Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Page
Consolidated Statements of Operations — Years Ended June 26, 2016, June 28, 2015, and June 29, 201452
Consolidated Statements of Comprehensive Income — Years Ended June 26, 2016, June 28, 2015, and June 29, 201453
Consolidated Balance Sheets — June 26, 2016 and June 28, 201554
Consolidated Statements of Cash Flows — Years Ended June 26, 2016, June 28, 2015, and June 29, 201455
Consolidated Statements of Stockholders’ Equity — Years Ended June 26, 2016, June 28, 2015, and June 29, 201457
Notes to Consolidated Financial Statements58
Reports of Independent Registered Public Accounting Firm98

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LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Year Ended
June 26, 2016June 28, 2015June 29, 2014
Revenue$5,885,893$5,259,312$4,607,309
Cost of goods sold3,266,9712,974,9762,599,828
Gross margin2,618,9222,284,3362,007,481
Research and development913,712825,242716,471
Selling, general and administrative630,954591,611613,341
Goodwill impairment—79,444—
Total operating expenses1,544,6661,496,2971,329,812
Operating income1,074,256788,039677,669
Gain on sale of real estate——83,090
Other expense, net(114,139)(47,189)(37,396)
Income before income taxes960,117740,850723,363
Income tax expense(46,068)(85,273)(91,074)
Net income$914,049$655,577$632,289
Net income per share:
Basic$5.75$4.11$3.84
Diluted$5.22$3.70$3.62
Number of shares used in per share calculations:
Basic158,919159,629164,741
Diluted175,159177,067174,503

See Notes to Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year Ended
June 26, 2016June 28, 2015June 29, 2014
Net income$914,049$655,577$632,289
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment(4,403)(22,139)4,192
Cash flow hedges:
Net unrealized (losses) gains during the period(17,725)1,5958,004
Net losses (gains) reclassified into earnings4,961(4,388)(10,892)
(12,764)(2,793)(2,888)
Available-for-sale investments:
Net unrealized gains (losses) during the period9,028(5,389)1,407
Net (gains) losses reclassified into earnings(371)71165
8,657(5,318)1,572
Defined benefit plans, net change in unrealized component(3,027)1,109(2,838)
Other comprehensive (loss) income, net of tax(11,537)(29,141)38
Comprehensive income$902,512$626,436$632,327

See Notes to Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

June 26, 2016June 28, 2015
ASSETS
Cash and cash equivalents$5,039,322$1,501,539
Investments1,788,6122,574,947
Accounts receivable, less allowance for doubtful accounts of $5,155 as of June 26, 2016 and $4,890 as of June 28, 20151,262,1451,093,582
Inventories971,911943,346
Prepaid expenses and other current assets152,921157,435
Total current assets9,214,9116,270,849
Property and equipment, net639,608621,418
Restricted cash and investments250,421170,969
Goodwill1,386,2761,387,509
Intangible assets, net564,921728,140
Other assets215,391185,763
Total assets$12,271,528$9,364,648
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable$348,199$300,203
Accrued expenses and other current liabilities772,910649,438
Deferred profit349,199322,070
Current portion of convertible notes and capital leases949,4941,359,650
Total current liabilities2,419,8022,631,361
Senior notes, convertible notes, and capital leases, less current portion3,383,5811,001,382
Income taxes payable231,514202,930
Other long-term liabilities134,562184,023
Total liabilities6,169,4594,019,696
Commitments and contingencies
Temporary equity, convertible notes207,552241,808
Stockholders’ equity:
Preferred stock, at par value of $0.001 per share; authorized - 5,000 shares, none outstanding——
Common stock, at par value of $0.001 per share; authorized - 400,000 shares; issued and outstanding 160,201 shares at June 26, 2016 and 158,531 shares at June 28, 2015160159
Additional paid-in capital5,572,8985,366,773
Treasury stock, at cost, 101,071 shares at June 26, 2016 and 99,562 shares at June 28, 2015(4,429,317)(4,302,847)
Accumulated other comprehensive loss(69,333)(57,796)
Retained earnings4,820,1094,096,855
Total stockholders’ equity5,894,5175,103,144
Total liabilities and stockholders’ equity$12,271,528$9,364,648

See Notes to Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended
June 26, 2016June 28, 2015June 29, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$914,049$655,577$632,289
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization291,028277,920292,254
Deferred income taxes(49,003)5,5517,537
Impairment of long-lived assets—9,82111,632
Equity-based compensation expense142,348135,354103,700
Income tax (expense) benefit on equity-based compensation plans(1,023)11,3165,973
Excess tax expense (benefit) on equity-based compensation plans1,020(11,398)(6,065)
Amortization of note discounts and issuance costs70,52237,55035,482
Gain on sale of business—(7,431)—
Gain on sale of assets(15,223)—(83,090)
Goodwill impairment—79,444—
Other, net48,78812,65612,669
Changes in operating asset and liability accounts:
Accounts receivable, net of allowance(169,034)(294,155)(201,549)
Inventories(66,371)(207,462)(190,058)
Prepaid expenses and other assets(46,664)(52,496)(11,923)
Trade accounts payable41,64576,61718,704
Deferred profit27,12986,14610,886
Accrued expenses and other liabilities161,066(29,507)78,608
Net cash provided by operating activities1,350,277785,503717,049
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and intangible assets(175,330)(198,265)(145,503)
Business acquisitions, net of cash acquired—(1,137)(30,227)
Purchases of available-for-sale securities(874,998)(3,086,808)(1,312,244)
Sales and maturities of available-for-sale securities1,673,8262,137,0681,028,278
Purchase of other investments—(2,500)—
Proceeds from sale of assets79,730—156,397
Proceeds from sale of business—41,212—
Transfer of restricted cash and investments(112,381)35628,085
Other, net1,6363,97810,000
Net cash provided by (used for) investing activities592,483(1,106,096)(265,214)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations(451,497)(1,515)(1,658)
Net proceeds from issuance of long-term debt2,338,144992,225—
Excess tax (expense) benefit on equity-based compensation plans(1,020)11,3986,065
Treasury stock purchases(158,389)(573,240)(244,859)
Dividends paid(190,402)(116,059)—
Reissuances of treasury stock related to employee stock purchase plan55,99248,80342,926
Proceeds from issuance of common stock3,40517,52034,791
Other, net(488)(660)—
Net cash provided by (used for) financing activities$1,595,745$378,472$(162,735)

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Year Ended
June 26, 2016June 28, 2015June 29, 2014
Effect of exchange rate changes on cash and cash equivalents$(722)$(9,017)$1,104
Net increase in cash and cash equivalents3,537,78348,862290,204
Cash and cash equivalents at beginning of year1,501,5391,452,6771,162,473
Cash and cash equivalents at end of year$5,039,322$1,501,539$1,452,677
Schedule of noncash transactions
Accrued payables for stock repurchases$—$3,255$3,392
Accrued payables for capital expenditures27,95322,4368,085
Dividends payable48,05247,65929,240
Transfers of finished goods inventory to property and equipment, net37,8224,547—
Supplemental disclosures:
Cash payments for interest$58,810$26,393$26,489
Cash payments for income taxes, net39,745114,51218,157

See Notes to Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Common Stock SharesCommon StockAdditional Paid-in CapitalTreasury StockAccumulated Other Comprehensive Income(Loss)Retained EarningsTotal
Balance at June 30, 2013162,873$163$5,084,544$(3,539,830)$(28,693)$2,972,688$4,488,872
Sale of common stock3,140334,788———34,791
Purchase of treasury stock(4,860)(5)—(253,180)——(253,185)
Income tax benefits on equity-based compensation plans——5,973———5,973
Reissuance of treasury stock1,19716,99135,934——42,926
Equity-based compensation expense——103,700———103,700
Reclassification from temporary to permanent equity——3,571———3,571
Net income—————632,289632,289
Other comprehensive income————38—38
Cash dividends declared ($.18 per common share)—————(29,240)(29,240)
Balance at June 29, 2014162,3501625,239,567(3,757,076)(28,655)3,575,7375,029,735
Sale of common stock2,876417,519———17,523
Purchase of treasury stock(7,638)(8)—(573,096)——(573,104)
Income tax benefits on equity-based compensation plans——11,316———11,316
Reissuance of treasury stock943121,47727,325——48,803
Equity-based compensation expense——135,354———135,354
Reclassification from temporary to permanent equity——(58,460)———(58,460)
Net income—————655,577655,577
Other comprehensive income————(29,141)—(29,141)
Cash dividends declared ($.84 per common share)—————(134,459)(134,459)
Balance at June 28, 2015158,5311595,366,773(4,302,847)(57,796)4,096,8555,103,144
Sale of common stock2,86323,403———3,405
Purchase of treasury stock(2,130)(2)—(155,132)——(155,134)
Income tax benefits on equity-based compensation plans——(1,023)———(1,023)
Reissuance of treasury stock937127,32928,662——55,992
Equity-based compensation expense——142,348———142,348
Effect of conversion of convertible notes——(188)———(188)
Reclassification to temporary from permanent equity, net——34,256———34,256
Net income—————914,049914,049
Other comprehensive income————(11,537)—(11,537)
Cash dividends declared ($1.20 per common share)—————(190,795)(190,795)
Balance at June 26, 2016160,201$160$5,572,898$(4,429,317)$(69,333)$4,820,109$5,894,517

See Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 26, 2016

Note 1: Company and Industry Information

The Company designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits. Semiconductor wafers are subjected to a complex series of process and preparation steps that result in the simultaneous creation of many individual integrated circuits. The Company leverages its expertise in the areas of deposition, etch, and single-wafer clean to develop processing solutions that are designed to benefit its customers through lower defect rates, enhanced yields, faster processing time, and/or reduced cost.

The Company sells its products and services primarily to companies involved in the production of semiconductors in the United States, Europe, Taiwan, Korea, Japan, China, and Southeast Asia.

The semiconductor industry is cyclical in nature and has historically experienced periodic downturns and upturns. Today’s leading indicators of changes in customer investment patterns, such as electronics demand, memory pricing, and foundry utilization rates, may not be any more reliable than in prior years. Demand for the Company’s equipment can vary significantly from period to period as a result of various factors, including, but not limited to, economic conditions, supply, demand, and prices for semiconductors, customer capacity requirements, and the Company’s ability to develop and market competitive products. For these and other reasons, the Company’s results of operations for fiscal years 2016, 2015, and 2014 may not necessarily be indicative of future operating results.

Note 2: Summary of Significant Accounting Policies

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”), requires management to make 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. The Company bases its estimates and assumptions on historical experience and on various other assumptions it believes to be applicable, and evaluates them on an on-going basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates.

Revenue Recognition: The Company recognizes 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 the Company has received customer acceptance or is otherwise released from its customer acceptance obligations. If terms of the sale provide for a lapsing customer acceptance period, the Company recognizes 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, the Company recognizes revenue when it can be reliably demonstrated that the delivered system meets all of the agreed-to customer specifications. In situations with multiple deliverables, the Company recognizes revenue upon the delivery of the separate elements to the customer and when the Company receives customer acceptance or is otherwise released from its customer acceptance obligations. The Company allocates revenue from multiple-element arrangements among the separate elements using their relative selling prices based on the Company’s best estimate of selling price. The Company’s 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. The Company generally recognizes revenue related to sales of spare parts and system upgrade kits upon shipment. The Company generally recognizes revenue related to services upon completion of the services requested by a customer order. The Company recognizes 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 recognized in deferred profit on the 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

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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. The Company’s 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 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 the Company’s 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 the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period in which the revision is made.

