiscal year 2022; and $2.70 billion after fiscal year 2023.

Senior Notes:

In March 2019 and November 2014, we issued $1.20 billion and $2.50 billion, respectively (each, a “2019 Senior Notes”, a “2014 Senior Notes”, and collectively the “Senior Notes”), aggregate principal amount of senior, unsecured long-term notes.

The interest rate specified for each series of the 2014 Senior Notes will be subject to adjustments from time to time if Moody’s Investor Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”) or, under certain circumstances, a substitute rating agency selected by us as a replacement for Moody’s or S&P, as the case may be (a “Substitute Rating Agency”), downgrades (or subsequently upgrades) its rating assigned to the respective series of the 2014 Senior Notes such that the adjusted rating is below investment grade. If the adjusted rating of any series of the 2014 Senior Notes from Moody’s (or, if applicable, any Substitute Rating Agency) is decreased to Ba1, Ba2, Ba3 or B1 or below, the stated interest rate on such series of the 2014 Senior Notes as noted above will increase by 25 bps, 50 bps, 75 bps or 100 bps, respectively (“bps” refers to Basis Points and 1% is equal to 100 bps). If the rating of any series of the 2014 Senior Notes from S&P (or, if applicable, any Substitute Rating Agency) with respect to such series of the 2014 Senior Notes is decreased to BB+, BB, BB- or B+ or below, the stated interest rate on such series of the 2014 Senior Notes as noted above will increase by 25 bps, 50 bps, 75 bps or 100 bps, respectively. The interest rates on any series of the 2014 Senior Notes will permanently cease to be subject to any adjustment (notwithstanding any subsequent decrease in the ratings by any of Moody’s, S&P and, if applicable, any Substitute Rating Agency) if such series of the 2014 Senior Notes becomes rated “Baa1” (or its equivalent) or higher by Moody’s (or, if applicable, any Substitute Rating Agency) and “BBB+” (or its equivalent) or higher by S&P (or, if applicable, any Substitute Rating Agency), or one of those ratings if rated by only one of Moody’s, S&P and, if applicable, any Substitute Rating Agency, in each case with a stable or positive outlook. Unlike the 2014 Senior Notes, the interest rate for each series of the 2019 Senior Notes will not be subject to such adjustments.

During the three months ended June 30, 2018, we entered into a series of forward contracts (the “2018 Rate Lock Agreements”) to lock the benchmark interest rate with notional amount of $500.0 million in aggregate. In October 2014, we entered into a series of forward contracts to lock the 10-year treasury rate (“benchmark rate”) on a portion of the 2014 Senior Notes with a notional amount of $1.00 billion in aggregate. For additional details on the forward contracts, refer to Note 17, “Derivative Instruments and Hedging Activities.”

The original discounts on the 2019 Senior Notes and the 2014 Senior Notes amounted to $6.7 million and $4.0 million, respectively, and are being amortized over the life of the debt. Interest is payable semi-annually on May 1 and November 1 of each year for the 2014 Senior Notes and semi-annually on March 15 and September 15 of each year for the 2019 Senior Notes. The indenture for the Senior Notes (the “Indenture”) includes covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are not restricted.

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

Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as of June 30, 2019 and June 30, 2018 was approximately $3.70 billion and $2.33 billion, respectively. While the Senior Notes are recorded at cost, the fair value of the long-term debt was determined based on quoted prices in markets that are not active; accordingly, the long-term debt is categorized as Level 2 for purposes of the fair value measurement hierarchy.

As of June 30, 2019, we were in compliance with all of our covenants under the Indenture associated with the Senior Notes.

Revolving Credit Facility:

In November 2017, we entered into a Credit Agreement (the “Credit Agreement”) providing for a $750.0 million five-year unsecured Revolving Credit Facility (the “Revolving Credit Facility”), which replaced our prior Credit Facility. 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. In November 2018, we entered into an Incremental Facility, Extension and Amendment Agreement (the “Amendment”), which amends the Credit Agreement to (a) extend the Maturity Date (the “Maturity Date”) from November 30, 2022 to November 30, 2023, (b) increase the total commitment by $250.0 million and (c) effect certain other amendments to the Credit Agreement as set forth in the Amendment. After giving effect to the Amendment, the total commitments under the Credit Agreement are $1.00 billion. During the third quarter of the fiscal year ended June 30, 2019, we made borrowings of $900.0 million from the Revolving Credit Facility, which were paid in full in the same quarter. As of June 30, 2019, we had no outstanding borrowings under the Revolving Credit Facility.

We may borrow, repay and reborrow funds under the Revolving Credit Facility until the Maturity Date, at which time such Revolving Credit Facility will terminate, and all outstanding loans under such facility, together with all accrued and unpaid interest, must be repaid. We may prepay outstanding borrowings under the Revolving Credit Facility at any time without a prepayment penalty.

Borrowings under the Revolving Credit Facility will bear interest, at our option, at either: (i) the Alternative Base Rate (“ABR”) plus a spread, which ranges from 0 bps to 75 bps, or (ii) the London Interbank Offered Rate (“LIBOR”) plus a spread, which ranges from 100 bps to 175 bps. The spreads under ABR and LIBOR are subject to adjustment in conjunction with credit rating downgrades or upgrades. We are also obligated to pay an annual commitment fee on the daily undrawn balance of the Revolving Credit Facility, which ranges from 10 bps to 25 bps, subject to an adjustment in conjunction with changes to our credit rating. As of June 30, 2019,we pay an annual commitment fee of 12.5 bps on the daily undrawn balance of the Revolving Credit Facility.

The Revolving Credit Facility requires us to maintain an interest expense coverage ratio as described in the Credit Agreement, on a quarterly basis, covering the trailing four consecutive fiscal quarters of no less than 3.50 to 1.00. In addition, we are required to maintain the maximum leverage ratio as described in the Credit Agreement on a quarterly basis of 3.00 to 1.00, covering the trailing four consecutive fiscal quarters for each fiscal quarter, which can be increased to 4.00 to 1.00 for a period of time in connection with a material acquisition or a series of material acquisitions. As of June 30, 2019, we elected to increase the maximum allowed leverage ratio to 4.00 to 1.00 following the Orbotech Acquisition.

We were in compliance with all covenants under the Credit Agreement as of June 30, 2019.

NOTE 9 — EQUITY, LONG-TERM INCENTIVE COMPENSATION PLANS AND NON-CONTROLLING INTEREST

Equity Incentive Program

As of June 30, 2019, we were able to issue new equity incentive awards, such as restricted stock units (“RSUs”) and stock options, to our employees, consultants and members of our Board of Directors under our 2004 Equity Incentive Plan (the “2004 Plan”) with 11.6 million shares available for issuance.

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

In addition, the plan administrator has the ability to grant “dividend equivalent” rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units before they are fully vested. The plan administrator, at its discretion, may grant a right to receive dividends on the aforementioned awards which may be settled in cash or our stock at the discretion of the plan administrator subject to meeting the vesting requirement of the underlying awards.

Assumed Equity Plans

As of the Acquisition Date, we assumed outstanding equity incentive awards under the following Orbotech equity incentive plans: (i) Equity Remuneration Plan for Key Employees of Orbotech and its Affiliates and Subsidiaries (as Amended and Restated in 2005), (ii) 2010 Equity-Based Incentive Plan, and (iii) 2015 Equity-Based Incentive Plan (each, an “Assumed Equity Plan” and collectively the “Assumed Equity Plans”). The awards under the Assumed Equity Plans, previously issued in the form of stock options and restricted share units (“RSUs”), were generally settled as follows:

a)	Each award of Orbotech’s stock options and RSUs that was outstanding and vested immediately prior to the Acquisition Date (collectively the “Vested Equity Awards”) was canceled and terminated and converted into the right to receive the purchase consideration in respect of such Vested Equity Awards as of the Acquisition Date, and in the case of stock options, less the exercise price.

b)

Each award of Orbotech’s stock options and RSUs that was outstanding and unvested immediately prior to the Acquisition Date was assumed by us (each, an “Assumed Option” and “Assumed RSU”, and collectively the “Assumed Equity Awards”) and converted to stock options and RSUs exercisable for the number of shares of our common stock equal to the product of (i) the number of Orbotech shares underlying such Assumed Equity Awards as of immediately prior to the Acquisition Date multiplied by (ii) the exchange ratio defined in the Acquisition Agreement. The Assumed Equity Awards generally retain all of the rights, terms and conditions of the respective plans under which they were originally granted, including the same service-based vesting schedule, applicable thereto.

