Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following discussion of our financial condition and results of operations contains forward-looking statements, which are subject to risks, uncertainties and changes in condition, significance, value and effect. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in “Risk Factors” and elsewhere in this 2015 Form 10-K and other documents we file from time to time with the Securities and Exchange Commission. (See “Cautionary Statement Regarding Forward-Looking Statements” in Part I of this 2015 Form 10-K).

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a description of our results of operations and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in this 2015 Form 10-K. MD&A consists of the following sections:

Executive Summary provides a summary of the key highlights of our results of operations and our management’s assessment of material trends and uncertainties relevant to our business.

Results of Operations provides an analysis of operating results.

Critical Accounting Policies and Estimates discusses accounting policies that reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Liquidity and Capital Resources provides an analysis of cash flows, contractual obligations and financial position.

Executive Summary

Lam Research has been an innovative supplier of wafer fabrication equipment and services to the semiconductor industry for more than 35 years. Our customers include semiconductor manufacturers that make memory, microprocessors, and other logic integrated circuits for a wide range of electronics; including cell phones, computers, tablets, storage devices, and networking equipment.

Our market-leading products are designed to help our customers build the smaller, faster, and more powerful devices that are necessary to power the capabilities required by end users. The process of integrated circuits fabrication consists of a complex series of process and preparation steps, and our product offerings in deposition, etch, and clean address a number of the most critical steps in the fabrication process. We leverage our expertise in semiconductor processing to develop technology and/or productivity solutions that typically benefit our customers through lower defect rates, enhanced yields, faster processing time, and reduced cost as well as by facilitating their ability to meet more stringent performance and design standards.

The semiconductor capital equipment industry has been highly competitive and characterized by rapid changes in demand. This cyclicality has been mitigated in recent years by market demands and consolidation among our customers. With a reduced number of customers, variability in their business plans may lead to changes in demand for Lam’s equipment and services. The variability in our customers’ investments during any particular period is dependent on several factors including but not limited to electronics demand, economic conditions (both general and in the semiconductor and electronics industries), industry supply and demand, prices for semiconductors, and our customers’ ability to develop and manufacture increasingly complex and costly semiconductor devices.

Demand for our products was strong throughout the fiscal year as semiconductor device manufacturers made capacity and technology investments. We expect growth in the overall wafer fabrication equipment market in calendar year 2015 compared to calendar year 2014 related to leading edge investments by our customers. Technology inflections in our industry, including FinFET transistors, 3D NAND, multiple patterning, and advanced packaging have led to an increase in the deposition and etch market sizes. We believe that, over the longer term, demand for our products should increase as the proportion of customers’ capital expenditures rises in these technology inflection areas, and we continue to gain market share.

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The following summarizes certain key annual financial information for the periods indicated below:

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013				FY15 vs. FY14								FY14 vs. FY13
		(in thousands, except per share data and percentages)
Revenue		$	5,259,312			$	4,607,309			$	3,598,916			$	652,003				14.2%			$	1,008,393				28.0%
Gross margin		$	2,284,336			$	2,007,481			$	1,403,059			$	276,855				13.8%			$	604,422				43.1%
Gross margin as a percent of total revenue			43.4%				43.6%				39.0%				-0.2%								4.6%
Total operating expenses		$	1,496,297			$	1,329,812			$	1,284,988			$	166,485				12.5%			$	44,824				3.5%
Net income		$	655,577			$	632,289			$	113,879			$	23,288				3.7%			$	518,410				455.2%
Diluted net income per share		$	3.70			$	3.62			$	0.66			$	0.08				2.2%			$	2.96				448.5%

Fiscal year 2015 revenues increased 14% compared to fiscal year 2014, reflecting the steady increase in technology inflections’ spending, as well as incremental market share gains. The small decrease in gross margin as a percentage of revenue for the fiscal year 2015 compared to fiscal year 2014 was due primarily to less favorable product mix partially offset by improved factory utilization due to higher production volumes.

Operating expenses in fiscal year 2015 increased as compared to fiscal year 2014 primarily related to continued investments in the next-generation research and development. In fiscal year 2015, we also recorded a goodwill impairment of approximately $79 million related to our single-wafer clean reporting unit.