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. The Company provides standard warranties for its systems. The Company records a provision for estimated warranty expenses to cost of sales for each system when it recognizes revenue. The Company does 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 the Company periodically monitors the performance and cost of warranty activities, if actual costs incurred are different than its estimates, the Company may recognize adjustments to provisions in the period in which those differences arise or are identified. In addition to the provision of standard warranties, the Company offers 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: The Company recognizes the fair value of equity-based compensation expense. The Company determines the fair value of its restricted stock units (“RSUs”), excluding market-based performance RSUs, based upon the fair market value of Company’s common stock at the date of grant, discounted for dividends. The Company estimates the fair value of its market-based performance RSUs using a Monte Carlo simulation model at the date of the grant. The Company estimates the fair value of its 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. The Company amortizes the fair value of equity-based awards over the vesting periods of the award and the Company has elected to use the straight-line method of amortization.

The Company makes quarterly assessments of the adequacy of its tax credit pool related to equity-based compensation to determine if there are any deficiencies that it is required to recognize in the Company’s Consolidated Statements of Operations. The Company will only recognize a benefit from equity-based compensation in paid-in-capital if it realizes an incremental tax benefit after all other tax attributes currently available to us have been utilized. In addition, the Company has 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. The Company 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. The Company tracks 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. The Company records a valuation allowance to reduce its 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. The Company believes 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 the Company determines that it 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

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determination is made. Likewise, if the Company 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.

The Company recognizes 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. The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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 the Company’s 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. The Company tests goodwill and identifiable intangible assets with indefinite useful lives for impairment at least annually. The Company amortizes intangible assets with estimable useful lives over their respective estimated useful lives, and the Company reviews 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.

The Company reviews goodwill at least annually for impairment. If certain events or indicators of impairment occur between annual impairment tests, the Company would perform an impairment test at that date. In testing for a potential impairment of goodwill, the Company: (1) allocates goodwill to its reporting units to which the acquired goodwill relates; (2) estimates the fair value of its reporting units; and (3) determines the carrying value (book value) of those reporting units. Furthermore, if the estimated fair value of a reporting unit is less than the carrying value, the Company 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 the Company’s goodwill impairment process it first assesses qualitative factors to determine whether it is necessary to perform a quantitative analysis. The Company does not calculate the fair value of a reporting unit unless the Company determines, based on a qualitative assessment, that it is more-likely-than-not that its fair value is less than its carrying amount. The Company performs an annual goodwill impairment analysis as of the first day of its fourth fiscal quarter. The Company did not record impairments of goodwill during the years ended June 26, 2016 and June 29, 2014. For the year ended June 28, 2015 the Company recorded an impairment charge on its single-wafer clean reporting unit of approximately $79.4 million.

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. The Company determines the fair value of its reporting units by using an income approach. Under the income approach, the Company determines 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, the Company makes estimates and judgments about the future cash flows of its reporting units, including estimated growth rates and assumptions about the economic environment. Although the Company’s 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, the Company makes certain judgments about allocating shared assets to the estimated balance sheets of its reporting units. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge.

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As a result, several factors could result in impairment of a material amount of the Company’s goodwill balance in future periods, including, but not limited to: (1) weakening of the global economy, weakness in the semiconductor equipment industry, or failure of the Company to reach its internal forecasts, which could impact the Company’s ability to achieve its forecasted levels of cash flows and reduce the estimated discounted cash flow value of its reporting units; and (2) a decline in the Company’s stock price and resulting market capitalization, and to the extent the Company determines that the decline is sustained and indicates a reduction in the fair value of the Company’s 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, the Company may be required to record an impairment charge to write down the asset to its realizable value.

The Company reviews indefinite-lived intangible assets for an impairment annually, or when events or circumstances indicate the carrying value may not be recoverable. Factors that may be a change in circumstances, indicating the carrying value of intangible assets subject to amortization may not be recoverable, include a reduced future cash flow estimate, and slower growth rates in the industry segment in which the Company participates. The Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets is less than their carrying value. If the sum is less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. The Company recognizes an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The Company did not record an impairment charge on indefinite-lived assets during the years ended June 26, 2016 or June 28, 2015. The Company recognized a $4.0 million impairment charge related to indefinite-lived assets during the year ended June 29, 2014.

Impairment of Long-Lived Assets (Excluding Goodwill and indefinite-lived Intangibles): The Company routinely considers whether indicators of impairment of long-lived assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets is less than their carrying value. If the sum is less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. The Company recognizes an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The fair value of the asset then becomes the asset’s new carrying value, which the Company depreciates over the remaining estimated useful life of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value. The Company did not record an impairment loss in the year ended June 26, 2016. The Company recorded a $9.8 million and $7.6 million impairment loss on long-lived assets during the years ended June 28, 2015 and June 29, 2014, respectively.

Fiscal Year: The Company follows a 52/53-week fiscal reporting calendar, and its fiscal year ends on the last Sunday of June each year. The Company’s most recent fiscal years ended on June 26, 2016, June 28, 2015, and June 29, 2014 and each included 52 weeks.

Principles of Consolidation: The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Cash Equivalents and Investments: Investments purchased with an original maturity of three months or less are considered cash equivalents. The Company also invests in certain mutual funds, which include equity and fixed income securities, related to its obligations under its deferred compensation plan, and such investments are classified as trading securities on the consolidated balance sheets. All of the Company’s other investments are classified as available-for-sale at the respective balance sheet dates. The Company accounts for its investment portfolio at fair value. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Differences between the cost and fair value of trading securities are recognized as “Other income (expense)” in the Consolidated Statement of Operations. The investments classified as available-for-sale are recorded at fair value based upon quoted market prices, and difference between the cost and fair value of available-for-sale securities is presented as a component of accumulated other comprehensive income (loss). Unrealized losses on available-for-sale securities are charged against “Other income (expense)” when a decline in fair value is determined to be other-than-temporary. The Company considers several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the extent to which the fair value is less than cost basis, (ii) the financial condition and near term prospects of the issuer, (iii) the length of

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time a security is in an unrealized loss position and (iv) the Company’s ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The Company’s ongoing consideration of these factors could result in additional impairment charges in the future, which could adversely affect its results of operation. An other-than-temporary impairment is triggered when there is an intent to sell the security, it is more-likely-than-not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost basis of the security. Other-than-temporary impairments attributed to credit losses are recognized in the income statement. The specific identification method is used to determine the realized gains and losses on investments.

Allowance for Doubtful Accounts: The Company evaluates its allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed to be uncollectible, the Company provides a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount it reasonably believes will be collected. The Company also provides allowances based on its write-off history.

Property and Equipment: Property and equipment is stated at cost. Equipment is depreciated by the straight-line method over the estimated useful lives of the assets, generally three to five years. Furniture and fixtures are depreciated by the straight-line method over the estimated useful lives of the assets, generally five years. Software is amortized by the straight-line method over the estimated useful lives of the assets, generally three to five years. Buildings are depreciated by the straight-line method over the estimated useful lives of the assets, generally twenty-five years. Leasehold improvements are generally amortized by the straight-line method over the shorter of the life of the related asset or the term of the underlying lease. Amortization of capital leases is included with depreciation expense.

Derivative Financial Instruments: In the normal course of business, the Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations. The Company’s policy is to mitigate the effect of these exchange rate fluctuations on certain foreign currency denominated business exposures. The Company has a policy that allows the use of derivative financial instruments to hedge foreign currency exchange rate fluctuations on forecasted revenue and expenses and net monetary assets or liabilities denominated in various foreign currencies. The Company carries derivative financial instruments (derivatives) on the balance sheet at their fair values. The Company does not use derivatives for trading or speculative purposes. The Company does not believe that it is exposed to more than a nominal amount of credit risk in its interest rate and foreign currency hedges, as counterparties are large, global and well-capitalized financial institutions. The Company’s exposures are in liquid currencies (Japanese yen, Swiss francs, euros, Taiwanese dollars, Chinese renminbi, Singapore dollar, and Korean won), so there is minimal risk that appropriate derivatives to maintain the Company’s hedging program would not be available in the future.

To hedge foreign currency risks, the Company uses foreign currency exchange forward and option contracts, where possible and prudent. These hedge contracts are valued using standard valuation formulas with assumptions about future foreign currency exchange rates derived from existing exchange rates, interest rates, and other market factors.

The Company considers its most current forecast in determining the level of foreign currency denominated revenue and expenses to hedge as cash flow hedges. The Company combines these forecasts with historical trends to establish the portion of its expected volume to be hedged. The revenue and expenses are hedged and designated as cash flow hedges to protect the Company from exposures to fluctuations in foreign currency exchange rates. If the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge are reclassified from accumulated other comprehensive income (loss) to other income (expense), net on the consolidated statement of operations at that time.

Guarantees: The Company has certain operating leases that contain provisions whereby the properties subject to the operating leases may be remarketed at lease expiration. The Company has guaranteed to the lessor an amount approximating the lessor’s investment in the property. Also, the Company’s guarantees generally include certain indemnifications to its lessors under operating lease agreements for environmental matters, potential overdraft protection obligations to financial institutions related to one of the Company’s subsidiaries, indemnifications to the Company’s customers for certain infringement of third-party intellectual property rights by its products and services, and the Company’s warranty obligations under sales of its products.

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Foreign Currency Translation: The Company’s non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, primarily generate and expend cash in their local currency. Accordingly, all balance sheet accounts of these local functional currency subsidiaries are translated into U.S. dollars at the fiscal period-end exchange rate, and income and expense accounts are translated into U.S. dollars using average rates in effect for the period, except for costs related to those balance sheet items that are translated using historical exchange rates. The resulting translation adjustments are recorded as cumulative translation adjustments and are a component of accumulated other comprehensive income (loss). Translation adjustments are recorded in other income (expense), net, where the U.S. dollar is the functional currency.

Note 3: Recent Accounting Pronouncements

In May 2014, the FASB released Accounting Standards Update (“ASU”) 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. The Company is 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. The Company has not yet selected a transition method, and is in the process of determining the impact that the new standard will have on its consolidated financial statements.

In April 2016, FASB released ASU 2016-10, "Revenue from Contracts with Customers." The amendment clarifies guidance in ASU 2014-09, “Revenue from Contracts with Customers” to improve guidance on criteria in assessing whether promises to transfer goods and services are separately identifiable and improve the understanding of the licensing implementation guidance. In May 2016, FASB released ASU 2016-12, "Revenue from Contracts with Customers." which also clarifies guidance in ASU 2014-09 on assessing collectability, non cash consideration, presentation of sales tax and completed contracts and contract modification in transition. The Company is required to adopt these standards starting in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Consolidated Financial Statements.

In April 2015, the FASB released ASU 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. The Company is required to adopt this standard starting in the first quarter of fiscal year 2017 and does not anticipate that implementation will have a material impact on its Consolidated Financial Statements.

In September 2015, the FASB released ASU 2015-16, “Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments”, which eliminates the requirement to restate prior period financial statements for measurement period adjustments. Instead, the cumulative impact of measurement period adjustments, including the impact on prior periods, is required to be recognized in the reporting period in which the adjustment is identified. The standard update will be effective for the Company beginning in its first quarter of fiscal year 2017.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU amends existing guidance to require that deferred income tax assets and liabilities be classified as non-current in a classified balance sheet, and eliminates the prior guidance which required an entity to separate deferred tax assets and liabilities into a current amount and a non-current amount in a classified balance sheet. The amendments in this ASU are effective for the Company beginning in its first quarter of fiscal year 2018. Earlier application is permitted as of the beginning of an interim or annual period. Additionally, the new guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company is evaluating the timing of adoption, but plans to adopt the guidance prospectively with an

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anticipated reclassification from current assets and liabilities to non-current assets and liabilities on its Consolidated Balance Sheet.

In January 2016, FASB released ASU 2016-1, “Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendment changes the accounting for and financial statement presentation of equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation of the investee. The amendment provides clarity on the measurement methodology to be used for the required disclosure of fair value of financial instruments measured at amortized cost on the balance sheet and clarifies that an entity should evaluate the need for a valuation allowance on deferred tax assets related to available-for-sale securities in combination with the entity's other deferred tax assets, among other changes. The Company is required to adopt this standard starting in the first quarter of fiscal year 2019 and does not anticipate that implementation will have a material impact on its Consolidated Financial Statements.