As of the Acquisition Date, the estimated fair value of the Assumed Equity Awards was $55.0 million, of which $13.3 million was recognized as goodwill and the balance of $41.7 million will be recognized as stock-based compensation expense over the remaining service period of the Assumed Equity Awards. The fair value of the Assumed Equity Awards for services rendered through the Acquisition Date was recognized as a component of the merger consideration, with the remaining fair value related to the post-combination services to be recorded as stock-based compensation over the remaining vesting period.

A total of 14,558 and 518,971 shares of our common stock underly the Assumed Options and RSUs and have an estimated weighted average fair value at the Acquisition Date of $53.3 and $104.5 per share, respectively. As of June 30, 2019, there were 14,558 and 465,587 shares of our common stock underlying the outstanding Assumed Options and RSUs, respectively, under the Assumed Equity Plans. The weighted-average remaining contractual terms, the aggregate intrinsic values, and the weighted average exercise price for the stock options outstanding under the Assumed Equity Plans as of June 30, 2019 were 4.4 years, $0.9 million, and $54.0 per share, respectively. No Assumed Options were exercised during the year ended June 30, 2019.

Equity Incentive Plans - General Information

The following table summarizes the combined activity under our equity incentive plans:

(In thousands)	Available For Grant(1)(5)
Balances as of June 30, 2016	6,778
Restricted stock units granted(2)	(2,169	)
Restricted stock units canceled	101
Balances as of June 30, 2017	4,710
Restricted stock units granted(2)	(1,132	)
Restricted stock units granted adjustment(4)	33
Restricted stock units canceled	69
Balances as of June 30, 2018	3,680
Plan shares increased	12,000
Restricted stock units granted(2)(3)	(2,463	)
Restricted stock units granted adjustment(4)	5
Restricted stock units canceled	51
Plan shares expired (1998 Director Plan)	(1,660	)
Balances as of June 30, 2019	11,613

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(1)	The number of RSUs reflects the application of the award multiplier as described above (1.8x or 2.0x depending on the grant date of the applicable award).

(2)

Includes RSUs granted to senior management with performance-based vesting criteria (in addition to service-based vesting criteria for any of such RSUs that are deemed to have been earned) (“performance-based RSUs”). As of June 30, 2019, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied. Therefore, this line item includes all such performance-based RSUs granted during the fiscal year, reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (0.7 million shares, 0.3 million shares and 84 thousand shares for the fiscal years ended June 30, 2019, 2018 and 2017, respectively, reflects the application of the 1.8x or 2.0x multiplier described above).

(3)

Includes RSUs granted to executive management during the fiscal year ended June 30, 2019 with both a market condition and a service condition (“market-based RSUs”). Under the award agreements, the vesting of the market-based RSUs is contingent on achieving total stockholder return (including stock price appreciation and cash dividends) objectives on a per share basis of equal to or greater than 150%, 175% and 200% multiplied by the measurement price of $116.39 during the five-year period ending March 20, 2024. The awards are split into three tranches and, to the extent that total stockholder return targets have been met, one-third of the maximum number of shares available under these awards will vest on each of the third, fourth, and fifth anniversaries of the grant date. This line item includes all such market-based RSUs granted during the third quarter of the fiscal year ended June 30, 2019 reported at the maximum possible number of shares that may ultimately be issuable if all applicable market-based criteria are met at their maximum levels and all applicable service-based criteria are fully satisfied (0.8 million shares for the year ended June 30, 2019 reflects the application of the multiplier described above).

(4)	Represents the portion of RSUs granted with performance-based vesting criteria and reported at the actual number of shares issued upon achievement of the performance vesting criteria during the year ended June 30, 2019 and 2018.

(5)	No additional stock options, RSUs or other awards will be granted under the Assumed Equity Plans.

The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For RSUs granted without “dividend equivalent” rights, fair value is calculated using the closing price of our common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on those RSUs. The fair value for RSUs granted with “dividend equivalent” rights is determined using the closing price of our common stock on the grant date The fair value for market-based RSUs is estimated on the grant date using a Monte Carlo simulation model with the following assumptions: expected volatilities ranging from 27.8% to 28.1%, based on a combination of implied volatility from traded options on our common stock and the historical volatility of our common stock; dividend yield ranging from 2.4% to 2.5%, based on our current expectations about our anticipated dividend policy; risk-free interest rate ranging from 2.3% to 2.4%, based on the implied yield available on U.S. Treasury zero-coupon issues with terms equal to the contractual terms of each tranche; and an expected term which takes into consideration the vesting term and the contractual term of the

market-based award. The awards are amortized over service periods of three, four, and five years, which is the longer of the explicit service period or the period in which the market target is expected to be met. The fair value for purchase rights under our Employee Stock Purchase Plan is determined using a Black-Scholes model.

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

	Year ended June 30,
(In thousands)	2019(1)				2018				2017
Stock-based compensation expense by:
Costs of revenues	$	10,384			$	8,062			$	5,338
Research and development	16,225				11,249				8,089
Selling, general and administrative	67,585				43,473				37,516
Total stock-based compensation expense	$	94,194			$	62,784			$	50,943

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(1)	Includes $10.9 million of stock-based compensation expense acceleration for certain equity awards for Orbotech employees.

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

(In thousands)	As of June 30,
2019				2018
Inventory	$	4,819			$	4,580

Restricted Stock Units

The following table shows the activity and weighted-average grant date fair value for RSUs during the fiscal year ended June 30, 2019:

	Shares (In thousands) (1)			Weighted-Average Grant Date Fair Value
Outstanding restricted stock units as of June 30, 2018(2)	2,014			$	76.50
Granted(2)	1,232			$	99.53
Granted adjustments(3)	(2	)		$	50.88
Assumed upon Orbotech Acquisition(4)	519			$	104.49
Vested and released	(500	)		$	73.88
Withheld for taxes	(323	)		$	73.88
Forfeited	(38	)		$	92.08
Outstanding restricted stock units as of June 30, 2019(2)	2,902			$	91.84

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

(2)

Includes performance-based and market-based RSUs. As of June 30, 2019, it had not yet been determined the extent to which (if at all) the performance-based or market-based vesting criteria had been satisfied. Therefore, this line item includes all such RSUs, reported at the maximum possible number of shares (i.e., 0.7 million shares for the fiscal year ended June 30, 2019, 0.2 million shares for fiscal year ended June 30, 2018 and 42 thousand shares for the fiscal year ended June 30, 2017) that may ultimately be issuable if all applicable performance-based and market-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.

(3)	Represents the portion of RSUs granted with performance-based vesting criteria and reported at the actual number of shares issued upon achievement of the performance vesting criteria during the fiscal year ended June 30, 2019.

(4)	Represents Assumed RSUs under the Assumed Equity Plans. Since the Assumed RSUs do not have “dividend equivalent” rights, the fair value was calculated using the closing price of our common stock on the Acquisition Date, adjusted to exclude the present value of dividends.

The RSUs granted by us generally vest (a) with respect to awards with only service-based vesting criteria, over periods ranging from two to four years and (b) with respect to awards with both performance-based and service-based vesting criteria, in two equal installments on the third and fourth anniversaries of the grant date, and (c) with respect to awards with both market-based and service-based vesting criteria in three equal installments on the third, fourth and fifth anniversaries of the grant date, in each case subject to the recipient remaining employed by us as of the applicable vesting date. The RSUs granted to the independent members of the Board of Directors vest annually.