Our cash and cash equivalents, short-term investments, and restricted cash and investments balances totaled approximately $4.2 billion as of June 28, 2015 compared to $3.2 billion as of June 29, 2014. This increase was primarily the result of $992 million net proceeds from March 2015 Senior Notes issuance. Cash flows provided from operating activities was $786 million for fiscal year 2015 compared to $717 million for fiscal year 2014. Cash flows provided from operating activities in fiscal 2015 was primarily used for $573 million in treasury stock purchases, $116 million in dividends paid to our stockholders, and $198 million of capital expenditures, and are partially offset by $66 million of treasury stock reissuance and common stock issuance resulting from our employee equity-based compensation programs.

Results of Operations

Shipments and Backlog

Shipments for fiscal year 2015 were approximately $5.5 billion and increased by 20% compared to fiscal year 2014. Shipments for fiscal year 2014 were approximately $4.6 billion and increased by 23% compared to fiscal year 2013. The increase in shipments during fiscal year 2015 as compared to fiscal year 2014, as well as the

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increase in shipments during fiscal year 2014 as compared to fiscal year 2013 related to continued strengthening of customer demand for semiconductor equipment.

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013
Shipments (in millions)		$	5,472			$	4,551			$	3,714
Korea			26%				24%				16%
Taiwan			22%				21%				29%
United States			15%				15%				20%
Japan			14%				13%				11%
China			12%				15%				9%
Europe			6%				7%				8%
Southeast Asia			5%				5%				7%

The percentage of total semiconductor processing system shipments to each of the markets we serve were as follows for fiscal years 2015, 2014, and 2013.

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013
Memory			58	%			60	%			36	%
Foundry			30	%			30	%			49	%
Logic/integrated device manufacturing			12	%			10	%			15	%

Our shipments to memory customers remained strong during fiscal year 2015 driven by mobile and enterprise demands. During fiscal year 2014, memory customer demand was higher due to node transitions in memory manufacturing, stable pricing for memory, and tight industry supply.

Unshipped orders in backlog as of June 28, 2015 were approximately $880 million and increased from approximately $866 million as of June 29, 2014. Our unshipped orders backlog includes orders for systems, spares, and services. Please refer to “Backlog” in Part I Item 1, “Business” of this report for a description of our policies for adding to and adjusting backlog.

Revenue

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013
Revenue (in millions)		$	5,259			$	4,607			$	3,599
Korea			27%				24%				17%
Taiwan			21%				23%				29%
United States			17%				13%				20%
Japan			12%				14%				10%
China			12%				14%				9%
Europe			6%				7%				8%
Southeast Asia			5%				5%				7%

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The revenue increase in fiscal year 2015 as compared to fiscal year 2014 reflected an increase in technology and capacity investments by our customers. The revenue increase in fiscal year 2014 as compared to fiscal year 2013 reflected increased customer and industry demand. Our revenue levels are generally correlated to the amount of shipments and our installation and acceptance timelines. The overall Asia region continues to account for a majority of our revenues as a substantial amount of the worldwide capacity additions for semiconductor manufacturing continues to occur in this region. Our deferred revenue balance was $518 million as of June 28, 2015 compared to $362 million as of June 29, 2014. Our deferred revenue balance does not include shipments to Japanese customers, to whom title does not transfer until customer acceptance. Shipments to Japanese customers are classified as inventory at cost until the time of customer acceptance. The anticipated future revenue value from shipments to Japanese customers was approximately $164 million as of June 28, 2015 compared to $34 million as of June 29, 2014.

Gross Margin

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013				FY15 vs. FY14								FY14 vs. FY13
		(in thousands, except percentages)
Gross margin		$	2,284,336			$	2,007,481			$	1,403,059			$	276,855				13.8%			$	604,422				43.1%
Percent of total revenue			43.4%				43.6%				39.0%				-0.2%								4.6%

The decrease in gross margin as a percentage of revenue for fiscal year 2015 compared to fiscal year 2014 was due primarily to a less favorable product mix partially offset by improved factory utilization due to higher production volumes.

The increase in gross margin as a percentage of revenue for fiscal year 2014 compared to fiscal year 2013 was due to higher business volumes as well as a more favorable product mix. Additionally, the Novellus acquisition related inventory fair value impact and cost associated with rationalization of certain product configurations decreased by $78 million and $15 million, respectively, in fiscal year 2014 as compared to fiscal year 2013.