In January 2016, FASB released ASU 2016-2, "Leases." The amendment requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The amendment offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The Company is required to adopt this standard starting in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Consolidated Financial Statements.

In March 2016, FASB released ASU 2016-9, "Compensation - Stock Compensation." Key changes in the amendment include:

•entities will be required to recognize all excess tax benefits or deficiencies as an income tax benefit or expense in the income statement, eliminating APIC pools;
•entities will no longer be required to delay recognition of excess tax benefits until they are realized;
•entities will be required to classify the excess tax benefits as an operating activity in the statement of cash flows;
•entities will be allowed to elect an accounting policy to either estimate the number of forfeitures, or account for forfeitures as they occur; and
•entities can withhold up to the maximum individual statutory tax rate without classifying the awards as a liability, the cash paid to satisfy the statutory income tax withholding obligations shall be classified as a financing activity in the statement of cash flows.

The Company is required to adopt this standard starting in the first quarter of fiscal year 2018. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Consolidated Financial Statements.

In June 2016, FASB released ASU 2016-13, "Financial Instruments - Credit Losses." The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Consolidated Financial Statements.

Note 4: Equity-Based Compensation Plans

The Company has stock plans that provide for grants of equity-based awards to eligible participants, including stock options and restricted stock units, of Lam Research common stock (“Common Stock”). An option is a right to purchase Common Stock at a set price. An RSU award is an agreement to issue a set number of shares of Common Stock at the time of vesting. The Company’s options and RSU awards typically vest over a period of three years or less. The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions.

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The Company recognized the following equity-based compensation expense and benefits in the Consolidated Statements of Operations:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Equity-based compensation expense$142,348$135,354$103,700
Income tax benefit recognized related to equity-based compensation$37,814$23,660$16,937
Income tax benefit realized from the exercise and vesting of options and RSUs$67,756$40,401$31,993

The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting term on a straight-line basis.

Stock Options and RSUs

The Lam Research Corporation 2007 Stock Incentive Plan, as amended and restated, 2011 Stock Incentive Plan, as amended and restated, and the 2015 Stock Incentive Plan (collectively the “Stock Plans”), provide for the grant of non-qualified equity-based awards to eligible employees, consultants and advisors, and non-employee directors of the Company and its subsidiaries. The 2015 Stock Incentive Plan was approved by shareholders on November 4, 2015 and authorizes up to 18,000,000 shares available for issuance under the plan. Additionally, 1,232,068 Shares that remained available for grants under the Company’s 2007 Stock Incentive Plan were added to the shares available for issuance under the 2015 Stock Incentive Plan.

A summary of stock plan transactions is as follows:

Options OutstandingRestricted Stock Units Outstanding
Number of SharesWeighted-Average Exercise PriceNumber of SharesWeighted-Average Fair Market Value at Grant
June 30, 20132,570,923$26.874,841,796$39.32
Granted166,455$51.762,811,602$53.21
Exercised(1,403,019)$24.75N/AN/A
Canceled(2,473)$30.21(281,476)$41.16
Vested restricted stockN/AN/A(1,736,453)$40.39
June 29, 20141,331,886$32.205,635,469$45.83
Granted76,659$80.601,804,937$79.74
Exercised(564,558)$31.05N/AN/A
Canceled(8,155)$29.32(174,879)$50.16
Vested restricted stockN/AN/A(2,311,439)$41.17
June 28, 2015835,832$37.444,954,088$60.13
Granted196,167$75.572,230,851$71.87
Exercised(123,726)$24.92N/AN/A
Canceled(862)$21.43(110,131)$69.17
Vested restricted stockN/AN/A(2,739,704)$54.04
June 26, 2016907,411$47.414,335,104$69.30

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Outstanding and exercisable options presented by price range at June 26, 2016 were as follows:

Range of Exercise PricesOptions OutstandingOptions Exercisable
Number of Options OutstandingWeighted-Average Remaining Life (Years)Weighted-Average Exercise PriceNumber of Options ExercisableWeighted-Average Exercise Price
$9.44-$19.05112,3720.30$13.18112,372$13.18
$21.28-$23.5940,6230.17$21.8840,623$21.88
$26.87-$29.68147,4270.50$29.24147,427$29.24
$32.04-$35.6827,7950.15$33.0227,795$33.02
$42.61-$80.60579,1943.31$61.16294,929$49.38
$9.44-$80.60907,4114.43$47.41623,146$35.56

As of June 26, 2016, there were a total of 5,242,515 shares subject to options and RSUs issued and outstanding under the Company’s Stock Plans. As of June 26, 2016, there were a total of 14,758,224 shares available for future issuance under the Stock Plans.

Stock Options

The fair value of the Company’s stock options granted during fiscal years 2016, 2015, and 2014, was estimated 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:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
Expected volatility33.08%34.45%35.28%
Risk-free interest rate1.27%1.46%1.39%
Expected term (years)4.794.804.78
Dividend yield1.59%0.89%—

The year-end intrinsic value relating to stock options for fiscal years 2016, 2015, and 2014 is presented below:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Intrinsic value - options outstanding$31,643$37,961$46,283
Intrinsic value - options exercisable$29,112$33,360$31,653
Intrinsic value - options exercised$6,562$26,806$41,379

As of June 26, 2016, there was $4.8 million of total unrecognized compensation expense related to unvested stock options granted and outstanding; that expense is expected to be recognized over a weighted-average remaining vesting period of 2.4 years.

Restricted Stock Units

The fair value of the Company’s RSUs was calculated based upon the fair market value of the Company’s stock at the date of grant, discounted for dividends. As of June 26, 2016, there was $221.3 million of total

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unrecognized compensation expense related to all unvested RSUs granted; that expense is expected to be recognized over a weighted-average remaining vesting period of 2.2 years.

During the fiscal years 2016, 2015 and 2014, the Company issued certain RSUs with both a market condition and a service condition (market-based performance RSUs, or “market-based PRSUs”). Based upon the terms of such awards, the number of shares that can be earned over the performance periods is based on the Company’s Common Stock price performance compared to the market price performance of the Philadelphia Semiconductor Sector Index (“SOX”), ranging from 0% to 150% of target. The stock price performance or market price performance is measured using the closing price for the 50-trading days prior to the dates the performance period begins and ends. The target number of shares represented by the market-based PRSUs is increased by 2% of target for each 1% that Common Stock price performance exceeds the market price performance of the SOX index. The result of the vesting formula is rounded down to the nearest whole number. Total stockholder return is a measure of stock price appreciation in this performance period. As of June 26, 2016, 1.1 million market-based PRSUs were outstanding. These market-based PRSUs generally vest two or three years from the grant date and require continued employment. Stock compensation expense for the market-based PRSUs was $19.6 million, $13.5 million and $3.8 million for the years ended June 26, 2016, June 28, 2015 and June 29, 2014, respectively.

The fair value of the Company’s market-based PRSUs granted during fiscal years 2016, 2015 and 2014, was calculated using a Monte Carlo simulation model at the date of the grant. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
Expected volatility29.81%27.93%29.27%
Risk-free interest rate0.97%1.05%0.55%
Expected term (years)2.922.982.67
Dividend yield1.59%0.89%—

ESPP

The 1999 Employee Stock Purchase Plan (the “1999 ESPP”) allows employees to designate a portion of their base compensation to be deducted and used to purchase the Company’s Common Stock at a purchase price per share of the lower of 85% of the fair market value of the Company’s Common Stock on the first or last day of the applicable purchase period. Typically, each offering period lasts twelve months and comprises three interim purchase dates. The Plan Administrator (the Compensation Committee of the Board) is authorized to set a limit on the number of shares a plan participant can purchase on any single plan exercise date. During fiscal years 2016, 2015, and 2014, there was no increase to the number of shares of Lam Research Common Stock reserved for issuance under the 1999 ESPP.

During fiscal year 2016, a total of 936,466 shares of the Company’s Common Stock were sold to employees under the 1999 ESPP. At June 26, 2016, 6,498,057 shares were available for purchase under the 1999 ESPP.

The 1999 ESPP rights were valued using a Black-Scholes option valuation model. During fiscal years 2016, 2015, and 2014, the 1999 ESPP was valued using the following weighted-average assumptions:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
Expected term (years)0.670.670.68
Expected stock price volatility35.48%27.60%30.24%
Risk-free interest rate0.29%0.07%0.07%
Dividend Yield1.18%0.69%—

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As of June 26, 2016, there was $3.1 million of total unrecognized compensation cost related to the 1999 ESPP that is expected to be recognized over a remaining vesting period of 2 months.

Note 5: Other Income (Expense), Net

The significant components of other income (expense), net, were as follows:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Interest income$29,512$19,268$12,540
Interest expense(134,773)(73,682)(61,692)
(Losses) gains on deferred compensation plan related assets, net(3,995)9,0719,559
Foreign exchange gains (losses), net3082,3311,529
Other, net(5,191)(4,177)668
$(114,139)$(47,189)$(37,396)

Interest expense in the year ended June 26, 2016 increased, as compared to the years ended June 28, 2015 and June 29, 2014, primarily due to interest expense associated with the $1.0 billion Senior Note issuance in March 2015 and the amortization of bridge loan financing issuance costs of approximately $31.9 million in the year ended June 26, 2016 (see Note 13 and Note 15 for additional information regarding the Senior Note and bridge loan financing).

Note 6: Income Taxes

The components of income (loss) before income taxes were as follows:

June 26, 2016June 28, 2015June 29, 2014
(in thousands)
United States$(113,607)$72,728$78,076
Foreign1,073,724668,122645,287
$960,117$740,850$723,363

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Significant components of the provision (benefit) for income taxes attributable to income before income taxes were as follows:

June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Federal:
Current$1,426$16,795$31,762
Deferred(38,616)12,11510,692
(37,190)28,91042,454
State:
Current2,8921,3763,192
Deferred(7,600)158(869)
(4,708)1,5342,323
Foreign:
Current90,75261,55149,273
Deferred(2,786)(6,722)(2,976)
87,96654,82946,297
Total Provision (Benefit) for Income Taxes$46,068$85,273$91,074

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. Significant components of the Company’s net deferred tax assets and liabilities were as follows:

June 26, 2016June 28, 2015
(in thousands)
Deferred tax assets:
Tax carryforwards$176,767$129,234
Allowances and reserves128,416131,079
Equity-based compensation29,41421,086
Inventory valuation differences17,17815,167
Prepaid cost sharing88,522—
Other24,54013,942
Gross deferred tax assets464,837310,508
Valuation allowance(101,689)(85,620)
Net deferred tax assets363,148224,888
Deferred tax liabilities:
Intangible assets(46,774)(64,725)
Convertible debt(151,483)(130,991)
Temporary differences for capital assets(61,845)(37,635)
Amortization of goodwill(14,176)(12,502)
Unremitted earnings of foreign subsidiaries(146,459)(66,412)
Other(8,594)(6,100)
Gross deferred tax liabilities(429,331)(318,365)
Net deferred tax liabilities$(66,183)$(93,477)

The change in the gross deferred tax assets, gross deferred tax liabilities and valuation allowance between fiscal year 2016 and 2015 is primarily due to an increase related to tax credit carryforwards, recognition of a prepaid cost sharing deferred tax benefit related to the Altera case ruling and a decrease in deferred tax liabilities related

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to amortization of intangible assets offset by an increase in deferred tax liabilities related to depreciation of tangible assets, convertible debt accretion and an accrual for future tax liabilities due to the expected repatriation of foreign earnings of certain foreign subsidiaries for 2016.

Realization of the Company’s net deferred tax assets is based upon the weighting of available evidence, including such factors as the recent earnings history and expected future taxable income. The Company believes it is more-likely-than-not that such deferred tax assets will be realized with the exception of $101.7 million primarily related to California and certain foreign deferred tax assets.