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

(In thousands, except for weighted-average grant date fair value)	Year ended June 30,
2019				2018				2017
Weighted-average grant date fair value per unit	$	99.53			$	95.95			$	78.83
Weighted-average fair value per unit assumed upon Orbotech Acquisition	$	104.49			$	—			$	—
Grant date fair value of vested restricted stock units	$	60,749			$	49,606			$	33,820
Tax benefits realized by us in connection with vested and released restricted stock units	$	15,053			$	16,615			$	15,829

As of June 30, 2019, the unrecognized stock-based compensation expense balance related to RSUs was $179.7 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of 1.6 years. The intrinsic value of outstanding RSUs as of June 30, 2019 was $343.0 million.

Cash-Based Long-Term Incentive Compensation

We have adopted a cash-based long-term incentive (“Cash LTI Plan”) program for many of our employees as part of our employee compensation program. Executives and non-employee members of the Board of Directors are not participating in this program. During the fiscal years ended June 30, 2019 and 2018, we approved Cash LTI awards of $85.2 million and $64.9 million, respectively. Cash LTI awards issued to employees under the Cash LTI Plan will 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 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. During the fiscal years ended June 30, 2019, 2018 and 2017, we recognized $55.5 million, $52.4 million and $48.8 million, respectively, in compensation expense under the Cash LTI Plan. As of June 30, 2019, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $152.2 million.

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 15% of their eligible earnings toward the semi-annual purchase of our common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).

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

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

	Year ended June 30,
	2019			2018			2017
Stock purchase plan:
Expected stock price volatility	33.2	%		28.7	%		23.4	%
Risk-free interest rate	2.1	%		1.1	%		0.5	%
Dividend yield	3.1	%		2.5	%		2.8	%
Expected life (in years)	0.50			0.50			0.50

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

(In thousands, except for weighted-average fair value per share)	Year ended June 30,
2019				2018				2017
Total cash received from employees for the issuance of shares under the ESPP	$	64,828			$	61,452			$	45,358
Number of shares purchased by employees through the ESPP	843				733				705
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP	$	1,133			$	1,664			$	1,999
Weighted-average fair value per share based on Black-Scholes model	$	21.72			$	21.95			$	15.16

The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which we estimate will be required to be issued under the ESPP during the forthcoming fiscal year. As of June 30, 2019, a total of 1.8 million shares were reserved and available for issuance under the ESPP.

Quarterly cash dividends

On May 3, 2019, our Board of Directors declared a regular quarterly cash dividend of $0.75 per share on the outstanding shares of our common stock, which was paid on June 4, 2019 to the stockholders of record as of the close of business on May 15, 2019. The total amount of regular quarterly cash dividends and dividend equivalents paid during the fiscal years ended June 30, 2019 and 2018 was $469.4 million and $395.6 million, respectively. The amount of accrued dividends equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights was $7.3 million and $6.7 million as of June 30, 2019 and 2018, respectively. These amounts will be paid upon vesting of the underlying RSUs. Refer to Note 19, “Subsequent Events” to the Consolidated Financial Statements for additional information regarding the declaration of our quarterly cash dividend announced subsequent to June 30, 2019.

Special cash dividend

On November 19, 2014, our Board of Directors declared a special cash dividend of $16.50 per share on our outstanding common stock, which was paid on December 9, 2014 to the stockholders of record as of the close of business on December 1, 2014. The declaration and payment of the special cash dividend was part of our leveraged recapitalization transaction under which the special cash dividend was financed through a combination of existing cash and proceeds from the debt financing disclosed in Note 8, “Debt” that was completed during the three months ended December 31, 2014. As of the declaration date, the total amount of the special cash dividend accrued by us was approximately $2.76 billion, substantially all of which was paid out during the three months ended December 31, 2014, except for the aggregate special cash dividend of $43.0 million that was accrued for the unvested RSUs and to be paid when such underlying unvested RSUs vest. During the second quarter of fiscal 2019, all of the special cash dividends accrued with respect to outstanding RSUs were vested and paid in full. We paid a special cash dividend with respect to vested RSUs during the fiscal years ended June 30, 2019 and 2018 of $2.9 million and $6.4 million respectively. Other than the special cash dividend declared during the three months ended December 31, 2014, we historically have not declared any special cash dividend.

Non-controlling Interest

We have consolidated the results of Orbotech LT Solar, LLC (“OLTS”) and Orbograph Ltd. (“Orbograph”), in which we own approximately 84% and 94% of the outstanding equity interest, respectively. OLTS is engaged in the research, development and marketing of products for the deposition of thin film coating of various materials on crystalline silicon photovoltaic wafers for solar energy panels through plasma-enhanced chemical vapor deposition (“PECVD”). Orbograph is engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers.

Additionally, we have consolidated the results of PixCell, an Israeli company developing diagnostic equipment for point-of-care hematology applications of which we own approximately 52% of the outstanding equity interest and are entitled to appoint the majority of this company’s directors.

NOTE 10 — STOCK REPURCHASE PROGRAM

Our Board of Directors has authorized a program which permits us to repurchase up to $2.00 billion of our common stock, reflecting an increase from $1.00 billion upon the close of the Orbotech Acquisition. For additional details, refer to Note 1, “Description of Business and Summary of Significant Accounting Policies.” The intent of this program is to offset the dilution from our equity incentive plans, employee stock purchase plan, the issuance of shares in the Orbotech Acquisition, as well as to return excess cash to our stockholders. Subject to market conditions, applicable legal requirements and other factors, the repurchases were made in the open market in compliance with applicable securities laws, including the Securities Exchange Act of 1934 and the rules promulgated thereunder such as Rule 10b-18 and Rule 10b5-1. This stock repurchase program has no expiration date and may be suspended at any time. As of June 30, 2019, an aggregate of approximately $858.7 million was available for repurchase under our stock repurchase program.

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

(In thousands)	Year ended June 30,
2019				2018				2017
Number of shares of common stock repurchased	10,207				1,960				243
Total cost of repurchases	$	1,103,202			$	203,169			$	25,002

As of June 30, 2019, we had repurchased 68 thousand shares for $8.0 million, for which repurchases had not settled prior to June 30, 2019. The amount was recorded as a component of other current liabilities for the period presented.

NOTE 11 — NET INCOME PER SHARE

Basic net income per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying our outstanding dilutive restricted stock units had been issued. The dilutive effect of outstanding restricted stock units is reflected in diluted net income per share by application of the treasury stock method.

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

(In thousands, except per share amounts)	Year ended June 30,
2019				2018				2017
Numerator:
Net income attributable to KLA	$	1,175,617			$	802,265			$	926,076
Denominator:
Weighted-average shares-basic, excluding unvested restricted stock units	156,053				156,346				156,468
Effect of dilutive restricted stock units and options	896				1,032				1,013
Weighted-average shares-diluted	156,949				157,378				157,481
Basic net income per share attributable to KLA	$	7.53			$	5.13			$	5.92
Diluted net income per share attributable to KLA	$	7.49			$	5.10			$	5.88
Anti-dilutive securities excluded from the computation of diluted net income per share	227				—				46

NOTE 12 — EMPLOYEE BENEFIT PLANS

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

The total expenses under the profit sharing and 401(k) programs aggregated $18.6 million, $16.0 million, and $15.3 million in the fiscal years ended June 30, 2019, 2018 and 2017, respectively. We have no defined benefit plans in the United States. In addition to the profit sharing plan and the United States 401(k), several of our foreign subsidiaries have retirement plans for their full-time employees, several of which are defined benefit plans. Consistent with the requirements of local law, our deposits funds for certain of these plans with insurance companies, with third-party trustees or into government-managed accounts and/or accrues for the unfunded portion of the obligation. The assumptions used in calculating the obligation for the foreign plans depend on the local economic environment.

We apply authoritative guidance that requires an employer to recognize the funded status of each of its defined pension and post-retirement benefit plans as a net asset or liability on its balance sheets. Additionally, the authoritative guidance requires an employer to measure the funded status of each of its plans as of the date of its year-end statement of financial position. The benefit obligations and related assets under our plans have been measured as of June 30, 2019 and 2018.