Research and Development

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013				FY15 vs. FY14								FY14 vs. FY13
		(in thousands, except percentages)
Research & development (“R&D”)		$	825,242			$	716,471			$	683,688			$	108,771				15.2%			$	32,783				4.8%
Percent of total revenue			15.7%				15.6%				19.0%				0.1%								-3.4%

We continued to make significant R&D investments focused on leading-edge deposition, plasma etch, single-wafer clean and other semiconductor manufacturing requirements. The increase in R&D expense during fiscal year 2015 compared to fiscal year 2014 was primarily due to a $71 million increase in salaries and benefits related to increased headcount and higher incentive and equity compensation, a $12 million increase in supplies, a $5 million increase in depreciation and lab maintenance, and a $6 million increase in outside services.

The increase in R&D expense during fiscal year 2014 compared to fiscal year 2013 was primarily due to a $41 million increase in salaries and benefits related to higher headcount and higher incentive and equity compensation offset by a reduction of $7 million in supplies.

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Selling, General and Administrative

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013				FY15 vs. FY14								FY14 vs. FY13
		(in thousands, except percentages)
Selling, general & administrative (“SG&A”)		$	591,611			$	613,341			$	601,300			$	(21,730	)			-3.5%			$	12,041				2.0%
Percent of total revenue			11.2%				13.3%				16.7%				-2.1%								-3.4%

The decrease in SG&A expense during fiscal year 2015 compared to fiscal year 2014 was due primarily to an $11 million decrease in integration costs, a $9 million decrease in costs associated with rationalization of product configurations, and an $8 million decrease related to impairment of long lived assets. This decrease is offset by an $8 million increase in compensation and benefits expense.

The increase in SG&A expense during fiscal year 2014 compared to fiscal year 2013 was due primarily to a net increase of $11 million in salaries, benefits and incentive compensation, $20 million increase in marketing expenses and outside services, $7 million in costs associated with rationalization of certain product configurations, $8 million of impairment of long lived assets, and a $5 million cost related to the renewal of our Fremont and Livermore buildings’ operating leases. This increase was offset by a $34 million reduction in integration costs and a $10 million reduction in amortization of intangible assets related to the Novellus integration.

Goodwill Impairment

Our annual goodwill impairment analysis for fiscal year 2015 resulted in a non-cash impairment charge upon our single-wafer clean reporting unit of $79 million, extinguishing the goodwill ascribed to the reporting unit. Uncertainty surrounding future revenue growth in certain products resulted in the estimated discounted cash flow falling below the carrying value of the goodwill balance.

Gain on Sale of Real Estate

During fiscal year 2014, we sold our interest in nonessential property in Palo Alto, California, resulting in $135 million in net proceeds and a realized gain of $83 million from the transaction.

Other Expense, Net

Other expense, net, consisted of the following:

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013
		(in thousands)
Interest income		$	19,268			$	12,540			$	14,737
Interest expense			(73,682	)			(61,692	)			(60,408	)
Gains on deferred compensation plan related assets, net			9,071				9,559				9,764
Foreign exchange gains (losses), net			2,331				1,529				(6,808	)
Other, net			(4,177	)			668				(8,698	)
		$	(47,189	)		$	(37,396	)		$	(51,413	)

The increase in interest expense during fiscal year 2015 as compared with fiscal years 2014 and 2013 was primarily due to the $1 billion Senior Note issuance in the March 2015 quarter.

Foreign exchange gains in fiscal year 2015 and 2014 and losses in fiscal years 2013 were related to un-hedged portions of the balance sheet exposures.

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Other, net expense realized during fiscal year 2015 was primarily due to a settlement of matters relating to certain investment transactions. Other, net income realized during fiscal year 2014 was primarily due to a gain on the disposition of a private equity investment. Other, net expenses during fiscal year 2013 included a $4 million other-than-temporary impairment of a public equity investment recognized during the March 2013 quarter.

Income Tax Expense (benefit)

		Year Ended
		June 28, 2015				June 29, 2014				June 30, 2013
		(in thousands, except percentages)
Income tax expense (benefit)		$	85,273			$	91,074			$	(47,221	)
Effective tax rate			11.5%				12.6%				-70.8%

The decrease in the effective tax rate in fiscal year 2015 as compared to fiscal year 2014 was primarily due to geographic mix of income between higher and lower tax jurisdictions, and an increased federal tax benefit in fiscal year 2015 due to a retroactive reinstatement of the second half of fiscal year 2014 federal research and development tax credit in fiscal year 2015. The increase in the effective tax rate in fiscal year 2014 as compared to fiscal year 2013 was primarily due to the change in the level of income and geographic mix of income between higher and lower tax jurisdictions, U.S. income and applicable foreign withholding taxes on undistributed foreign earnings of certain of our foreign subsidiaries for 2014, reduced tax benefit in fiscal year 2014 due to the expiration of the federal research and development tax credit as of December 31, 2013, and tax benefits in fiscal year 2013 related to the recognition of previously unrecognized tax benefits due to the lapse of the statute of limitations and successful resolution of certain tax matters.