The provisions related to the tax accounting for equity-based compensation prohibit the recognition of a deferred tax asset for an excess benefit that has not yet been realized. As a result, the Company will only recognize an excess benefit from equity-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available to us have been utilized. In addition, the Company continued to elect to account for the indirect benefits of equity-based compensation such as the research and development tax credit through the Consolidated Statement of Operations.

At June 26, 2016, the Company had federal net operating loss carryforwards of approximately $181.2 million. The majority of these losses will begin to expire in fiscal year 2019, and are subject to limitations on their utilization. The tax benefits relating to approximately $59.6 million of federal net operating loss carryforwards will be credited to additional paid-in-capital when recognized.

At June 26, 2016, the Company had state net operating loss carryforwards of approximately $164.5 million. If not utilized, the net operating loss carryforwards will begin to expire in fiscal year 2020, and are subject to limitations on their utilization. The tax benefits relating to approximately $46.4 million of state net operating loss carryforwards will be credited to additional paid-in-capital when recognized.

At June 26, 2016, the Company had federal tax credit carryforwards of approximately $193.6 million, of which $28.0 million of foreign tax credit will begin to expire in fiscal year 2017 and $163.7 million of research and development tax credit will begin to expire in fiscal year 2030. The remaining balance of $1.8 million of AMT credit may be carried forward indefinitely. The tax benefits relating to approximately $19.7 million of federal tax credit carryforwards will be credited to additional paid-in-capital when recognized.

At June 26, 2016, the Company had state tax credit carryforwards of approximately $264.0 million. Substantially all state tax credit carryforwards may be carried forward indefinitely.

At June 26, 2016, the Company had foreign net operating loss carryforwards of approximately $30.6 million, of which approximately $15.6 million may be carried forward indefinitely and $15.0 million will begin to expire in fiscal year 2017.

A reconciliation of income tax expense provided at the federal statutory rate (35% in fiscal years 2016, 2015, and 2014) to actual income tax expense (benefit) is as follows:

June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Income tax expense computed at federal statutory rate$336,041$259,297$253,177
State income taxes, net of federal tax benefit(14,070)(8,611)1,884
Foreign income taxed at different rates(265,123)(175,581)(164,130)
Tax credits(48,277)(24,416)(15,650)
State valuation allowance, net of federal tax benefit17,9488,594(1,707)
Equity-based compensation12,36628,84523,167
Other permanent differences and miscellaneous items7,183(2,855)(5,667)
$46,068$85,273$91,074

In July 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera Corporation (“Altera”) with respect to Altera’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement with Altera’s

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foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding stock-based compensation from its inter-company cost-sharing arrangement. However, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. The Company has evaluated the opinion and has recorded a tax benefit of $87.7 million related to reimbursement of cost share payments for the previously shared stock-based compensation costs. The Company has also recorded a tax benefit of $11.2 million related to stock-based compensation expense. In addition, the Company has recorded a tax liability of $73.6 million for the U.S. tax cost of potential repatriation of the associated contingent foreign earnings because at this time the Company cannot reasonably conclude that it has the ability and the intent to indefinitely reinvest these contingent earnings. The Company will continue to monitor this matter and related potential impacts to the consolidated financial statements.

Effective from fiscal year 2014 through June 2023, the Company has a 10 year tax ruling in Switzerland for one of its foreign subsidiaries. In the prior years, the Company had a tax holiday in Switzerland which was effective from fiscal year 2003 through June 2013. The impact of the tax ruling decreased taxes by approximately $4.3 million, $4.8 million and $7.4 million for fiscal years 2016, 2015 and 2014, respectively. The benefit of the tax ruling on diluted earnings per share was approximately $0.02 in fiscal year 2016, $0.03 in fiscal year 2015 and $0.04 in fiscal year 2014.

Unremitted earnings of the Company’s foreign subsidiaries included in consolidated retained earnings aggregated to approximately $4.3 billion at June 26, 2016. These earnings are indefinitely reinvested in foreign operations. If these earnings were remitted to the United States, they would be subject to U.S. and foreign withholding taxes of approximately $1.2 billion at current statutory rates. The Company’s federal income tax provision includes U.S. income taxes on certain foreign-based income.

As of June 26, 2016, the total gross unrecognized tax benefits were $417.4 million compared to $363.6 million as of June 28, 2015 and $352.1 million as of June 29, 2014. During fiscal year 2016, gross unrecognized tax benefits increased by approximately $53.8 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $323.4 million, $276.8 million and $269.4 million, as of June 26, 2016, June 28, 2015 and June 29, 2014 respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:

(in thousands)
Balance as of June 30, 2013$333,114
Lapse of statute of limitations(16,048)
Increases in balances related to tax positions taken during prior periods6,225
Decreases in balances related to tax positions taken during prior periods(4,182)
Increases in balances related to tax positions taken during current period33,003
Balance as of June 29, 2014352,112
Settlements and effective settlements with tax authorities(2,108)
Lapse of statute of limitations(9,376)
Increases in balances related to tax positions taken during prior periods3,729
Decreases in balances related to tax positions taken during prior periods(12,615)
Increases in balances related to tax positions taken during current period31,810
Balance as of June 28, 2015363,552
Lapse of statute of limitations(10,992)
Increases in balances related to tax positions taken during prior periods18,200
Decreases in balances related to tax positions taken during prior periods(421)
Increases in balances related to tax positions taken during current period47,093
Balance as of June 26, 2016$417,432

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $42.4 million, $35.5 million and $29.5 million cumulatively, for gross interest and penalties as of June 26, 2016, June 28, 2015 and June 29, 2014, respectively.

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The Company is subject to audits by state and foreign tax authorities. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of June 26, 2016, tax years 2004-2015 remain subject to examination in the jurisdictions where the Company operates.

The Company is in various stages of the examinations in connection with all of its tax audits worldwide and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.

Note 7: Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, restricted stock units (“RSUs”), and Convertible Notes. The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share.

Year Ended
June 26, 2016June 28, 2015June 29, 2014
(in thousands, except per share data)
Numerator:
Net income$914,049$655,577$632,289
Denominator:
Basic average shares outstanding158,919159,629164,741
Effect of potential dilutive securities:
Employee stock plans2,1203,1932,864
Convertible notes13,46413,5306,898
Warrants656715—
Diluted average shares outstanding175,159177,067174,503
Net income per share - basic$5.75$4.11$3.84
Net income per share - diluted$5.22$3.70$3.62

For purposes of computing diluted net income per share, weighted-average common shares do not include potentially dilutive securities that are anti-dilutive under the treasury stock method. The following potentially dilutive securities were excluded:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Number of options and RSUs excluded14933078

Diluted shares outstanding include the effect of the Convertible Notes. Diluted shares outstanding do not include any effect resulting from note hedges associated with the Company’s 2016 or 2018 Notes (as described in Note 13) as their impact would have been anti-dilutive.

Note 8: Financial Instruments

Fair Value

The Company defines fair value as 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. When determining the

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fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.

A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. The level of an asset or liability in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities with sufficient volume and frequency of transactions.

Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or model-derived valuations techniques for which all significant inputs are observable in the market or can be corroborated by, observable market data for substantially the full term of the assets or liabilities.

Level 3: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities and based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data.

The Company’s primary financial instruments include cash and cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and capital leases, and foreign currency related derivatives. The estimated fair value of cash and cash equivalents, accounts receivable and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of capital lease obligations approximate their carrying value as the substantial majority of these obligations have interest rates that adjust to market rates on a periodic basis. Refer to Note 13 to the Consolidated Financial Statements for additional information regarding the fair value of the Company’s Convertible Notes and Senior Notes.

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Investments

The following table sets forth the Company’s cash, cash equivalents, investments, restricted cash and investments, and other assets measured at fair value on a recurring basis as of June 26, 2016 and June 28, 2015:

June 26, 2016
(Reported Within)
CostUnrealized GainUnrealized (Loss)Fair ValueCash and Cash EquivalentsShort-Term InvestmentsRestricted Cash & InvestmentsOther Assets
(in thousands)
Cash$418,216$—$—$418,216$412,573$—$5,643$—
Level 1:
Time Deposit904,243——904,243659,465—244,778—
Money Market Funds3,904,288——3,904,2883,904,288———
US Treasury and Agencies446,5302,041(2)448,56962,996385,573——
Mutual Funds39,3181,400(397)40,321———40,321
Level 1 Total5,294,3793,441(399)5,297,4214,626,749385,573244,77840,321
Level 2:
Municipal Notes and Bonds265,386355(16)265,725—265,725——
US Treasuries and Agencies8,068151—8,219—8,219——
Government-Sponsored Enterprises31,88591(13)31,963—31,963——
Foreign Government Bonds41,44076(4)41,512—41,512——
Corporate Notes and Bonds979,5664,341(566)983,341—983,341——
Mortgage Backed Securities - Residential17,39537(152)17,280—17,280——
Mortgage Backed Securities - Commercial55,12930(160)54,999—54,999——
Level 2 Total1,398,8695,081(911)1,403,039—1,403,039——
Total$7,111,464$8,522$(1,310)$7,118,676$5,039,322$1,788,612$250,421$40,321

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June 28, 2015
(Reported Within)
CostUnrealized GainUnrealized (Loss)Fair ValueCash and Cash EquivalentsShort-Term InvestmentsRestricted Cash & InvestmentsOther Assets
(in thousands)
Cash$276,663$—$—$276,663$271,452$—$5,211$—
Level 1:
Time Deposit177,567——177,56744,738—132,829—
Money Market Funds1,177,875——1,177,8751,177,875———
US Treasury and Agencies349,00972(861)348,220—315,29132,929—
Mutual Funds30,5842,926(47)33,463———33,463
Level 1 Total1,735,0352,998(908)1,737,1251,222,613315,291165,75833,463
Level 2:
Municipal Notes and Bonds659,550429(335)659,6447,474652,170——
US Treasuries and Agencies4,007—(4)4,003—4,003——
Government-Sponsored Enterprises53,6122(249)53,365—53,365——
Foreign Government Bonds50,33631(161)50,206—50,206——
Corporate Notes and Bonds1,329,587685(3,797)1,326,475—1,326,475——
Mortgage Backed Securities - Residential32,23172(292)32,011—32,011——
Mortgage Backed Securities - Commercial141,98844(606)141,426—141,426——
Level 2 Total2,271,3111,263(5,444)2,267,1307,4742,259,656——
Total$4,283,009$4,261$(6,352)$4,280,918$1,501,539$2,574,947$170,969$33,463

The Company accounts for its investment portfolio at fair value. Realized gains (losses) for investment sales are specifically identified. Management assesses the fair value of investments in debt securities that are not actively traded through consideration of interest rates and their impact on the present value of the cash flows to be received from the investments. The Company also considers whether changes in the credit ratings of the issuer could impact the assessment of fair value. There were no other-than-temporary impairment charges in fiscal year 2016, 2015, or 2014. Additionally, gross realized gains/(losses) from sales of investments were $2.0 million and $(3.0) million in fiscal year 2016, $2.8 million and $(2.1) million in fiscal year 2015, and $1.5 million and $(2.0) million in fiscal year 2014, respectively.