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

	Year ended June 30,
(In thousands)	2019				2018
Change in projected benefit obligation:
Projected benefit obligation as of the beginning of the fiscal year	$	96,682			$	97,265
Service cost	4,220				4,127
Interest cost	1,132				1,302
Contributions by plan participants	69				78
Actuarial (gain) loss	4,187				(8,228		)
Benefit payments	(1,755		)		(1,190		)
Assumed benefit obligation from acquisition	11,095				—
Transfer in	—				2,806
Foreign currency exchange rate changes and others, net	(140		)		522
Projected benefit obligation as of the end of the fiscal year	$	115,490			$	96,682
	Year ended June 30,
(In thousands)	2019				2018
Change in fair value of plan assets:
Fair value of plan assets as of the beginning of the fiscal year	$	27,932			$	21,780
Actual return on plan assets	854				850
Employer contributions	3,587				3,662
Benefit and expense payments	(1,752		)		(1,190		)
Assumed plan assets from acquisition	3,424				—
Transfer in	—				2,806
Foreign currency exchange rate changes and others, net	(490		)		24
Fair value of plan assets as of the end of the fiscal year	$	33,555			$	27,932

	As of June 30,
(In thousands)	2019				2018
Underfunded status	$	81,935			$	68,750
	As of June 30,
(In thousands)	2019				2018
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation	$	72,508			$	60,047
Projected benefit obligation	$	115,490			$	96,682
Plan assets at fair value	$	33,555			$	27,932

	Year ended June 30,
	2019		2018		2017
Weighted-average assumptions(1):
Discount rate	0.3%-1.7%		0.5%-2.3%		0.8%-1.9%
Expected rate of return on assets	1.0%-2.9%		1.3%-2.9%		1.5%-2.9%
Rate of compensation increases	1.8%-4.5%		3.0%-4.5%		3.0%-5.8%

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(1)	Represents the weighted-average assumptions used to determine the benefit obligation.

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

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

	As of June 30,
(In thousands)	2019				2018
Unrecognized transition obligation	$	242			$	251
Unrecognized prior service cost	4				28
Unrealized net loss	25,721				23,208
Amount of losses recognized	$	25,967			$	23,487

Losses in accumulated other comprehensive income (loss) related to our foreign defined benefit pension plans expected to be recognized as components of net periodic benefit cost over the fiscal year ending June 30, 2020 are as follows:

(In thousands)
Unrecognized prior service cost	$	3
Unrealized net loss	906
Amount of losses expected to be recognized	$	909

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

	Year ended June 30,
(In thousands)	2019				2018				2017
Components of net periodic pension cost:
Service cost(1)	$	4,220			$	4,127			$	4,015
Interest cost	1,132				1,302				1,117
Return on plan assets	(476		)		(428		)		(393		)
Amortization of transitional obligation	—				—				251
Amortization of prior service cost	21				26				46
Amortization of net loss	1,047				1,731				1,617
Net periodic pension cost	$	5,944			$	6,758			$	6,653

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(1)	Service cost is reported in cost of revenues, research and development and selling, general and administrative expenses. All other components of net periodic pension cost are reported in other expense (income), net in the Consolidated Statements of Operations.

Fair Value of Plan Assets

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of inputs used to measure fair value of plan assets are described in Note 3, “Fair Value Measurements.”

The foreign plans’ investments are managed by third-party trustees consistent with the regulations or market practice of the country where the assets are invested. We are not actively involved in the investment strategy, nor does it have control over the target allocation of these investments. These investments made up 100% of total foreign plan assets in the fiscal years ended June 30, 2019 and 2018.

The expected aggregate employer contribution for the foreign plans during the fiscal year ending June 30, 2020 is $3.1 million.

The total benefits to be paid from the foreign pension plans are not expected to exceed $5.3 million in any year through the fiscal year ending June 30, 2029.

Foreign plan assets measured at fair value on a recurring basis consisted of the following investment categories as of June 30, 2019 and 2018, respectively:

As of June 30, 2019 (In thousands)	Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	18,571			$	18,571			$	—
Bonds, equity securities and other investments	14,984				—				14,984
Total assets measured at fair value	$	33,555			$	18,571			$	14,984
As of June 30, 2018 (In thousands)	Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	15,737			$	15,737			$	—
Bonds, equity securities and other investments	12,195				—				12,195
Total assets measured at fair value	$	27,932			$	15,737			$	12,195

Concentration of Risk

We manage a variety of risks, including market, credit and liquidity risks, across our plan assets through our investment managers. We define a concentration of risk as an undiversified exposure to one of the above-mentioned risks that increases the exposure of the loss of plan assets unnecessarily. We monitor exposure to such risks in the foreign plans by monitoring the magnitude of the risk in each plan and diversifying our exposure to such risks across a variety of instruments, markets and counterparties. As of June 30, 2019, we did not have concentrations of plan asset investment risk in any single entity, manager, counterparty, sector, industry or country.

NOTE 13 — INCOME TAXES

The components of income before income taxes are as follows:

	Year ended June 30,
(In thousands)	2019				2018				2017
Domestic income before income taxes	$	545,401			$	716,015			$	615,906
Foreign income before income taxes	750,830				739,916				557,340
Total income before income taxes	$	1,296,231			$	1,455,931			$	1,173,246

The provision for income taxes is comprised of the following:

(In thousands)	Year ended June 30,
2019				2018				2017
Current:
Federal	$	82,460			$	504,758			$	200,831
State	5,665				6,422				4,660
Foreign	59,274				41,414				38,208
	147,399				552,594				243,699
Deferred:
Federal	1,636				98,702				444
State	2,118				1,526				2,852
Foreign	(29,939		)		844				175
	(26,185		)		101,072				3,471
Provision for income taxes	$	121,214			$	653,666			$	247,170

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

(In thousands)	As of June 30,
2019				2018
Deferred tax assets:
Tax credits and net operating losses	$	208,572			$	171,701
Employee benefits accrual	65,065				64,707
Stock-based compensation	9,432				8,902
Inventory reserves	67,249				62,232
Non-deductible reserves	21,633				29,841
Depreciation and amortization	—				701
Unearned revenue	16,126				11,104
Unrealized loss on investments	1,492				956
Other	55,518				25,602
Gross deferred tax assets	445,087				375,746
Valuation allowance	(166,571		)		(163,570		)
Net deferred tax assets	$	278,516			$	212,176
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries not indefinitely reinvested	$	(243,491	)		$	(7,146	)
Deferred profit	(15,718		)		(13,027		)
Depreciation and amortization	(515,643		)		—
Total deferred tax liabilities	(774,852		)		(20,173		)
Total net deferred tax assets (liabilities)	$	(496,336	)		$	192,003

The provision for income taxes and the significant components of deferred income tax assets and liabilities for the year ended June 30, 2019 includes the tax impact of the acquisition of Orbotech.

As of June 30, 2019, we, excluding Orbotech, had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $20.5 million, $28.9 million and $23.1 million, respectively. Orbotech had U.S. federal, state, and foreign NOLs of approximately $49.0 million, $27.5 million and $53.6 million, respectively. Orbotech also had capital loss carry-forwards of approximately $44.6 million. The U.S. federal NOL carry-forwards will expire at various dates beginning in 2023 through 2033. The utilization of NOLs created by acquired companies is subject to annual limitations under Section 382 of the Internal Revenue Code. However, it is not expected that such annual limitation will significantly impair the realization of these NOLs. The state NOLs will begin to expire in 2019. Foreign NOLs and capital loss carry-forwards will be carried forward indefinitely. State credits of $225.8 million for us including Orbotech, will also be carried forward indefinitely.

The net deferred tax asset valuation allowance was $166.6 million and $163.6 million as of June 30, 2019 and June 30, 2018, respectively. The change was primarily due to an increase in the valuation allowance related to state credit carry-forwards generated in the fiscal year ended June 30, 2019, partially offset by a decrease in the valuation allowance related to foreign NOL carry-forwards. The valuation allowance is based on our assessment that it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. Of the valuation allowance as of June 30, 2019, $163.2 million relates to federal and state credit carry-forwards. The remainder of the valuation allowance relates to state NOL carry-forwards.