International revenues account for a significant portion of our total revenues, such that a material portion of our pre-tax income is earned and taxed outside the United States at rates that are generally lower than in the United States. Please refer to Note 7 of our Consolidated Financial Statements.

Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Our gross deferred tax assets, composed primarily of reserves and accruals that are not currently deductible and tax credit carryforwards, were $311 million and $343 million at the end of fiscal years 2015 and 2014, respectively. These gross deferred tax assets were offset by deferred tax liabilities of $318 million and $294 million at the end of fiscal years 2015 and 2014, respectively, and a valuation allowance of $86 million and $74 million at the end of fiscal years 2015 and 2014, respectively. The change in the gross deferred tax assets and deferred tax liabilities between fiscal year 2015 and 2014 is primarily due to the reclassification of deferred tax assets as a result of the adoption of Accounting Standards Update 2013-11, an accrual for future tax liabilities due to the expected repatriation of foreign earnings of certain foreign subsidiaries for 2015, and convertible debt accretion, offset by a decrease in deferred tax liabilities related to amortization of intangible assets.

Our fiscal years 2015 and 2014 valuation allowance of $86 million and $74 million primarily relate to California and certain foreign deferred tax assets.

As of our fiscal year end of June 28, 2015, we continue to record a valuation allowance to offset the entire California deferred tax asset balance due to the single sales factor apportionment election resulting in lower taxable income in California. We also continue to record valuation allowances on certain foreign entities’ net operating losses.

We evaluate if the deferred tax assets are realizable on a quarterly basis and will continue to assess the need for changes in valuation allowances, if any.

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Uncertain Tax Positions

We re-evaluate 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, and effectively settled issues under audit. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make certain judgments, estimates and assumptions that could affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We based our estimates and assumptions on historical experience and on various other assumptions we believed to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates.

The significant accounting policies used in the preparation of our financial statements are described in Note 2 of our Consolidated Financial Statements. Some of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex, and/or subjective judgments, often regarding estimates about matters that are inherently uncertain.

We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Revenue Recognition: We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred and title has passed or services have been rendered, the selling price is fixed or determinable, collection of the receivable is reasonably assured, and we have received customer acceptance or are otherwise released from our customer acceptance obligations. If terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. If the practices of a customer do not provide for a written acceptance or the terms of sale do not include a lapsing acceptance provision, we recognize revenue when it can be reliably demonstrated that the delivered system meets all of the agreed-to customer specifications. In situations with multiple deliverables, we recognize revenue upon the delivery of the separate elements to the customer and when we receive customer acceptance or are otherwise released from our customer acceptance obligations. We allocate revenue from multiple-element arrangements among the separate elements using their relative selling prices, based on our best estimate of selling price. Our sales arrangements do not include a general right of return. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items. We generally recognize revenue related to sales of spare parts and system upgrade kits upon shipment. We generally recognize revenue related to services upon completion of the services requested by a customer order. We recognize revenue for extended maintenance service contracts with a fixed payment amount on a straight-line basis over the term of the contract. When goods or services have been delivered to the customer, but all conditions for revenue recognition have not been met, deferred revenue and deferred costs are recorded in deferred profit on our Consolidated Balance Sheet.

Inventory Valuation: Inventories are stated at the lower of cost or market using standard costs that approximate actual costs on a first-in, first-out basis. Finished goods are reported as inventories until the point of title transfer to the customer. Unless specified in the terms of sale, title generally transfers at the physical transfer of the products to the freight carriers. Transfer of title for shipments to Japanese customers occurs at the time of customer acceptance.

Management evaluates the need to record adjustments for impairment of inventory at least quarterly. Our policy is to assess the valuation of all inventories including manufacturing raw materials, work-in-process, finished goods, and spare parts in each reporting period. Obsolete inventory or inventory in excess of management’s estimated

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usage requirement is written down to its estimated market value if less than cost. Estimates of market value include, but are not limited to, management’s forecasts related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, general semiconductor market conditions, and possible alternative uses. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period in which we make the revision.