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The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:

June 26, 2016
Unrealized Losses Less Than 12 MonthsUnrealized Losses 12 Months or GreaterTotal
Fair ValueGross Unrealized LossFair ValueGross Unrealized LossFair ValueGross Unrealized Loss
(in thousands)
Municipal Notes and Bonds$43,084$(10)$1,994$(6)$45,078$(16)
US Treasury & Agencies65,997(2)——65,997(2)
Retail Funds7,539(397)——7,539(397)
Government-Sponsored Enterprises1,211(13)——1,211(13)
Foreign Government Bonds9,201(4)——9,201(4)
Corporate Notes and Bonds185,982(317)46,761(249)232,743(566)
Mortgage Backed Securities - Residential12,402(68)1,328(84)13,730(152)
Mortgage Backed Securities - Commercial39,588(102)6,179(58)45,767(160)
$365,004$(913)$56,262$(397)$421,266$(1,310)

The amortized cost and fair value of cash equivalents, investments, and restricted cash and investments with contractual maturities are as follows:

CostEstimated Fair Value
(in thousands)
Due in one year or less$5,429,726$5,430,010
Due after one year through five years1,128,3041,134,632
Due in more than five years95,90095,497
$6,653,930$6,660,139

Management has the ability, if necessary, to liquidate any of its cash equivalents and investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase nonetheless are classified as short-term on the accompanying Consolidated Balance Sheets.

Derivative Instruments and Hedging

The Company carries derivative financial instruments (“derivatives”) on its Consolidated Balance Sheets at their fair values. The Company enters into foreign currency forward contracts and foreign currency options with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate fluctuations. The counterparties to these foreign currency forward contracts and foreign currency options are large global financial institutions that the Company believes are creditworthy, and therefore, it does not consider the risk of counterparty nonperformance to be material.

Cash Flow Hedges

The Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations on non-US dollar transactions or cash flows, primarily from Japanese yen-denominated revenues and euro-denominated and Korean won-denominated expenses. The Company’s policy is to mitigate

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the foreign exchange risk arising from the fluctuations in the value of these non-U.S. dollar denominated transactions or cash flows through a foreign currency cash flow hedging program, using foreign currency forward and options that generally expire within 12 months and no later than 24 months. These foreign currency hedge contracts are designated as cash flow hedges and are carried on the Company’s balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income (loss) and subsequently recognized in revenue/expense in the same period the hedged items are recognized.

In addition, the Company entered into and settled a series of forward-starting interest rate swap agreements during the twelve months ended June 26, 2016 and June 28, 2015, with a total notional value of $600.0 million and $375.0 million, respectively, to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and were settled in conjunction with the issuance of debt during the three months ended June 26, 2016 and March 29, 2015, respectively. The effective portion of the contracts’ gain/loss is included in accumulated other comprehensive (loss) and will amortize into income as the hedged item impacts earnings.

At inception and at each quarter end, hedges are tested prospectively and retrospectively for effectiveness using regression analysis. Changes in the fair value of the forward contracts due to changes in time value are excluded from the assessment of effectiveness and are recognized in revenue or expense in the current period. The change in time value related to these contracts was not material for all reported periods. Changes in the fair value of foreign exchange options due to changes in time value are included in the assessment of effectiveness. To qualify for hedge accounting, the hedge relationship must meet criteria relating both to the derivative instrument and the hedged item. These criteria include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows will be measured. There were no material gains or losses during the fiscal year ended June 26, 2016 or June 28, 2015 associated with ineffectiveness or forecasted transactions that failed to occur.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges must be tested to demonstrate an expectation of providing highly effective offsetting changes to future cash flows on hedged transactions. When derivative instruments are designated and qualify as effective cash flow hedges, the Company recognizes effective changes in the fair value of the hedging instrument within accumulated other comprehensive income (loss) until the hedged exposure is realized. Consequently, with the exception of excluded time value and hedge ineffectiveness recognized, the Company’s results of operations are not subject to fluctuation as a result of changes in the fair value of the derivative instruments. If hedges are not highly effective or if the Company does not believe that the underlying hedged forecasted transactions will occur, the Company may not be able to account for its derivative instruments as cash flow hedges. If this were to occur, future changes in the fair values of the Company’s derivative instruments would be recognized in earnings. Additionally, related amounts previously recorded in other comprehensive income would be reclassified to income immediately. As of June 26, 2016, the Company had losses of $15.6 million accumulated in other comprehensive income, net of tax, including, $14.8 million losses related to foreign exchange which it expects to reclassify from other comprehensive income into earnings over the next 12 months and $0.8 million losses related to interest rate contracts which it expects to reclassify from other comprehensive income into earnings over the next 10.0 years.

Fair Value Hedges

During the fiscal year ended June 26, 2016, the Company entered into a series of interest rate contracts with a total notional value of $400.0 million whereby the Company receives fixed rates and pays variable rates based on certain benchmark interest rates, resulting in a net increase or decrease to interest expense, a component of Other expense, net in our Consolidated Statement of Operations. These interest rate contracts are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. The Company concluded that these interest rate contracts meet the criteria necessary to qualify for the short-cut method of hedge accounting, and as such an assumption is made that the change in the fair value of the hedged debt, due to changes in the benchmark rate, exactly offsets the change in the fair value of the interest rate swap. Therefore, the derivative is considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness is recognized.

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Balance Sheet Hedges

The Company also enters into foreign currency hedge contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities, primarily third party accounts receivables, accounts payables and intercompany receivables and payables. These foreign currency hedge contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these derivatives is recorded as a component of other income (expense) and offsets the change in fair value of the foreign currency denominated assets and liabilities, which are also recorded in other income (expense).

As of June 26, 2016, the Company had the following outstanding foreign currency contracts that were entered into under its cash flow and balance sheet hedge program:

Derivatives Designated as Hedging Instruments:Derivatives Not Designated as Hedging Instruments:
(in thousands)
Foreign Currency Forward Contracts
Buy ContractsSell ContractsBuy ContractsSell Contracts
Japanese yen$—$219,148$—$56,870
Swiss franc——4,467—
Euro36,303—16,048—
Korean won8,577——4,971
Chinese Renminbi——9,105—
Singapore Dollar——18,273—
Taiwan dollar——23,341—
$44,880$219,148$71,234$61,841
Foreign Currency Option Contracts
Buy PutSell PutBuy Put (1)Sell Put
Japanese yen$—$—$39,135$39,135

(1) Contracts were entered into and designated as cash flow hedges under ASC 815, during the fiscal year as part of our cash flow hedge program. The contracts were subsequently de-designated during the fiscal year ended June 26, 2016, changes in fair market value subsequent to de-designation effect current earnings.

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The fair value of derivatives instruments in the Company’s consolidated balance sheet as of June 26, 2016 and June 28, 2015 were as follows:

June 26, 2016June 28, 2015
Fair Value of Derivative Instruments (Level 2)Fair Value of Derivative Instruments (Level 2)
Asset DerivativesLiability DerivativesAsset DerivativesLiability Derivatives
Balance Sheet LocationFair ValueBalance Sheet LocationFair ValueBalance Sheet LocationFair ValueBalance Sheet LocationFair Value
(in thousands)
Derivatives designated as hedging instruments:
Foreign exchange contractsPrepaid expense and other assets$249Accrued liabilities$16,585Prepaid expense and other assets$3,388Accrued liabilities$957
Interest rate contracts, short-termAccrued expenses and other current liabilities50Prepaid expense and other assets159Accrued expenses and other current liabilities—Prepaid expense and other assets—
Interest rate contracts, long-termOther long-term liabilities8,661Other long-term liabilities—
Derivatives not designated as hedging instruments:
Foreign exchange contractsPrepaid expense and other assets107Accrued liabilities1,529Prepaid expense and other assets8Accrued liabilities960
Total derivatives$9,067$18,273$3,396$1,917

Under the master agreements with the respective counterparties to the Company’s foreign exchange contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis in the Company’s balance sheet. As of June 26, 2016, the potential effect of rights of set-off associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $6.4 million, resulting in a net derivative asset of $2.7 million and net derivative liability of $11.9 million. As of June 28, 2015, the potential effect of rights of set-off associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $1.9 million, resulting in a net derivative asset of $1.5 million. The Company is not required to pledge, nor is the Company entitled to receive, cash collateral related to these derivative transactions.

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The effect of derivative instruments designated as cash flow hedges, before tax, on the Company’s Consolidated Statements of Operations was as follows:

Year Ended June 26, 2016Year Ended June 28, 2015
Location of Gain (Loss) Recognized in or Reclassified into IncomeEffective PortionIneffective Portion and Amount Excluded from EffectivenessEffective PortionIneffective Portion and Amount Excluded from Effectiveness
Derivatives Designated as Hedging InstrumentsGain (Loss) Recognized in AOCIGain (Loss) Reclassified from AOCI into IncomeGain (Loss) Recognized in IncomeGain Recognized in AOCIGain Reclassified from AOCI into IncomeGain (Loss) Recognized in Income
(in thousands)(in thousands)
Foreign exchange contractsRevenue$(22,575)$(2,950)$1,009$13,678$11,375$258
Foreign exchange contractsCost of goods sold81(2,423)(172)(6,318)(4,349)(75)
Foreign exchange contractsSelling, general, and administrative1885(69)(2,579)(2,618)(39)
Foreign exchange contractsOther expense, net——(11)———
Interest rate contractsOther expense, net3,329(360)96(5,071)(112)(231)
$(18,977)$(5,728)$853$(290)$4,296$(87)

The effect of derivative instruments not designated as cash flow hedges on the Company’s Consolidated Statement of Operations was as follows:

Year Ended
June 26, 2016June 28, 2015
Derivatives Not Designated as Hedging Instruments:Location of (Loss) Gain Recognized in IncomeLoss Recognized in IncomeGain Recognized in Income
(in thousands)
Foreign Exchange ContractsOther income$(16,208)$1,784

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short term investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit in large global financial institutions. Such deposits may be in excess of insured limits. Management believes that the financial institutions that hold the Company’s cash are creditworthy and, accordingly, minimal credit risk exists with respect to these balances.

The Company’s over-all portfolio of available-for-sale securities must maintain an average minimum rating of “AA-” or “Aa3” as rated by Standard and Poor’s or Moody’s Investor Services, respectively. To ensure diversification and minimize concentration, the Company’s policy limits the amount of credit exposure with any one financial institution or commercial issuer.

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The Company is exposed to credit losses in the event of nonperformance by counterparties on the foreign currency forward contracts that are used to mitigate the effect of exchange rate fluctuations and on contracts related to structured share repurchase agreements. These counterparties are large global financial institutions and, to date, no such counterparty has failed to meet its financial obligations to the Company.

Credit risk evaluations, including trade references, bank references and Dun & Bradstreet ratings, are performed on all new customers and the Company monitors its customers’ financial statements and payment performance. In general, the Company does not require collateral on sales.

As of June 26, 2016, three customers accounted for approximately 24%, 19%, and 11% of accounts receivable. As of June 28, 2015, four customers accounted for approximately 17%, 13%, 12%, and 11% of accounts receivable. No other customers accounted for more than 10% of accounts receivable.

Note 9: Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market. System shipments to Japanese customers, for which title does not transfer until customer acceptance, are classified as finished goods inventory and carried at cost until title transfers. Inventories consist of the following:

June 26, 2016June 28, 2015
(in thousands)
Raw materials$536,844$566,645
Work-in-process151,406141,264
Finished goods283,661235,437
$971,911$943,346

Note 10: Property and Equipment

Property and equipment, net, consist of the following:

June 26, 2016June 28, 2015
(in thousands)
Manufacturing, engineering and office equipment$824,532$717,788
Computer equipment and software157,125137,623
Land46,04753,391
Buildings213,364238,631
Leasehold improvements96,64981,899
Furniture and fixtures23,60921,629
1,361,3261,250,961
Less: accumulated depreciation and amortization(721,718)(629,543)
$639,608$621,418

Depreciation expense, including amortization of capital leases, during fiscal years 2016, 2015, and 2014, was $134.7 million, $120.3 million, and $129.1 million, respectively.

The Company recorded a $15.2 million gain on sale of real estate and related development rights, net of associated exit costs, in fiscal year 2016 in selling, general and administrative expenses in the Consolidated Statement of Operations. The Company recorded an $83.1 million gain on sale of real estate in the Consolidated Statement of Operations in fiscal year 2014. No significant gains on sale were realized in fiscal year 2015.