As of June 30, 2019, we intend to indefinitely reinvest $2.94 billion of cumulative undistributed earnings held by certain non-U.S. subsidiaries. If these undistributed earnings were repatriated to the U.S., the potential deferred tax liability associated with the undistributed earnings would be approximately $104.8 million.

We benefit from tax holidays in Israel and Singapore where we manufacture certain of our products. These tax holidays are on approved investments and are scheduled to expire at varying times in the next one to nine years. We are in compliance with all the terms and conditions of the tax holidays as of June 30, 2019. The net impact of these tax holidays was to decrease our tax expense by approximately $31.6 million, $39.7 million and $32.6 million in the fiscal years ended June 30, 2019, 2018 and 2017, respectively. The benefits of the tax holidays on diluted net income per share were $0.20, $0.25 and $0.21 for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

Our Israel tax holiday is scheduled to expire in June 2020. We will adopt Israel’s Preferred Technology Enterprise (“PTE”) regime after the expiration of the current holiday.

The reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows:

	Year ended June 30,
	2019			2018			2017
Federal statutory rate	21.0	%		28.1	%		35.0	%
State income taxes, net of federal benefit	0.5	%		0.5	%		0.4	%
Effect of foreign operations taxed at various rates	(10.5	)%		(11.0	)%		(12.2	)%
Tax Cuts and Jobs Act of 2017 - Transition tax and deferred tax effects	(1.5	)%		30.3	%		—	%
Global intangible low-taxed income	3.5	%		—	%		—	%
Foreign derived intangible income	(4.0	)%		—	%		—	%
Research and development tax credit	(1.8	)%		(1.4	)%		(1.1	)%
Net change in tax reserves	1.4	%		(0.4	)%		1.3	%
Domestic manufacturing benefit	—	%		(1.1	)%		(1.5	)%
Effect of stock-based compensation	0.4	%		(0.1	)%		(0.2	)%
Other	0.4	%		—	%		(0.6	)%
Effective income tax rate	9.4	%		44.9	%		21.1	%

A reconciliation of gross unrecognized tax benefits is as follows:

	Year ended June 30,
(In thousands)	2019				2018				2017
Unrecognized tax benefits at the beginning of the year	$	63,994			$	68,439			$	50,365
Increases for tax positions from acquisitions	60,753				—				—
Increases for tax positions taken in prior years	13,001				4,642				6,788
Decreases for tax positions taken in prior years	(1,304		)		(6,045		)		(246		)
Increases for tax positions taken in current year	26,178				16,812				14,696
Decreases for settlements with taxing authorities	—				(9,666		)		—
Decreases for lapsing of statutes of limitations	(16,196		)		(10,188		)		(3,164		)
Unrecognized tax benefits at the end of the year	$	146,426			$	63,994			$	68,439

The amount of unrecognized tax benefits that would impact the effective tax rate was $136.1 million, $57.9 million and $68.4 million as of June 30, 2019, 2018 and 2017, respectively. The amount of interest and penalties recognized during the years ended June 30, 2019, 2018 and 2017 was expense of $2.9 million, expense of $0.1 million, and income of $2.2 million as a result of a release of unrecognized tax benefits, respectively. Our policy is to include interest and penalties related to unrecognized tax benefits within other expense (income), net. The amount of interest and penalties accrued as of June 30, 2019 and 2018 was approximately $21.8 million and $6.0 million, respectively.

We are subject to federal income tax examinations for all years beginning from the fiscal year ended June 30, 2016 and are under U.S. federal income tax examination for the fiscal year ended June 30, 2016. We are subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2015. We are also subject to examinations in other major foreign jurisdictions, including Singapore and Israel, for all years beginning from the calendar year ended December 31, 2012. We are under audit in Germany related to a wholly owned subsidiary of Orbotech for the years ended December 31, 2013 to December 31, 2015.

In May 2017, Orbotech received an assessment from the Israel Tax Authority (“ITA”) with respect to its fiscal years 2012 through 2014 (the “Assessment”, and the “Audit Period”, respectively), for an aggregate amount of tax against us, after offsetting all NOLs for tax purposes available through the end of 2014, of approximately NIS 218 million (approximately $61.0 million as of June 30, 2019), which amount includes related interest and linkage differentials to the Israeli consumer price index (as of date of the Assessment). We believe our recorded unrecognized tax benefits are sufficient to cover the resolution of the Assessment.

On August 31, 2018, Orbotech filed an objection in respect of the tax assessment (the “Objection”). Orbotech is now in the process of the second stage, in which the claims raised by it in the Objection are examined by different personnel at the ITA. In addition, the ITA can examine additional items and may assess additional amounts in the second stage. The second stage must be completed within one year of when the Objection was filed.

In connection with the above, there is an ongoing criminal investigation in Israel against Orbotech, which became our wholly owned subsidiary as of the acquisition date, certain of its employees and its tax consultant. On April 11, 2018, Orbotech received a “suspect notification letter” (dated March 28, 2018) from the Tel Aviv District Attorney’s Office (Fiscal and Financial). In the letter, it was noted that the investigation file was transferred from the Assessment Investigation Officer to the District Attorney’s Office. The letter further states that the District Attorney’s Office has not yet made a decision regarding submission of an indictment against Orbotech; and that if after studying the case, a decision is made to consider prosecuting Orbotech, Orbotech will receive an additional letter, and within 30 days, Orbotech may present its arguments to the District Attorney’s Office as to why it should not be indicted. To date, neither we nor Orbotech has received such an additional letter or any other correspondence or contact from the District Attorney’s Office. We will continue to monitor the progress of the District Attorney's Office investigation, however, cannot anticipate when the review of the case will be completed and what will be the results thereof. We intend to cooperate with the District Attorney’s Office to enable them to conclude their investigation.

It is possible that certain examinations may be concluded in the next twelve months. We believe that we may recognize up to $14.3 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of examinations with various tax authorities.

NOTE 14 — COMMITMENTS AND CONTINGENCIES

Factoring. We have agreements (referred to as “factoring agreements”) with financial institutions to sell certain of our trade receivables and promissory notes from customers without recourse. We do not believe we are at risk for any material losses as a result of these agreements. In addition, we periodically sell certain letters of credit (“LCs”), without recourse, received from customers in payment for goods and services.

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

	Year ended June 30,
(In thousands)	2019				2018				2017
Receivables sold under factoring agreements	$	193,089			$	217,462			$	152,509
Proceeds from sales of LCs	$	95,436			$	5,511			$	48,780

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

Leases. We lease certain of our facilities, autos and equipment under arrangements that are accounted for as operating leases. Facilities rent expense was $13.5 million, $10.4 million and $9.6 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

The following is a schedule of expected operating lease payments:

Fiscal year ending June 30,	Amount (In thousands)
2020	$	30,296
2021	22,250
2022	16,217
2023	11,878
2024	7,912
2025 and thereafter	15,018
Total minimum lease payments	$	103,571

Purchase Commitments. We maintain commitments to purchase inventory from our suppliers as well as goods, services, and other assets in the ordinary course of business. Our liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers. Our estimate of our significant purchase commitments for primarily material, services, supplies and asset purchases is approximately $631.1 million as of June 30, 2019, which are primarily due within the next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.

Cash Long-Term Incentive Plan. As of June 30, 2019, we have committed $179.3 million for future payment obligations under our Cash LTI Plan. The calculation of compensation expense related to the Cash LTI Plan includes estimated forfeiture rate assumptions. Cash LTI awards issued to employees under the Cash LTI Plan vest in three or four equal installments, with one-third or one-fourth of the aggregate amount of the Cash LTI award vesting on each 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.

Guarantees and Contingencies. We maintain guarantee arrangements available through various financial institutions for up to $50.8 million, of which $44.7 million had been issued as of June 30, 2019, primarily to fund guarantees to customs authorities for value-added tax (“VAT”) and other operating requirements of our subsidiaries in Europe, Israel and Asia.