Warranty: Typically, the sale of semiconductor capital equipment includes providing parts and service warranties to customers as part of the overall price of the system. We provide standard warranties for our systems. We record a provision for estimated warranty expenses to cost of sales for each system when we recognize revenue. We do not maintain general or unspecified reserves; all warranty reserves are related to specific systems. All actual or estimated parts and labor costs incurred in subsequent periods are charged to those established reserves on a system-by-system basis.

While we periodically monitor the performance and cost of warranty activities, if actual costs incurred are different than our estimates, we may recognize adjustments to provisions in the period in which those differences arise or are identified. In addition to the provision of standard warranties, we offer customer-paid extended warranty services. Revenues for extended maintenance and warranty services with a fixed payment amount are recognized on a straight-line basis over the term of the contract. Related costs are recorded as incurred.

Equity-based Compensation — Employee Stock Purchase Plan (“ESPP”) and Employee Stock Plans: We recognize the fair value of equity-based compensation expense. We determine the fair value of our restricted stock units (“RSUs”), excluding market-based performance RSUs, based upon the fair market value of our common stock at the date of grant, discounted for dividends. We estimate the fair value of our market-based performance RSUs using a Monte Carlo simulation model at the date of the grant. We estimate the fair value of our stock options and ESPP awards using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award. We amortize the fair value of equity-based awards over the vesting periods of the award and we have elected to use the straight-line method of amortization.

We make quarterly assessments of the adequacy of our tax credit pool related to equity-based compensation to determine if there are any deficiencies that we are required to recognize in our Consolidated Statements of Operations. We will only recognize a benefit from equity-based compensation in paid-in-capital if we realize an incremental tax benefit after all other tax attributes currently available to us have been utilized. In addition, we have elected to account for the indirect benefits of equity-based compensation on the research tax credit through the income statement rather than through paid-in-capital. We have also elected to net deferred tax assets and the associated valuation allowance related to net operating loss and tax credit carryforwards for the accumulated stock award tax benefits for income tax footnote disclosure purposes. We will track these stock award attributes separately and will only recognize these attributes through paid-in-capital.

Income Taxes: Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more-likely-than-not that such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at the time. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more-likely-than-not that the deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.

We recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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Goodwill and Intangible Assets: The valuation of intangible assets acquired in a business combination requires the use of management estimates including but not limited to estimating future expected cash flows from assets acquired and determining discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available.

Goodwill represents the amount by which the purchase price in each business combination exceeds the fair value of the net tangible and identifiable intangible assets acquired. Each component of the Company for which discrete financial information is available and for which management regularly reviews the results of operations is considered a reporting unit. All goodwill acquired in a business combination is assigned to one or more reporting units as of the acquisition date. Goodwill is assigned to our reporting units that are expected to benefit from the synergies of the combination. The goodwill assigned to a reporting unit is the difference between the acquisition consideration assigned to the reporting unit on a relative fair value basis and the fair value of acquired assets and liabilities that can be specifically attributed to the reporting unit. We test goodwill and identifiable intangible assets with indefinite useful lives for impairment at least annually. We amortize intangible assets with estimable useful lives over their respective estimated useful lives, and we review for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable and the carrying amount exceeds its fair value.

We review goodwill at least annually for impairment. If certain events or indicators of impairment occur between annual impairment tests, we will perform an impairment test at that date. In testing for a potential impairment of goodwill, we: (1) allocate goodwill to the reporting units to which the acquired goodwill relates; (2) estimate the fair value of our reporting units; and (3) determine the carrying value (book value) of those reporting units. Prior to this allocation of the assets to the reporting units, we assess long-lived assets for impairment. Furthermore, if the estimated fair value of a reporting unit is less than the carrying value, we must estimate the fair value of all identifiable assets and liabilities of that reporting unit, in a manner similar to a purchase price allocation for an acquired business. This can require independent valuations of certain internally generated and unrecognized intangible assets such as in-process R&D and developed technology. Only after this process is completed can the amount of goodwill impairment, if any, be determined. In our goodwill impairment process we first assess qualitative factors to determine whether it is necessary to perform a quantitative analysis. We do not calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more-likely-than-not that the reporting unit’s fair value is less than its carrying amount. Our most recent annual goodwill impairment analysis, which was performed as of the first day of our fourth quarter of fiscal year 2015, March 30, 2015, resulted in the recognition of a $79.4 million goodwill impairment charge on our single-wafer clean systems reporting unit. We did not record any goodwill impairment in fiscal years 2014 or 2013.