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Note 11: Goodwill and Intangible Assets

Goodwill

The balance of Goodwill was $1.4 billion as of June 26, 2016 and June 28, 2015. As of June 26, 2016, $61.1 million of the goodwill balance is tax deductible and the remaining balance is not tax deductible due to purchase accounting and applicable foreign law. The Company recognized a $79.4 million impairment of goodwill on the Company's single-wafer clean reporting unit during the year ended June 28, 2015. No goodwill impairment was recognized in fiscal years 2016 or 2014.

Intangible Assets

The following table provides the Company’s intangible assets, other than goodwill, as of June 26, 2016:

GrossAccumulated AmortizationNet
(in thousands)
Customer relationships$615,272$(300,711)$314,561
Existing technology643,433(401,036)242,397
Patents36,053(28,701)7,352
Other intangible assets36,114(35,503)611
Total intangible assets$1,330,872$(765,951)$564,921

The following table provides details of the Company’s intangible assets, other than goodwill, as of June 28, 2015:

GrossAccumulated AmortizationNet
(in thousands)
Customer relationships$615,490$(234,968)$380,522
Existing technology643,919(313,071)330,848
Patents33,553(26,431)7,122
Other intangible assets35,914(35,366)548
Intangible assets subject to amortization1,328,876(609,836)719,040
Development rights9,1009,100
Intangible assets not subject to amortization9,1009,100
Total intangible assets$1,337,976$(609,836)$728,140

The Company recognized $156.3 million, $157.7 million, and $163.2 million in intangible asset amortization expense during fiscal years 2016, 2015, and 2014, respectively. During the fiscal year 2016, the company transferred ownership of the development rights previously recognize as a component of a real estate sale, see Note 10 for additional information regarding this transaction.

The Company recognized a $9.8 million impairment of existing technology during the fiscal year 2015, resulting from current market demand for the technology. The Company recognized a $4.0 million impairment of in process research and development during fiscal year 2014, due to the cancellation of a project. No impairments were recognized in fiscal year 2016.

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The estimated future amortization expense of intangible assets, excluding those with indefinite lives, as of June 26, 2016 was as follows:

Fiscal YearAmount
(in thousands)
2017$154,592
2018153,379
2019115,306
202050,107
202147,597
Thereafter43,940
$564,921

Note 12: Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

June 26, 2016June 28, 2015
(in thousands)
Accrued compensation$331,528$314,516
Warranty reserves100,32193,209
Income and other taxes payable86,72339,275
Dividend payable48,05247,659
Other206,286154,779
$772,910$649,438

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Note 13: Long Term Debt and Other Borrowings

As of June 26, 2016 and June 28, 2015, the Company's outstanding debt consisted of the following:

June 26, 2016June 28, 2015
Amount (in thousands)Effective Interest RateAmount (in thousands)Effective Interest Rate
Fixed-rate 0.50% Convertible Notes Due May 15, 2016 ("2016 Notes")$——$450,000(3)4.29%
Fixed-rate 1.25% Convertible Notes Due May 15, 2018 ("2018 Notes")449,954(1)5.27%450,000(3)5.27%
Fixed-rate 2.75% Senior Notes Due March 15, 2020 ("2020 Notes")500,0002.88%500,0002.88%
Fixed-rate 2.80% Senior Notes Due June 15, 2021 ("2021 Notes")800,0002.95%——
Fixed-rate 3.45% Senior Notes Due June 15, 2023 ("2023 Notes")600,0003.60%——
Fixed-rate 3.80% Senior Notes Due March 15, 2025 ("2025 Notes")500,0003.87%500,0003.87%
Fixed-rate 3.90% Senior Notes Due June 15, 2026 ("2026 Notes")1,000,0004.01%——
Fixed-rate 2.625% Convertible Notes Due May 15, 2041 ("2041 Notes")699,895(1)4.28%699,935(3)4.28%
Total debt outstanding, at par4,549,8492,599,935
Unamortized discount(232,727)(247,849)
Fair value adjustment - interest rate contracts8,552—
Total debt outstanding, at carrying value$4,325,674$2,352,086
Reported as:
Current portion of long-term debt$942,298(2)$1,358,126(2)
Long-term debt3,383,376993,960
Total debt outstanding, at carrying value$4,325,674$2,352,086

(1) As of June 26, 2016, these notes were convertible at the option of the bondholder, as a result of the condition described in (2) below. Upon closure of the conversion period, Notes not converted will be reclassified back into noncurrent liabilities and the temporary equity will be reclassified into permanent equity.

(2) As of the report date the market value of the Company's Common Stock was greater than 130% of the convertible notes conversion price for 20 or more of the 30 consecutive trading days preceding the quarter-end. As a result, the convertible notes were classified in current liabilities and a portion of the equity component, representing the unamortized discount, was classified in temporary equity on the Company's Consolidated Balance Sheets.

(3) As of June 28, 2015, these notes were convertible at the option of the bond holder, as a result of the condition described in (2) above.

The Company’s contractual cash obligations relating to its outstanding debt as of June 26, 2016 were as follows:

Payments Due By Fiscal Year:Long-term Debt
(in thousands)
2017(1)$1,149,849
2018—
2019—
2020500,000
2021800,000
Thereafter2,100,000
Total$4,549,849

(1) As noted above, the conversion period for the 2018 and 2041 Notes is open as of June 26, 2016. As there is the potential for conversion at the option of the holder, the principal balance of the 2018 and 2041 Notes have been included in the one year payment period.

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Convertible Senior Notes

In May 2011, the Company issued and sold $450.0 million in aggregate principal amount of 0.5% Convertible Senior Notes due May 2016 (the “2016 Notes”) at par. At the same time, the Company issued and sold $450.0 million in aggregate principal amount of 1.25% Convertible Senior Notes due May 2018 (the “2018 Notes”) at par. The Company pays 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 on May 15 and November 15 of each year. The 2016 Notes were extinguished upon maturity on May 15, 2016. Just prior to the 2016 Note's scheduled maturity, the notes were convertible at the bondholders' option. During the three months ended June 28, 2016, 449.7 thousand of the 2016 Notes, with a total par value of $449.7 million were converted, in settlement of the conversion the bondholders received a cash payment equal to the par value of the 2016 Notes converted, as well as 1.6 million shares of Common Stock. To off-set the dilutive impact of the Common Stock consideration paid, the Company exercised the associated note hedge and received 1.6 million shares from counterparties. The remaining 2016 Notes were settled at par value, without conversion.

In June 2012, with the acquisition of Novellus, the Company assumed $700.0 million in aggregate principal amount of 2.625% Convertible Senior Notes due May 2041 (the “2041 Notes,” collectively with the 2016 Notes (prior to the 2016 Notes current period maturity) and the 2018 Notes, the “Convertible Notes”). The Company pays cash interest at an annual rate of 2.625%, on a semi-annual basis on May 15 and November 15 of each year on the 2041 Notes. The 2041 Notes also have a contingent interest payment provision that may require the Company to pay additional interest, up to 0.60% per year, based on certain thresholds, beginning with the semi-annual interest payment on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the 2041 Notes.

The Company separately accounts for the liability and equity components of the Convertible Notes. The initial liability components of the Convertible Notes were valued based on the present value of the future cash flows using the Company’s borrowing rate at the date of the issuance or assumption for similar debt instruments without the conversion feature, which equals the effective interest rate on the liability component disclosed in the following table. The equity component was initially valued equal to the principle value of the notes, less the present value of the future cash flows using the Company’s borrowing rate at the date of the issuance or assumption for similar debt instruments without a conversion feature, which equated to the initial debt discount.

Under certain circumstances, the Convertible Notes may be converted into shares of the Company’s Common Stock. The number of shares each debenture is convertible into is based on conversion rates, disclosed in the following table. The conversion rates are adjusted for certain corporate events, including dividends on the Company’s Common Stock. In addition to the conversion of the 2016 Notes described above, during the year ended June 26, 2016, 99 of the Convertible Notes, with a total par value of $99.0 thousand were settled at the note holders’ option. In conjunction with the conversions in the year ended June 26, 2016, 475 shares of common stock were issued. Additionally, during the year ended June 26, 2016, the Company received notice of note holders' intention to convert 12 of the 2041 Notes, the Company expects those conversions to settle in the three months ended September 25, 2016.

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Selected additional information regarding the Convertible Notes outstanding as of June 26, 2016 and June 28, 2015 is as follows:

June 26, 2016June 28, 2015
2018 Notes2041 Notes2016 Notes2018 Notes2041 Notes
(in thousands, except years, percentages, conversion rate, and conversion price)
Carrying amount of permanent equity component, net of tax$72,992$152,397$61,723$57,215$148,487
Carrying amount of temporary equity component, net of tax$31,894$175,658$14,507$47,679$179,622
Remaining amortization period (years)1.924.9
Fair Value of Notes (Level 2)$645,009$1,732,240
Conversion rate (shares of common stock per $1,000 principal amount of notes)16.335429.3158
Conversion price (per share of common stock)$61.22$34.11
If-converted value in excess of par value$154,818$988,326
Estimated share dilution using average quarterly stock price of $80.08 per share1,73111,778

Convertible Note Hedges and Warrants

Concurrent with the issuance of the 2016 Notes and 2018 Notes, the Company purchased a convertible note hedge and sold warrants. As of June 26, 2016, the warrants had not been exercised and remained outstanding. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock. The warrants settlement is contractually defined as net share settlement.

In conjunction with the convertible note hedge, counterparties agreed to sell to the Company shares of Common Stock equal to the number of shares issuable upon conversion of the 2016 Notes and 2018 Notes in full. The convertible note hedge transactions will be settled in net shares. The note hedges will terminate upon the earlier of (i) the maturity date, or (ii) the first day none of the respective notes remain outstanding, due to conversion or otherwise. Settlement of the convertible note hedge in net shares, based on the number of shares issued upon conversion of the 2016 and 2018 Notes, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 2016 Notes and 2018 Notes. The Company exercised the convertible note hedge related to the 2016 Notes in the year ended June 26, 2016, to offset the impact of the Company's Common Stock issued for conversions just prior to scheduled maturity, as described above. Additionally, the impact of the Company's exercise of the note hedge associated with the 2016 Notes and 2018 Notes converted during the year ended June 26, 2016 was the receipt of 79 shares of the Company's Common Stock. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock.

The following table presents the details of the warrants and convertible note hedge arrangements as of June 26, 2016:

2016 Notes2018 Notes
(shares in thousands)
Warrants:
Number of shares to be delivered upon exercise7,3517,350
Estimated share dilution using average quarterly stock price $80.08 per share990565
Exercise price$69.30$73.93
Expiration date rangeAugust 15 - October 21, 2016August 15 - October 23, 2018
Convertible Note Hedge:
Number of shares available from counterparties—7,350
Exercise price—$61.22

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Senior Notes

On March 12, 2015, the Company completed a public offering of $500.0 million aggregate principal amount of the Company’s Senior Notes due March 2020 (the “2020 Notes”) and $500.0 million aggregate principal amount of the Company’s Senior Notes due March 2025 (the “2025 Notes”, together with the 2020 Notes, the “Senior Notes”). The Company 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. During the year ended June 26, 2016, the Company entered into a series of interest rate contracts hedging the fair value of a portion of the 2025 Notes par value, whereby the company receives a fixed rate and pays a variable rate based on a certain benchmark interest rate. Refer to Note 8 for additional information regarding these interest rate contracts.

The Company 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 of 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. The Company 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, the Company 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.

On June 7, 2016, The Company completed a public offering of $800.0 million aggregate principal amount of Senior Notes due June 2021 (the "2021 Notes"), $600.0 million aggregate principal amount of Senior Notes due June 2023 (the "2023 Notes") and $1.0 billion aggregate principal amount of Senior Notes due June 2026 (the "2026 Notes" together with the 2020, 2021, 2023, and 2025 Notes, the “Senior Notes”). The Company will pay interest at an annual rate of 2.80%, 3.45% and 3.90%, respectively, on the 2021 Notes, 2023 Notes and 2026 Notes, on a semi-annual basis on June 15 and December 15 of each year, beginning December 15, 2016.