Indemnification Obligations. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to us. These obligations arise under the terms of our certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that we are required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. For example, we have paid or reimbursed legal expenses incurred in connection with the investigation of our historical stock option practices and the related litigation and government inquiries by several of our current and former directors, officers and employees. Although the maximum potential amount of future payments we could be required to make under the indemnification obligations generally described in this paragraph is theoretically unlimited, we believe the fair value of this liability, to the extent estimable, is appropriately considered within the reserve we have established for currently pending legal proceedings.

We are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which we customarily agrees to hold the other party harmless against losses arising from, or provides customers with other remedies to protect against, bodily injury or damage to personal property caused by our products, non-compliance with our product performance specifications, infringement by our products of third-party intellectual property rights and a breach of warranties, representations and covenants related to matters such as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by us is typically subject to the other party making a claim to and cooperating with us pursuant to the procedures specified in the particular contract. This usually allows us to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, our obligations under these agreements may be limited in terms of amounts, activity (typically at our option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, we may have recourse against third parties and/or insurance covering certain payments made by us.

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

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

NOTE 15 — LITIGATION AND OTHER LEGAL MATTERS

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

NOTE 16 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The authoritative guidance requires companies to recognize all derivative instruments and hedging activities, including foreign currency exchange contracts and interest rate lock agreements, (collectively “derivatives”) as either assets or liabilities at fair value on the Consolidated Balance Sheets. In accordance with the accounting guidance, we designate foreign currency exchange contracts and interest rate lock agreements as cash flow hedges of certain forecasted foreign currency denominated sales, purchase and spending transactions, and the benchmark interest rate of the corresponding debt financing, respectively.

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

In October 2014, we entered into a series of forward contracts (“Rate Lock Agreements”) to lock the benchmark rate on a portion of the 2014 Senior Notes. The Rate Lock Agreements had a notional amount of $1.00 billion in aggregate which matured in the second quarter of the fiscal year ended June 30, 2015. The Rate Lock Agreements were terminated on the date of pricing of the $1.25 billion of 4.650% Senior Notes due in 2024 and we recorded the fair value of $7.5 million as a gain within accumulated other comprehensive income (loss) (“OCI”) as of December 31, 2014. We recognized $0.8 million for each of the fiscal years ended June 30, 2019, 2018 and 2017, for the amortization of the gain recognized in accumulated other comprehensive income (loss), which amount reduced the interest expense. As of June 30, 2019, the unamortized portion of the fair value of the forward contracts for the rate lock agreements was $4.0 million.

During the three months ended June 30, 2018, we entered into a series of forward contracts (the “2018 Rate Lock Agreements”) to lock the benchmark interest rate prior to expected debt issuances. The objective of the 2018 Rate Lock Agreements was to hedge the risk associated with the variability in interest rates due to the changes in the benchmark rate leading up to the closing of the intended financing, on the notional amount being hedged. The 2018 Rate Lock Agreement had a notional amount of $500.0 million in aggregate, which matured and terminated in the third quarter of fiscal year ended June 30, 2019 and we recorded the fair value of $13.6 million as a loss within OCI. We recognized $0.3 million amortization of the loss recognized in AOCI, which increased the interest expense for the fiscal year ended June 30, 2019. As of June 30, 2019, the unamortized portion of the fair value of the 2018 Rate Lock Agreements was $13.2 million.

For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gains or losses is reported in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Prior to adopting the new accounting guidance for hedge accounting, time value was excluded from the assessment of effectiveness for derivatives designated as cash flow hedges. Time value was amortized on a mark-to-market basis and recognized in earnings over the life of the derivative contract. For derivative contracts executed after adopting the new accounting guidance, the election to include time value for the assessment of effectiveness is made on all forward contracts designated as cash flow hedges. The change in fair value of the derivative are recorded in OCI until the hedged item is recognized in earnings. The assessment of effectiveness of options contracts designated as cash flow hedges continue to exclude time value after adopting

the new accounting guidance. The initial value of the component excluded from the assessment of effectiveness are recognized in earnings over the life of the derivative contract. Any difference between change in the fair value of the excluded components and the amounts recognized in earnings are recorded in OCI.

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

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

The gains (losses) on derivatives in cash flow hedging relationships recognized in OCI for the indicated periods were as follows:

	Year ended June 30,
(In thousands)	2019				2018
Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amounts included in the assessment of effectiveness	$	(8,649	)		$	—
Foreign exchange contracts:
Amounts included in the assessment of effectiveness	$	(358	)		$	(1,934	)
Amounts excluded from the assessment of effectiveness	$	(112	)		$	—

The locations and amounts of designated and non-designated derivative’s gains and losses reported in the Consolidated Statements of Operations for the indicated periods were as follows:

	Year ended June 30,
	2019																2018
(In thousands)	Revenues				Costs of Revenues and Operating Expense				Interest Expense				Other Expense (Income), Net				Revenues				Costs of Revenues				Interest Expense				Other Expense (Income), Net
Total amounts presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded	$	4,568,904			$	1,869,377			$	124,604			$	(31,462	)		$	4,036,701			$	1,446,041			$	114,376			$	(30,482	)
Gains (losses) on Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amount of gains (losses) reclassified from accumulated OCI to earnings	$	—			$	—			$	424			$	—			$	—			$	—			$	—			$	—
Amount of gains (losses) reclassified from accumulated OCI to earnings as a result that a forecasted transaction is no longer probable of occurring	$	—			$	—			$	—			$	4			$	—			$	—			$	—			$	—
Foreign exchange contracts:
Amount of gains (losses) reclassified from accumulated OCI to earnings	$	4,329			$	(739	)		$	—			$	—			$	955			$	2,137			$	754			—
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach	$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Amount excluded from the assessment of effectiveness	$	—			$	—			$	—			$	(323	)		$	—			$	—			$	—			$	(567	)
Gains (losses) on Derivatives Not Designated as Hedging Instruments:
Amount of gains (losses) recognized in earnings	$	—			$	—			$	—			$	(23	)		$	—			$	—			$	—			$	(2,311	)

The U.S. dollar equivalent of all outstanding notional amounts of foreign currency hedge contracts, with maximum remaining maturities of approximately ten months as of June 30, 2019 and 2018, were as follows:

(In thousands)	As of June 30, 2019				As of June 30, 2018
Cash flow hedge contracts- foreign currency
Purchase	$	31,108			$	8,116
Sell	$	113,226			$	115,032
Other foreign currency hedge contracts
Purchase	$	257,614			$	130,442
Sell	$	273,061			$	154,442

The locations and fair value of our derivatives reported in our Consolidated Balance Sheets as of the dates indicated below were as follows:

	Asset Derivatives										Liability Derivatives
	Balance Sheet Location		As of June 30, 2019				As of June 30, 2018				Balance Sheet Location		As of June 30, 2019				As of June 30, 2018
(In thousands)	Fair Value									Fair Value
Derivatives designated as hedging instruments
Rate lock contracts	Other current assets		$	—			$	219			Other current liabilities		$	—			$	5,158
Foreign exchange contracts	Other current assets		397				3,259				Other current liabilities		2,097				312
Total derivatives designated as hedging instruments			397				3,478						2,097				5,470
Derivatives not designated as hedging instruments
Foreign exchange contracts	Other current assets		2,160				1,907				Other current liabilities		1,237				1,358
Total derivatives not designated as hedging instruments			2,160				1,907						1,237				1,358
Total derivatives			$	2,557			$	5,385					$	3,334			$	6,828

The changes in OCI, before taxes, related to derivatives for the indicated periods were as follows:

		Year ended June 30,
(In thousands)		2019				2018
Beginning balance		$	2,346			$	8,126
Amount reclassified to earnings		(4,018		)		(3,846		)
Net change in unrealized gains or losses		(9,119		)		(1,934		)
Ending balance		$	(10,791	)		$	2,346

Offsetting of Derivative Assets and Liabilities

We present derivatives at gross fair values in the Consolidated Balance Sheets. We have entered into arrangements with each of our counterparties, which reduce credit risk by permitting net settlement of transactions with the same counterparty under certain conditions. The information related to the offsetting arrangements for the periods indicated was as follows (in thousands):