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. We determine the fair value of our reporting units by using an income approach. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.

In estimating the fair value of a reporting unit, we make estimates and judgments about the future cash flows of our reporting units, including estimated growth rates and assumptions about the economic environment. Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates it is using to manage the underlying businesses, there is significant judgment involved in determining the cash flows attributable to a reporting unit. In addition, we make certain judgments about allocating shared assets to the estimated balance sheets of our reporting units. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge.

As a result, several factors could result in an impairment of a material amount of our goodwill balance in future periods, including, but not limited to: (1) weakening of the global economy, weakness in the semiconductor

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equipment industry, or our failure to reach internal forecasts, which could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted cash flow value of our reporting units; and (2) a decline in our common stock price and resulting market capitalization, and to the extent we determine that the decline is sustained and indicates a reduction in the fair value of our reporting units below their carrying value. Further, the value assigned to intangible assets, other than goodwill, is based on estimates and judgments regarding expectations such as the success and life cycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, we may be required to record an impairment charge to write down the asset to its realizable value.

Recent Accounting Pronouncements

In July 2013, the FASB released Accounting Standards Update 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The new standard requires that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset for a net operating loss carryforward or other tax credit carryforward when settlement in this manner is available under the tax law. We adopted this standard during the fiscal year without significant impact on our financial position, results of operations, or cash flows.

In April 2014, the FASB released Accounting Standards Update 2014-8 “Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity.” The new standard re-defines discontinued operations and requires only those disposals of components of an entity, including classifications as held for sale, that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results to be reported as discontinued operations. In addition, the new standard expands the disclosure requirements of discontinued operations. We adopted this standard during the fiscal year without significant impact on our financial position, results of operations, or cash flows.

In May 2014, the FASB released Accounting Standards Update 2014-9 “Revenue from Contracts with Customers” to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. We are required to adopt this standard starting in the first quarter of fiscal year 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the standard; or (ii) retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per the standard. We have not yet selected a transition method, and are in the process of determining the impact that the new standard will have on our Consolidated Financial Statements.

In April 2015, the FASB released Accounting Standards Update 2015-3 “Interest — Imputation of Interest.” The amendment requires that debt issuance costs related to recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We are required to adopt this standard starting in the first quarter of fiscal year 2017, we do not anticipate that adoption will have a material impact on our Consolidated Financial Statements.

Liquidity and Capital Resources

Total gross cash, cash equivalents, short-term investments, and restricted cash and investments balances were $4.2 billion at the end of fiscal year 2015 compared to $3.2 billion at the end of fiscal year 2014. This increase was primarily the result of $992 million net proceeds from the March 2015 debt issuances. Approximately $2.2 billion of

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our total cash and investments as of both June 28, 2015 and June 29, 2014, was held outside the United States in our foreign subsidiaries, the majority of which is held in U.S. dollars and, of which substantially all would be subject to tax at U.S. rates if it were to be repatriated. Refer to Note 7 of our Consolidated Financial Statements, included in Item 8 of this report, for information concerning the potential tax impact of repatriating earnings for certain non-U.S. subsidiaries that are permanently reinvested outside the United States.

Cash Flows from Operating Activities

Net cash provided by operating activities of $785.5 million during fiscal year 2015 consisted of (in millions):

Net income		$	655.6
Non-cash charges:
Depreciation and amortization			277.9
Equity-based compensation			135.4
Deferred income taxes			6.0
Amortization of note discounts and issuance costs			37.6
Goodwill impairment			79.4
Long-lived asset impairment			10.0
Changes in operating asset and liability accounts			(420.9	)
Other			4.5
		$	785.5

Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in accounts receivable of $294.2 million, inventories of $207.5 million, and prepaid expenses and other assets of $52.5 million, combined with a decrease in accrued expenses and other liabilities of $29.5 million, partially offset by the following sources of cash: increases in accounts payable of $76.6 million and deferred profit of $86.1 million.

Cash Flows from Investing Activities

Net cash used for investing activities during fiscal year 2015 was $1,106.1 million, which was primarily due to net purchases of available-for-sale securities of $949.7 million, and capital expenditures of $198.3 million, partially offset by cash proceeds on the sale of business of $41.2 million.

Cash Flows from Financing Activities

Net cash provided by financing activities during fiscal year 2015 was $378.5 million, which was primarily due to $992.2 million in proceeds from issuance of long-term debt, partially offset by $573.2 million in treasury stock repurchases and $116.1 million of dividends paid to stockholders.