The Company may redeem the 2021 Notes, 2023 Notes, and 2026 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 2021 Notes, 2023 Notes, and 2026 Notes and accrued and unpaid interest before May 15, 2021, for the 2021 Notes, before April 15, 2023 for the 2023 Notes, and before March 15, 2026, for the 2026 Notes. The Company may redeem the 2021 Notes, 2023 Notes, and 2026 Notes at par, plus accrued and unpaid interest at any time on or after May 15, 2021 for the 2021 Notes, on or after April 15, 2023 for the 2023 Notes, and on or after March 15, 2026 for the 2026 Notes. In addition, upon the occurrence of certain events, as described in the indenture, the Company will be required to make an offer to repurchase the 2021 Notes, 2023 Notes and 2026 Notes at a price equal to 101% of the principal amount of the respective note, plus accrued and unpaid interest.

In the event (i) the proposed merger with KLA-Tencor is not completed on or prior to December 30, 2016, or (ii) the Agreement and Plan of Merger and Reorganization, dated as of October 20, 2015, by and among us, KLA-Tencor, Topeka Merger Sub 1, Inc., and Topeka Merger Sub 3, Inc. (as assignee of Topeka Merger Sub 2), is terminated on or at any time prior to such date (each such event referred to as a “Special Mandatory Redemption Event”), the Company will be required to redeem all of the 2023 Notes and the 2026 Notes then outstanding, at a special mandatory redemption price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest from the date of initial issuance, or the most recent interest payment date on which interest was paid, whichever is later, to, but not including, the Special Mandatory Redemption Date (as defined below). The 2021 Notes are not subject to this special mandatory redemption. The “Special Mandatory Redemption Date” means the date specified in the notice of special mandatory redemption to be delivered to the holders of the notes within five business days following the Special Mandatory Redemption Event, which Special Mandatory Redemption Date shall be three business days after such notice is mailed.

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Selected additional information regarding the Senior Notes outstanding as of June 26, 2016 is as follows:

Remaining Amortization periodFair Value of Notes (Level 2)
(years)(in thousands)
2020 Notes3.7$506,250
2021 Notes5.0$818,104
2023 Notes7.0$614,970
2025 Notes8.7$510,750
2026 Notes10.0$1,049,510

Term Loan Agreement

On May 13, 2016, we entered into an Amended and Restated Term Loan Agreement (the “Amended and Restated Term Loan Agreement”), which amends and restates the Term Loan Agreement we entered into on November 10, 2015 with a syndicate of lenders. The Amended and Restated Term Loan Agreement provides for a $1,530.0 million senior unsecured term loan facility composed of two tranches; (i) a $1,005.0 million tranche of 3-year senior unsecured loans (the "3-Year Tranche") maturing on the 3-year anniversary of the closing date of the acquisition of KLA-Tencor subject to several conditions; and (ii) a $525.0 million tranche of 5-year senior unsecured loans (the "5-Year Tranche") maturing on the 5-year anniversary of the closing date of the acquisition of KLA-Tencor subject to several conditions. The Amended and Restated Term Loan will terminate on October 20, 2016 if the merger has not been consummated by such date.

Interest on amounts borrowed under the Amended and Restated Term Loan Agreement is, at the Company’s option, based on (i) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.50%, or (c) one-month LIBOR plus 1.00%, plus a spread of 0.00% to 0.75% for the 3-Year Tranche or 0.125% to 1.000% for the 5-Year Tranche or (ii) LIBOR multiplied by the statutory reserve rate, plus a spread of 1.000% to 1.750% for the 3-Year Tranche or 1.125% to 2.000% for the 5-Year Tranche, in each case as the applicable spread is determined based on the rating of the Company’s non-credit enhanced, senior unsecured long-term debt.

Principal and accrued and unpaid interest is due and payable in equal quarterly amounts as set forth in the Amended and Restated Term Loan Agreement, with any remaining balance due and accrued and unpaid interest due at maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s rating described above. The Amended and Restated Term Loan Agreement also contains financial covenants that require the Company to maintain (i) a consolidated debt to capitalization ratio of no more than 0.50 to 1.00 (the “Capitalization Covenant”), provided that, until and including the earlier of (x) the end of the first two consecutive full fiscal quarters following the Amended and Restated Term Loan Agreement's closing date that the Company is in compliance with the Capitalization Covenant and (y) December 31, 2017, if the Company is not in compliance with the Capitalization Covenant, the Company will be deemed not to have violated the Capitalization Covenant so long as the Company’s consolidated debt to adjusted EBITDA ratio is less than or equal to 4.50 to 1.00 for the period of four fiscal quarters then ended, and (ii) liquidity of no less than $1.0 billion, in each case determined in accordance with the Amended and Restated Term Loan Agreement. The funding of the loans under the Amended and Restated Term Loan Agreement will be on the closing date of the acquisition of KLA-Tencor subject to several conditions.

Revolving Credit Facility

On November 10, 2015, we entered into an Amendment and Restatement Agreement (as amended on April 26, 2016 by Amendment No. 1 to the Amended and Restated Credit Agreement, and as further amended, restated, supplemented or otherwise modified from time to time, the “Amended and Restated Credit Agreement”), which amends and restates the Company's prior unsecured Credit Agreement, dated March 12, 2014 (as amended by Amendment No. 1, dated March 5, 2015). The Amended and Restated Credit Agreement provides for an increase to our revolving unsecured credit facility, from $300.0 million to $750.0 million with a syndicate of lenders. It includes an expansion option, subject to certain requirements, for us to request an increase in the facility of up to an additional $250.0 million, for a potential total commitment of $1.0 billion. Proceeds from the credit facility can be used for general corporate purposes. The facility matures on November 10, 2020.

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Interest on amounts borrowed under the credit facility is, at the Company’s 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 multiplied by the statutory rate, plus a spread of 0.9% to 1.5%, in each case as the applicable spread is determined based on the rating of the Company’s non-credit enhanced, senior unsecured long-term debt. Principal and any accrued and unpaid interest is due and payable upon maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s credit rating. The Restated Credit Agreement contains affirmative covenants, negative covenants, financial covenants and events of default that are substantially similar to those in the Amended and Restated Term Loan Agreement. As of June 26, 2016, the Company had no borrowings outstanding under the credit facility and was in compliance with all financial covenants.

Bridge Facility

On October 20, 2015, the Company obtained a commitment for $4.2 billion of bridge financing from Goldman Sachs Bank USA and Goldman Sachs Lending Partners LLC (“the Commitment Parties”) to finance, in part, the acquisition of KLA-Tencor. The Commitment Parties' commitment to provide financing (the “Bridge Facility”) is subject to certain conditions, including consummation of the merger with KLA-Tencor. On November 10, 2015, the Company entered into the Term Loan Agreement for $0.9 billion and the Bridge Facility was reduced to $3.3 billion, correspondingly, both with a syndicate of lenders. Following the execution of our June 2016 debt offering and other available credit modifications (see Note 13), this commitment was terminated during the three months ended June 26, 2016.

Interest Cost

The following table presents the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the debt discount, issuance costs, and effective portion of interest rate contracts with respect to the long-term debt and other borrowings during the fiscal years ended June 26, 2016, June 28, 2015, and June 29, 2014.

June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Contractual interest coupon$63,053$36,074$26,248
Amortization of interest discount35,20634,88633,065
Amortization of issuance costs35,3152,4352,362
Amortization of interest rate contract359113—
Total interest cost recognized$133,933$73,508$61,675

The increase in interest expense during the fiscal year ended June 26, 2016 is primarily the result of the issuance of $1.0 billion Senior Notes in March 2015. The increase in amortization of issuance costs during the year ended June 26, 2016 is primarily due the amortization of bridge loan financing issuance costs of approximately $31.9 million.

Note 14: Retirement and Deferred Compensation Plans

Employee Savings and Retirement Plan

The Company maintains a 401(k) retirement savings plan for its eligible employees in the United States. Each participant in the plan may elect to contribute from 1% to 75% of annual eligible earnings to the plan, subject to statutory limitations. The Company makes matching employee contributions in cash to the plan at the rate of 50% of the first 6% of earnings contributed. Employees participating in the 401(k) retirement savings plan are fully vested in the Company matching contributions, and investments are directed by participants. The Company made matching contributions of $13.2 million, $11.8 million, and $10.2 million, in fiscal years 2016, 2015, and 2014, respectively.

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Deferred Compensation Arrangements

The Company has an unfunded, non-qualified deferred compensation plan whereby certain executives may defer a portion of their compensation. Participants earn a return on their deferred compensation based on their allocation of their account balance among various mutual funds. The Company controls the investment of these funds and the participants remain general creditors of the Company. Participants are able to elect the payment of benefits on a specified date at least three years after the opening of a deferral sub-account or upon retirement. Distributions are made in the form of lump sum or annual installments over a period of up to 20 years as elected by the participant. If no alternate election has been made, a lump sum payment will be made upon termination of a participant’s employment with the Company. As of June 26, 2016 and June 28, 2015, the liability of the Company to the plan participants was $122.9 million and $113.4 million, respectively, which was recorded in accrued expenses and other current liabilities on the Consolidated Balance Sheets. As of June 26, 2016 and June 28, 2015, the Company had investments in the aggregate amount of $149.8 million and $138.9 million, respectively, which correlate to the deferred compensation obligations, which were recorded in other assets on the Consolidated Balance Sheets.

Postretirement Healthcare Plan

The Company maintains a postretirement healthcare plan for certain executive and director retirees. Coverage continues through the duration of the lifetime of the retiree or the retiree’s spouse, whichever is longer. The benefit obligation was $37.0 million and $30.2 million as of June 26, 2016 and June 28, 2015, respectively.

Note 15: Commitments and Contingencies

The Company has certain obligations to make future payments under various contracts, some of these are recorded on its balance sheet and some are not. Obligations that are recorded on the Company’s balance sheet include the Company’s capital lease obligations. Obligations that are not recorded on the Company’s balance sheet include contractual relationships for operating leases, purchase obligations, and certain guarantees. The Company’s commitments relating to capital leases and off-balance sheet agreements are included in the tables below. These amounts exclude $231.5 million of liabilities related to uncertain tax benefits because the Company is unable to reasonably estimate the ultimate amount or time of settlement. See Note 6 of the Consolidated Financial Statements for further discussion.

Capital Leases

Capital leases reflect building and office equipment leases. The Company’s contractual cash obligations relating to its existing capital leases, including interest, as of June 26, 2016 were as follows:

Payments Due By Fiscal Year:Capital Leases
(in thousands)
2017$7,208
201883
201977
202057
2021—
Total7,425
Interest on capital leases24
Current portion of capital leases7,196
Long-term portion of capital leases$205

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Operating Leases and Related Guarantees

The Company leases the majority of its administrative, R&D and manufacturing facilities, regional sales/service offices and certain equipment under non-cancelable operating leases. Certain of the Company’s facility leases for buildings located at its Fremont, California headquarters and certain other facility leases provide the Company with options to extend the leases for additional periods or to purchase the facilities. Certain of the Company’s facility leases provide for periodic rent increases based on the general rate of inflation. The Company’s rental expense for facilities occupied during fiscal years 2016, 2015, and 2014 was approximately $16 million, $15 million, and $12 million, respectively.

The Company has operating leases regarding certain improved properties in Fremont and Livermore, California (the “Operating Leases”). The Company is required to maintain cash collateral in an aggregate of approximately $244.8 million in separate interest-bearing accounts security for the Company’s obligations. These amounts are recorded with other restricted cash and investments in the Company’s Consolidated Balance Sheet as of June 26, 2016.

During the term of the Operating Leases and when the terms of the Operating Leases expire, the property subject to those Operating Leases may be re-marketed. The Company has guaranteed to the lessor that each property will have a certain minimum residual value. The aggregate guarantee made by the Company under the Operating Leases is generally no more than $219.0 million; however, under certain default circumstances, the guarantee with regard to an Operating Lease may be 100% of the lessor’s aggregate investment in the applicable property, which in no case will exceed $249.9 million, in the aggregate.

The Company’s contractual cash obligations with respect to operating leases, excluding the residual value guarantees discussed above, as of June 26, 2016 were as follows:

Payments Due By Fiscal Year:Operating Leases
(in thousands)
2017$20,393
201810,495
20199,407
20207,418
20216,152
Thereafter8,758
Less: Sublease Income(206)
Total$62,417

Other Guarantees

The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into insurance contracts that are intended to limit its exposure to such indemnifications. As of June 26, 2016, the Company had not recorded any liability on its Consolidated Financial Statements in connection with these indemnifications, as it does not believe that it is probable that any amounts will be paid under these guarantees.

Generally, the Company indemnifies, under pre-determined conditions and limitations, its customers for infringement of third-party intellectual property rights by the Company’s products or services. The Company seeks to limit its liability for such indemnity to an amount not to exceed the sales price of the products or services subject to its indemnification obligations. The Company does not believe that it is probable that any material amounts will be paid under these guarantees.

The Company provides guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of June 26, 2016, the maximum potential amount of future payments that the Company could be required to make under these arrangements and letters of credit

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was $12.1 million. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid.

Purchase Obligations

Purchase obligations consist of non-cancelable significant contractual obligations either on an annual basis or over multi-year periods. The contractual cash obligations and commitments table presented below contains the Company’s minimum obligations at June 26, 2016 under these arrangements and others. For obligations with cancellation provisions, the amounts included in the following 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.

The Company’s commitments related to these agreements as of June 26, 2016 were as follows:

Payments Due By Fiscal Year:Purchase Obligations
(in thousands)
2017$221,312
20182,179
20192,179
20202,144
20212,061
Thereafter1,711
Total$231,586

Warranties

The Company provides standard warranties on its systems. The liability amount is based on actual historical warranty spending activity by type of system, customer, and geographic region, modified for any known differences such as the impact of system reliability improvements.

Changes in the Company’s product warranty reserves were as follows:

Year Ended
June 26, 2016June 28, 2015
(in thousands)
Balance at beginning of period$93,209$69,385
Warranties issued during the period124,582119,119
Settlements made during the period(114,008)(100,196)
Changes in liability for pre-existing warranties(3,462)4,901
Balance at end of period$100,321$93,209

Legal Proceedings

While the Company is not currently a party to any legal proceedings that it believes material, the Company is either a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business, including intellectual property claims. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company believes that the amount of any such additional loss would be immaterial to the Company’s business, financial condition, and results of operations.

Note 16: Stock Repurchase Program

On April 29, 2014, the Board of Directors authorized the repurchase of up to $850.0 million of Common Stock. These repurchases can be conducted on the open market or as private purchases and may include the use of derivative contracts with large financial institutions, in all cases subject to compliance with applicable law. Repurchases are funded using the Company’s on-shore cash and on-shore cash generation. This repurchase program has no termination date and may be suspended or discontinued at any time.

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Repurchases under the repurchase program were as follows during the periods indicated:

PeriodTotal Number of Shares RepurchasedTotal Cost of RepurchaseAverage Price Paid Per ShareAmount Available Under Repurchase Program
(in thousands, except per share data)
Available balance as of June 28, 2015$316,587
Quarter Ended September 27, 20151,205$87,493$72.61$229,094
Quarter Ended December 27, 2015—$—$—$229,094
Quarter Ended March 27, 2016—$—$—$229,094
Quarter Ended June 26, 2016—$—$—$229,094

In addition to shares repurchased under the Board-authorized repurchase program shown above, the Company acquired 924,823 shares at a total cost of $67.6 million, during the twelve months ended June 26, 2016, which the Company withheld through net share settlements to cover minimum tax withholding obligations upon the vesting of restricted stock unit awards granted under the Company’s equity compensation plans. The shares retained by the Company through these net share settlements are not a part of the Board-authorized repurchase program but instead are authorized under the Company’s equity compensation plans. The Company is restricted from repurchasing Common Stock pursuant to the KLA-Tencor merger agreement.

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Note 17: Comprehensive Income (Loss)

The components of accumulated other comprehensive loss, net of tax at the end of the period, as well as the activity during the period, were as follows:

Accumulated foreign currency translation adjustmentAccumulated unrealized holding gain (loss) on cash flow hedgesAccumulated unrealized holding gain (loss) on available-for-sale investmentsAccumulated unrealized components of defined benefit plansTotal
(in thousands)
Balance as of June 28, 2015$(35,125)$(2,859)$(3,761)$(16,051)$(57,796)
Other comprehensive (loss) income before reclassifications(4,287)(17,725)9,028(3,027)(16,011)
(Gains) losses reclassified from accumulated other comprehensive income (loss) to net income(116)4,961(1)(371)(2)—4,474
Net current-period other comprehensive (loss) income(4,403)(12,764)8,657(3,027)(11,537)
Balance as of June 26, 2016$(39,528)$(15,623)$4,896$(19,078)$(69,333)
(1)Amount of after tax gain reclassified from accumulated other comprehensive income into net income located in revenue: $2,623 gain, cost of goods sold: $2,111 gain, and other income and expense: $227 gain.
(2)Amount of after tax gain reclassified from accumulated other comprehensive income into net income located in other expense, net.

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Tax related to the components of other comprehensive income during the period were as follows:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Tax benefit (expense) on change in unrealized gains/losses on cash flow hedges:
Tax benefit (expense) on unrealized gains/losses arising during the period$1,252$1,885$(1,065)
Tax (benefit) expense on gains/losses reclassified to earnings(767)(92)1,615
4851,793550
Tax (expense) benefit on change in unrealized gains/losses on available-for-sale investments:
Tax (expense) benefit on unrealized gains/losses arising during the period(2,764)1,796(735)
Tax expense (benefit) on gains/losses reclassified to earnings24531493
(2,519)1,827(242)
Tax benefit (expense) on change in unrealized components of defined benefit plans1,648(871)1,895
Tax (expense) benefit on other comprehensive (loss) income$(386)$2,749$2,203

Note 18: Segment, Geographic Information and Major Customers

The Company operates in one reportable business segment: manufacturing and servicing of wafer processing semiconductor manufacturing equipment. The Company’s material operating segments qualify for aggregation due to their customer base and similarities in economic characteristics, nature of products and services, and processes for procurement, manufacturing and distribution.

The Company operates in seven geographic regions: United States, Europe, Japan, Korea, Taiwan, China and Southeast Asia. For geographical reporting, revenue is attributed to the geographic location in which the customers’ facilities are located while long-lived assets are attributed to the geographic locations in which the assets are located.

Revenues and long-lived assets by geographic region were as follows:

Year Ended
June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Revenue:
Taiwan$1,485,037$1,084,239$1,049,214
Korea1,057,3311,406,6171,127,406
China1,039,951661,094623,408
Japan983,821623,575634,131
Southeast Asia605,236278,350247,398
United States495,123890,891622,022
Europe219,394314,546303,730
Total revenue$5,885,893$5,259,312$4,607,309

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June 26, 2016June 28, 2015June 29, 2014
(in thousands)
Long-lived assets:
United States$529,316$505,814$429,548
Europe81,37786,77989,221
Korea17,28118,23018,776
Taiwan8,6478,9084,259
China1,339960846
Japan980378454
Southeast Asia668349392
$639,608$621,418$543,496

In fiscal year 2016, four customers accounted for approximately 17%, 16%, 12%, and 10% of total revenues. In fiscal year 2015, three customers accounted for approximately 28%, 12%, and 11% of total revenues. In fiscal year 2014, three customers accounted for approximately 23%, 15%, and 14% of total revenues. No other customers accounted for more than 10% of total revenues.

Note 19 – Business Combinations

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

Each KLA-Tencor stockholder may elect to receive, for all shares of KLA-Tencor common stock they hold at the closing of the transaction, one of the following, determined on a per-share basis: (1) mixed consideration, consisting of both (i) 0.5 of a share of Common Stock and (ii) $32.00 in cash; (2) all-stock consideration, consisting of a number of shares of Common Stock equal to (i) 0.5 plus (ii) the quotient of $32.00 divided by the five day volume weighted average price of Common Stock over a five trading day period ending shortly before the closing of the transaction (“the five day VWAP”); or (3) all-cash consideration, consisting of (i) $32.00 plus (ii) the product of 0.5 times the five day VWAP. KLA-Tencor stockholders who do not make an election will be deemed to have elected the mixed consideration. All-cash and all-stock elections will be subject to proration in accordance with the terms of the merger agreement. The stock component of the consideration is expected to represent a tax-free exchange. Completion of the transaction is subject to certain closing conditions, including but not limited to receipt of all required regulatory approvals, and other customary conditions. On February 19, 2016, at special meetings of the stockholders of the Company and KLA-Tencor, respectively, the Company's stockholders approved the issuance of Common Stock to KLA-Tencor stockholders in connection with the merger and KLA-Tencor's stockholders adopted the merger agreement, satisfying two of the conditions to closing. If the merger agreement is terminated, under specific circumstances specified in the terms of the merger agreement, the Company would be required to pay KLA-Tencor a termination fee of up to $290.0 million. The merger agreement is terminable by either party on or after October 20, 2016; unless the parties mutually agree to extend the outside date.

On May 13, 2016, Lam Research and KLA-Tencor each received a request for additional information and documentary material (commonly referred to as a "Second Request") from the United States Department of Justice ("DOJ") in connection with the proposed transaction between the companies. The companies are working with the staff of the DOJ on the terms of a consent decree. The Company and KLA-Tencor are continuing to work diligently to secure the necessary regulatory approvals. The companies have received clearance from competition authorities in Germany, Ireland, Israel and Taiwan and are in discussions with competition regulators in other jurisdictions.

The Company has entered into (1) a senior unsecured term loan agreement which provides up to $1.53 billion in term loans, subject to certain conditions; and (2) senior notes providing approximately $2.4 billion. The Company has also entered into an amendment and restatement of its existing revolving credit agreement pursuant to

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which, among other things, the revolving lenders agreed to increase their aggregate commitments under the revolving credit agreement from $300.0 million to $750.0 million.

The Company intends to fund the cash component of the merger consideration and related fees and expenses and to prepay KLA-Tencor’s term loan with a combination of the combined companies’ balance sheet cash and proceeds of approximately $4.0 billion under various financing arrangements (see Note 13). In connection with the close of the anticipated merger, the Company expects to offer to holders of KLA-Tencor’s outstanding $2.5 billion aggregate principal amount of senior unsecured notes (the “KLA-Tencor Senior Notes”) new series of Lam Research senior unsecured notes in exchange for the KLA-Tencor Senior Notes.

During the 12 months ended June 26, 2016, the Company expensed as incurred acquisition-related costs of $51.0 million, respectively, within selling, general, and administrative expense in the Consolidated Statement of Operations.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Lam Research Corporation

We have audited the accompanying consolidated balance sheets of Lam Research Corporation as of June 26, 2016 and June 28, 2015, 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 26, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lam Research Corporation at June 26, 2016 and June 28, 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 26, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lam Research Corporation’s internal control over financial reporting as of June 26, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 16, 2016 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Jose, California

August 16, 2016

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Lam Research Corporation

We have audited Lam Research Corporation’s internal control over financial reporting as of June 26, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Lam Research Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

In our opinion, Lam Research Corporation maintained, in all material respects, effective internal control over financial reporting as of June 26, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2016 Consolidated Financial Statements of Lam Research Corporation and our report dated August 16, 2016 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Jose, California

August 16, 2016

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