As of June 30, 2019														Gross Amounts of Derivatives Not Offset in the Consolidated Balance Sheets
Description		Gross Amounts of Derivatives				Gross Amounts of Derivatives Offset in the Consolidated Balance Sheets				Net Amount of Derivatives Presented in the Consolidated Balance Sheets				Financial Instruments				Cash Collateral Received				Net Amount
Derivatives - assets		$	2,557			$	—			$	2,557			$	(1,397	)		$	—			$	1,160
Derivatives - liabilities		$	(3,334	)		$	—			$	(3,334	)		$	1,397			$	—			$	(1,937	)

As of June 30, 2018														Gross Amounts of Derivatives Not Offset in the Consolidated Balance Sheets
Description		Gross Amounts of Derivatives				Gross Amounts of Derivatives Offset in the Consolidated Balance Sheets				Net Amount of Derivatives Presented in the Consolidated Balance Sheets				Financial Instruments				Cash Collateral Received				Net Amount
Derivatives - assets		$	5,385			$	—			$	5,385			$	(1,888	)		$	—			$	3,497
Derivatives - liabilities		$	(6,828	)		$	—			$	(6,828	)		$	1,888			$	—			$	(4,940	)

NOTE 17 — SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer.

As a result of the Orbotech Acquisition, we updated our organizational structure resulting in four reportable segments: Semiconductor Process Control; Specialty Semiconductor Process; PCB, Display and Component Inspection; and Other. The reportable segments are determined based on several factors including, but not limited to, customer base, homogeneity of products, technology, delivery channels and similar economic characteristics.

Semiconductor Process Control.

The Semiconductor Process Control (“SPC”) segment offers comprehensive portfolio of inspection, metrology and data analytics products, and related service, which helps integrated circuit manufacturers achieve target yield throughout the entire semiconductor fabrication process-from research and development (“R&D”) to final volume production. Our differentiated products and services are designed to provide comprehensive solutions that help our customers accelerate development and production ramp cycles, achieve higher and more stable semiconductor die yields and improve their overall profitability. This reportable segment is comprised of two operating segments.

Specialty Semiconductor Process

The Specialty Semiconductor Manufacturing segment develops and sells advanced vacuum deposition and etching process tools, which are used by a broad range of specialty semiconductor customers, including manufacturers of microelectromechanical systems (“MEMS”), radio frequency (“RF”) communication chips, and power semiconductors for automotive and industrial applications. This reportable segment is comprised of one operating segment.

PCB, Display and Component Inspection

The PCB, Display and Component Inspection segment enable electronic device manufacturers to inspect, test and measure printed circuit boards (“PCBs”), flat panel displays (“FPDs”) and ICs to verify their quality, pattern the desired electronic circuitry on the relevant substrate and perform three-dimensional shaping of metalized circuits on multiple surfaces. This segment also engages in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers. This reportable segment is comprised of two operating segments.

Other

We engage in the research, development and marketing of products for the deposition of thin film coating of various materials on crystalline silicon photovoltaic wafers for solar energy panels. This reportable segment is comprised of one operating segment.

The CODM assesses the performance of each operating segment and allocates resources to those segments based on total revenue and segment gross margin and does not evaluate the segments using discrete asset information. Segment gross margin excludes corporate allocation and effects of foreign exchange rates, amortization of intangible assets, amortization of inventory fair value adjustments, and transaction costs associated with our acquisitions related to costs of revenues.

The following is a summary of results for each of our four reportable segments for the indicated periods:

	Year ended June 30,
(In thousands)	2019				2018				2017
Semiconductor Process Control:
Revenue	$	4,080,822			$	3,944,015			$	3,408,876
Segment gross margin	$	2,590,434			$	2,554,223			$	2,160,747
Specialty Semiconductor Process:
Revenue	$	151,164			$	—			$	—
Segment gross margin	$	78,800			$	—			$	—
PCB, Display and Component Inspection:
Revenue	$	332,810			$	92,516			$	71,557
Segment gross margin	$	155,765			$	38,428			$	30,914
Other:
Revenue	$	4,676			$	—			$	—
Segment gross margin	$	1,102			$	—			$	—
Totals:
Revenue	$	4,569,472			$	4,036,531			$	3,480,433
Segment gross margin	$	2,826,101			$	2,592,651			$	2,191,661

The following table reconciles total reportable segment revenue to total revenue for the indicated periods:

	Year ended June 30,
(In thousands)	2019				2018				2017
Total revenue for reportable segments	$	4,569,472			$	4,036,531			$	3,480,433
Corporate allocation and effects of foreign exchange rates	(568		)		170				(419		)
Total revenue	$	4,568,904			$	4,036,701			$	3,480,014

The following table reconciles total segment gross margin to total income before income taxes for the indicated periods:

	Year ended June 30,
(In thousands)	2019				2018				2017
Total segment gross margin	$	2,826,101			$	2,592,651			$	2,191,661
Merger and acquisition-related charges, corporate allocation, and effects of foreign exchange rates(1)	126,574				1,991				(2,138		)
Research and development	711,030				608,531				526,688
Selling, general and administrative	599,124				442,304				388,211
Interest expense	124,604				114,376				122,476
Other expense (income), net	(31,462		)		(30,482		)		(16,822		)
Income before income taxes	$	1,296,231			$	1,455,931			$	1,173,246

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(1)

Acquisition-related charges primarily include amortization of intangible assets, amortization of inventory fair value adjustments, and other acquisition-related costs classified or presented as part of costs of revenues. Merger-related charges are associated with the merger agreement terminated during the fiscal year ended June 30, 2017 between KLA and Lam Research Corporation (“Lam”) primarily includes employee retention-related expenses associated with costs of revenues.

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

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

(Dollar amounts in thousands)	Year ended June 30,
2019							2018							2017
Revenues:
China	$	1,215,807			27	%		$	643,033			16	%		$	412,098			12	%
Taiwan	1,105,726				24	%		636,363				16	%		1,104,307				32	%
North America	596,452				13	%		494,330				12	%		523,024				14	%
Korea	584,091				13	%		1,178,601				29	%		688,094				20	%
Japan	581,529				13	%		638,358				16	%		351,202				10	%
Europe and Israel	305,924				7	%		300,883				7	%		263,789				8	%
Rest of Asia	179,375				3	%		145,133				4	%		137,500				4	%
Total	$	4,568,904			100	%		$	4,036,701			100	%		$	3,480,014			100	%

The following is a summary of revenues by major products for the indicated periods:

(Dollar amounts in thousands)	Year ended June 30,
2019							2018							2017
Revenues:
Wafer Inspection	$	1,657,753			36	%		$	1,731,809			43	%		$	1,600,889			46	%
Patterning	1,134,409				25	%		1,116,022				28	%		917,178				26	%
Specialty Semiconductor Process	129,854				3	%		—				—	%		—				—	%
PCB, Display and Component Inspection	238,275				5	%		85,836				2	%		66,399				2	%
Services	1,176,661				26	%		876,030				22	%		776,080				22	%
Other	231,952				5	%		227,004				5	%		119,468				4	%
Total	$	4,568,904			100	%		$	4,036,701			100	%		$	3,480,014			100	%

Wafer Inspection, and Patterning products are offered in Semiconductor Process Control segment. Services are offered in multiple segments. Other includes primarily refurbished systems, remanufactured legacy systems, and enhancements and upgrades for previous-generation products which are part of Semiconductor Process Control segment.

In the fiscal year ended June 30, 2019, one customer accounted for approximately 15% of total revenues. In the fiscal year ended June 30, 2018, one customer accounted for approximately 21% of total revenues. In the fiscal year ended June 30, 2017, two customers accounted for approximately 23% and 16% of total revenues.