Liquidity

Given the historical cyclical nature of the semiconductor equipment industry, we believe that maintaining sufficient liquidity reserves is important to support sustaining levels of investment in R&D and capital infrastructure. Based upon our current business outlook, we expect that our levels of cash, cash equivalents, and short-term investments at June 28, 2015 will be sufficient to support our presently anticipated levels of operations, investments, debt service requirements, and capital expenditures, through at least the next 12 months.

In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on demand for our products and services. While we have substantial cash balances in

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the United States and offshore, we may require additional funding and need or choose to raise the required funds through borrowings or public or private sales of debt or equity securities. We believe that, if necessary, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives. However, given the possibility of changes in market conditions or other occurrences, there can be no certainty that such funding will be available in needed quantities or on terms favorable to us.

Off-Balance Sheet Arrangements and Contractual Obligations

We have certain obligations to make future payments under various contracts, some of which are recorded on our balance sheet and some of which are not. Obligations that are recorded on our balance sheet in accordance with GAAP include our long-term debt which is outlined in the following table. Our off-balance sheet arrangements are presented as operating leases and purchase obligations in the table. Our contractual obligations and commitments as of June 28, 2015, relating to these agreements and our guarantees are included in the following table based on their contractual maturity date. The amounts in the table below exclude $203 million of liabilities related to uncertain tax benefits as we are unable to reasonably estimate the ultimate amount or time of settlement. See Note 7 of the Consolidated Financial Statements for further discussion.

		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years				Sublease Income
		(in thousands)
Operating Leases		$	58,544			$	17,593			$	20,548			$	10,071			$	10,810			$	(478	)
Capital Leases			9,077				1,630				7,300				147				—				—
Purchase Obligations			193,855				189,954				1,961				1,940				—				—
Long-term Debt and Interest Expense (1)			3,361,407				508,717				562,790				598,122				1,691,778				—
Total		$	3,622,883			$	717,894			$	592,599			$	610,280			$	1,702,588			$	(478	)

(1)

The conversion period for the Convertible Notes was open as of June 28, 2015 and as such the net carrying value of the Convertible Notes is included within current liabilities on our Consolidated Balance Sheet. The principal balances of the Converible Notes are reflected in the payment period in the table above based on the contractual maturity assuming no conversion. See Note 14 of our Consolidate Financial Statements for additional information concerning the Convertible Notes and associated conversion features.

Operating Leases

We lease most of our administrative, R&D and manufacturing facilities, regional sales/service offices and certain equipment under non-cancelable operating leases. Certain of our facility leases for buildings located in Fremont and Livermore, California, and certain other facility leases provide us with an option to extend the leases for additional periods or to purchase the facilities. Certain of our facility leases provide for periodic rent increases based on the general rate of inflation. In addition to amounts included in the table above, we have guaranteed residual values for certain of our Fremont and Livermore facility leases of up to $250 million. See Note 16 to the Consolidated Financial Statements for further discussion.

Capital Leases

Capital leases reflect building and office equipment lease obligations. The amounts in the table above include the interest portion of payment obligations.

Purchase Obligations

Purchase obligations consist of significant contractual obligations either on an annual basis or over multi-year periods related to our outsourcing activities or other material commitments, including vendor-consigned inventories. The contractual cash obligations and commitments table presented above contains our minimum obligations at June 28, 2015 under these arrangements and others. For obligations with cancellation provisions,

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the amounts included in the preceding table were limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee. Actual expenditures will vary based on the volume of transactions and length of contractual service provided.

Long-Term Debt

In May 2011, we issued and sold $450 million in aggregate principal amount of 0.50% Convertible Senior Notes due May 2016 (the “2016 Notes”) at par. At the same time, we issued and sold $450 million in aggregate principal amount of 1.25% Convertible Senior Notes due May 2018 (the “2018 Notes”) at par. We pay cash interest at an annual rate of 0.5% and 1.25%, respectively, on the 2016 Notes and the 2018 Notes, on a semi-annual basis. The 2016 Notes and 2018 Notes may be converted into our Common Stock, under certain circumstances, based on a conversion rate of 16.0806 shares of our Common Stock per $1,000 principal amount of Notes, which is equal to a conversion price of approximately $62.19 per share of our Common Stock. The conversion price will be subject to adjustment for certain corporate events, including dividends on our Common Stock. Concurrently with the issuance of the Notes, we purchased convertible note hedges and sold warrants, which were structured to reduce the potential future economic dilution associated with the conversion of the 2016 Notes and 2018 the Notes.