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

	As of June 30,
(In thousands)	2019				2018
Long-lived assets:
United States	$	253,255			$	187,352
Israel	66,082				26,980
Europe	62,027				12,924
Singapore	49,523				47,009
Rest of Asia	17,912				12,041
Total	$	448,799			$	286,306

NOTE 18 — RELATED PARTY TRANSACTIONS

During the fiscal years ended June 30, 2019, 2018 and 2017, we purchased from, or sold to, several entities, where one or more of our executive officers or members of our Board of Directors, or their immediate family members were, during the periods presented, an executive officer or a board member of a subsidiary, including Citrix Systems, Inc., Integrated Device Technology, Inc., Juniper Networks, Inc., Keysight Technologies, Inc., MetLife Insurance K.K., NetApp, Inc., and Proofpoint, Inc.

The following table provides the transactions with these parties for the indicated periods (for the portion of such period that they were considered related):

	Year ended June 30,
(In thousands)	2019				2018				2017
Total revenues	$	2,402			$	474			$	16
Total purchases(1)	$	2,881			$	14,723			$	1,048

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(1)

During the fourth quarter of the fiscal year ended June 30, 2018, we acquired a product line from Keysight Technologies, Inc. (“Keysight”) and entered into a transition services agreement pursuant to which Keysight provides certain manufacturing services to us. For additional details refer to Note 6, “Business Combinations”. We recorded the manufacturing services fees under the transition services agreement with Keysight within cost of revenues, which was immaterial for the fiscal year ended June 30, 2019 and 2018.

Our receivable and payable balances from these parties were immaterial as of June 30, 2019 and June 30, 2018.

NOTE 19 — SUBSEQUENT EVENTS

On August 1, 2019, we announced that our Board of Directors had declared a quarterly cash dividend of $0.75 per share to be paid on September 3, 2019 to stockholders of record as of the close of business on August 15, 2019.

NOTE 20 — QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of our quarterly consolidated results of operations (unaudited) for the fiscal years ended June 30, 2019 and 2018.

(In thousands, except per share data)	First Quarter Ended September 30, 2018				Second Quarter Ended December 31, 2018				Third Quarter Ended March 31, 2019				Fourth Quarter Ended June 30, 2019
Total revenues(1)(2)	$	1,093,260			$	1,119,898			$	1,097,311			$	1,258,435
Gross margin	$	711,873			$	711,638			$	610,366			$	665,650
Net income attributable to KLA	$	395,944			$	369,100			$	192,728			$	217,845
Net income attributable to KLA per share:
Basic(4)	$	2.55			$	2.43			$	1.23			$	1.36
Diluted(4)	$	2.54			$	2.42			$	1.23			$	1.35

(In thousands, except per share data)	First Quarter Ended September 30, 2017				Second Quarter Ended December 31, 2017				Third Quarter Ended March 31, 2018				Fourth Quarter Ended June 30, 2018
Total revenues	$	969,581			$	975,822			$	1,021,294			$	1,070,004
Gross margin	$	616,464			$	628,820			$	652,938			$	692,438
Net income (loss) attributable to KLA(3)	$	280,936			$	(134,319	)		$	306,881			$	348,767
Net income (loss) attributable to KLA per share:
Basic(4)	$	1.79			$	(0.86	)		$	1.96			$	2.24
Diluted(4)	$	1.78			$	(0.86	)		$	1.95			$	2.22

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(1)	On July 1, 2018, we adopted ASC 606 using the modified retrospective transition approach. Results for reporting periods beginning after June 30, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the previous revenue guidance in ASC 605.

(2)	On February 20, 2019, we completed the acquisition of Orbotech for total consideration of approximately $3.26 billion. The operating results of Orbotech have been included in our Consolidated financial statements for the fiscal year ended June 30, 2019 from the Acquisition Date. For additional details, refer to Note 6 “Business Combinations” to our Consolidated Financial Statements.

(3)	We had a net loss of $134.3 million in the second quarter of 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.

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of KLA Corporation:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of KLA Corporation (formerly known as KLA-Tencor Corporation) and its subsidiaries (the “Company”) as of June 30, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2019, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Notes 1 and 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2019.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Orbotech, Ltd. from its assessment of internal control over financial reporting as of June 30, 2019 because it was acquired by the Company in a purchase business combination during 2019. We have also excluded Orbotech, Ltd. from our audit of internal control over financial reporting. Orbotech, Ltd. is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting were $917.6 million and $388.9 million, respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2019.

Definition and Limitations of Internal Control over Financial Reporting

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

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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Acquisition of Orbotech, Ltd. - Valuation of Intangible Assets

As described in Notes 1 and 6 to the consolidated financial statements, the Company completed the acquisition of Orbotech, Ltd. (“Orbotech”) for consideration of approximately $3.26 billion in 2019, which resulted in approximately $1.55 billion of intangible assets being recorded. Management applied significant judgment in estimating the fair value of the intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the revenue growth rates, technology migration curves, discount rates, royalty rates and customer attrition rates.

The principal considerations for our determination that performing procedures relating to the valuation of the intangible assets acquired in the acquisition of Orbotech is a critical audit matter are there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of intangible assets acquired due to the significant amount of judgment by management when developing the estimate. Significant audit effort was required in performing procedures and evaluating the significant assumptions relating to the estimate, including the revenue growth rates and the technology migration curves; and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of intangible assets and controls over development of the assumptions related to the valuation of the intangible assets. These procedures also included, among others, reading the purchase agreement, and testing management’s process for estimating the fair value of intangible assets. Testing management’s process included evaluating the appropriateness of the valuation methods and the reasonableness of significant assumptions, including the revenue growth rates and the technology migration curves for the intangible assets, and using professionals with specialized skill and knowledge to assist with the evaluation. Evaluating the reasonableness of the revenue growth rates involved considering the past performance of the acquired business as well as economic and industry forecasts. The technology migration curves were evaluated by considering the revenue attribution between existing technology and in-process research and development based on the assessment of the separation of forecasted future revenue between developed products and new generation products together with the technology carryover rate.

Uncertain Tax Positions related to the Orbotech Acquisition

As described in Note 13 to the consolidated financial statements, the Company has recorded liabilities for gross uncertain tax positions of approximately $60.8 million at June 30, 2019 in connection with acquisitions completed by the Company. The majority of the uncertain tax positions were related to the Orbotech acquisition. The uncertain tax positions for the Orbotech acquisition relate to multiple jurisdictions, including Israel, which as further discussed in Note 13 is comprised principally of a liability for an uncertain tax position arising from the assessment Orbotech received from the Israel Tax Authority (“ITA”) with respect to its fiscal years 2012 through 2014. The calculation of the Company’s tax liabilities including liabilities associated with the Orbotech acquisition, involves dealing with uncertainties in the application of complex tax regulations. The evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity.

The principal considerations for our determination that performing procedures relating to the uncertain tax positions related to the Orbotech acquisition is a critical audit matter are there was significant judgment by management when evaluating uncertain tax positions, including a high degree of estimation uncertainty relative to the application of complex tax regulations and evaluation of factors including changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. This in turn led to significant auditor judgment and effort in performing procedures to evaluate the timely identification and accurate measurement of uncertain tax positions. Also, the evaluation of audit evidence available to support the tax liabilities for uncertain tax positions is complex and required significant auditor judgment as the nature of the evidence is often highly subjective, and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification and recognition of the liability for uncertain tax positions, and controls addressing completeness of the uncertain tax positions, as well as controls over measurement of the liability. These procedures also included, among others, (i) testing and evaluating the information used in the calculation of the liability for uncertain tax positions related to the Orbotech acquisition, including international filing positions, the related final tax returns and communications between the Company and the tax authorities; (ii) testing the calculation of the liability for uncertain tax positions by jurisdiction, including management’s assessment of the technical merits of tax positions related to the Orbotech matters and estimates of the amount of tax benefit expected to be sustained for the matters; (iii) testing the completeness of management’s assessment of both the identification of uncertain tax positions and possible outcomes of each uncertain tax position; and (iv) evaluating the status and results of income tax audits with other relevant tax authorities. Professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of the uncertain tax positions related to the Orbotech acquisition, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than-not of being sustained, the amount of potential benefit to be realized, and the application of relevant tax laws.

/s/ PricewaterhouseCoopers LLP

San Jose, California

August 16, 2019

We have served as the Company’s auditor since 1977.