In June 2012, with the acquisition of Novellus, we assumed $700 million in aggregate principal amount of 2.625% Convertible Senior Notes due May 2041 (the “2041 Notes,” and collectively with the 2016 Notes and the 2018 Notes, the “Convertible Notes”). We pay cash interest at an annual rate of 2.625%, on a semi-annual basis. The 2041 Notes may be converted, under certain circumstances, into our Common Stock based on a conversion rate of 28.8585 shares of Common Stock per $1,000 principal amount of notes, which represents a conversion price of approximately $34.65 per share of Common Stock. The conversion price will be subject to adjustment for certain events, including dividends on our Common Stock.

During the quarter-ended June 28, 2015, the market value of our Common Stock was greater than or equal to 130% of the Convertible Notes conversion prices for 20 or more trading days of the 30 consecutive trading days preceding the quarter end. As a result, the Convertible Notes are convertible at the option of the holder and are classified as current liabilities in our Consolidated Balance Sheets for fiscal year 2015.

On March 12, 2015, we completed a public offering of $500 million aggregate principal amount of Senior Notes due March 15, 2020 (the “2020 Notes”) and $500 million aggregate principal amount of Senior Notes due March 15, 2025 (the “2025 Notes,” together with the 2020 Notes, the “Senior Notes”, and collectively with the Convertible Notes, the “Notes”). We will pay interest at an annual rate of 2.75% and 3.80%, respectively, on the 2020 Notes and 2025 Notes, on a semi-annual basis on March 15 and September 15 of each year, beginning September 15, 2015.

We may redeem the Senior Notes at a redemption price equal to 100% of the principal amount of such series (“par”), plus a “make whole” premium as described in the indenture in respect to the Senior Notes and accrued and unpaid interest before February 15, 2020, for the 2020 Notes and before December 15, 2024, for the 2025 Notes. We may redeem the Senior Notes at par, plus accrued and unpaid interest at any time on or after February 15, 2020 for the 2020 Notes and on or after December 24, 2024 for the 2025 Notes. In addition, upon the occurrence of certain events, as described in the indenture, we will be required to make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest.

During fiscal year 2015, 2014, and 2013, we made $1.5 million, $1.7 million, and $2.2 million, respectively, in principal payments on long-term debt and capital leases, respectively.

Revolving Credit Arrangements

On March 12, 2014, we entered into a $300 million revolving unsecured credit facility with a syndicate of lenders that matures on March 12, 2019. The facility includes an option for us to, subject to certain requirements, request an increase in the facility of up to an additional $200 million, for a potential total commitment of $500 million.

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Proceeds from the credit facility can be used for general corporate purposes. Interest on amounts borrowed under the credit facility is, at our option, based on (i) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.5%, or (c) one-month LIBOR plus 1.0%, plus a spread of 0.0% to 0.5% or (ii) LIBOR plus a spread of 0.9% to 1.5%, in each case the applicable spread is determined based on the rating of our non-credit enhanced, senior unsecured long-term debt. Principal, and any accrued and unpaid interest, is due and payable upon maturity. Additionally, we will pay the lenders a quarterly commitment fee that varies based on our rating described above. The credit facility contains certain restrictive covenants including maintaining a consolidated debt to total capitalization ratio of no more than 0.5 to 1.0 and maintaining unrestricted or unencumbered cash and investments, of no less than $1.0 billion. As of June 28, 2015, we had no borrowings outstanding under the credit facility and were in compliance with all financial covenants.

Other Guarantees

We have issued certain indemnifications to our lessors for taxes and general liability under some of our agreements. We have entered into certain insurance contracts that may limit our exposure to such indemnifications. As of June 28, 2015, we had not recorded any liability on our Consolidated Financial Statements in connection with these indemnifications, as we do not believe, based on information available, that it is probable that we will pay any amounts under these guarantees.

Generally, we indemnify, under pre-determined conditions and limitations, our customers for infringement of third-party intellectual property rights by our products or services. We seek to limit our liability for such indemnity to an amount not to exceed the sales price of the products or services subject to our indemnification obligations. We do not believe, based on information available, that it is probable that we will pay any material amounts under these guarantees.

We provide guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of June 28, 2015, the maximum potential amount of future payments that we could be required to make under these arrangements and letters of credit was $15.5 million. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid.