Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

	Page
Consolidated Statements of Operations — Years Ended June 25, 2017, June 26, 2016, and June 28, 2015	50
Consolidated Statements of Comprehensive Income — Years Ended June 25, 2017, June 26, 2016, and June 28, 2015	51
Consolidated Balance Sheets — June 25, 2017, and June 26, 2016	52
Consolidated Statements of Cash Flows — Years Ended June 25, 2017, June 26, 2016, and June 28, 2015	53
Consolidated Statements of Stockholders’ Equity — Years Ended June 25, 2017, June 26, 2016, and June 28, 2015	55
Notes to Consolidated Financial Statements	56
Reports of Independent Registered Public Accounting Firm	93

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Lam Research Corporation 2017 10-K 49

LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
Revenue	$	8,013,620			$	5,885,893			$	5,259,312
Cost of goods sold	4,410,261				3,266,971				2,974,976
Gross margin	3,603,359				2,618,922				2,284,336
Research and development	1,033,742				913,712				825,242
Selling, general, and administrative	667,485				630,954				591,611
Goodwill impairment	—				—				79,444
Total operating expenses	1,701,227				1,544,666				1,496,297
Operating income	1,902,132				1,074,256				788,039
Other expense, net	(90,459		)		(114,139		)		(47,189		)
Income before income taxes	1,811,673				960,117				740,850
Income tax expense	(113,910		)		(46,068		)		(85,273		)
Net income	$	1,697,763			$	914,049			$	655,577
Net income per share:
Basic	$	10.47			$	5.75			$	4.11
Diluted	$	9.24			$	5.22			$	3.70
Number of shares used in per share calculations:
Basic	162,222				158,919				159,629
Diluted	183,770				175,159				177,067

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2017 10-K 50

LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
Net income	$	1,697,763			$	914,049			$	655,577
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(2,843		)		(4,403		)		(22,139		)
Cash flow hedges:
Net unrealized gains (losses) during the period	5,841				(17,725		)		1,595
Net losses (gains) reclassified into earnings	8,971				4,961				(4,388		)
	14,812				(12,764		)		(2,793		)
Available-for-sale investments:
Net unrealized (losses) gains during the period	(3,789		)		9,028				(5,389		)
Net (gains) losses reclassified into earnings	(1		)		(371		)		71
	(3,790		)		8,657				(5,318		)
Defined benefit plans, net change in unrealized component	(546		)		(3,027		)		1,109
Other comprehensive income (loss), net of tax	7,633				(11,537		)		(29,141		)
Comprehensive income	$	1,705,396			$	902,512			$	626,436

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2017 10-K 51

LAM RESEARCH CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	June 25, 2017				June 26, 2016
ASSETS:
Cash and cash equivalents	$	2,377,534			$	5,039,322
Investments	3,663,628				1,788,612
Accounts receivable, less allowance for doubtful accounts of $5,103 as of June 25, 2017 and $5,155 as of June 26, 2016	1,673,398				1,262,145
Inventories	1,232,916				971,911
Prepaid expenses and other current assets	195,022				151,160			(1)
Total current assets	9,142,498				9,213,150
Property and equipment, net	685,595				639,608
Restricted cash and investments	256,205				250,421
Goodwill	1,385,673				1,386,276
Intangible assets, net	410,995				564,921
Other assets	241,799				209,939			(1)
Total assets	$	12,122,765			$	12,264,315
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Trade accounts payable	$	464,643			$	348,199
Accrued expenses and other current liabilities	969,361				772,910
Deferred profit	607,672				349,199
Current portion of convertible notes and capital leases	908,439				947,733			(1)
Total current liabilities	2,950,115				2,418,041
Senior notes, convertible notes, and capital leases, less current portion	1,784,974				3,378,129			(1)
Income taxes payable	120,178				231,514
Other long-term liabilities	280,186				134,562
Total liabilities	5,135,453				6,162,246
Commitments and contingencies
Temporary equity, convertible notes	169,861				207,552
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 161,723 shares at June 25, 2017, and 160,201 shares at June 26, 2016	162				160
Additional paid-in capital	5,845,485				5,572,898
Treasury stock, at cost, 105,569 shares at June 25, 2017, and 101,071 shares at June 26, 2016	(5,216,187		)		(4,429,317		)
Accumulated other comprehensive loss	(61,700		)		(69,333		)
Retained earnings	6,249,691				4,820,109
Total stockholders’ equity	6,817,451				5,894,517
Total liabilities and stockholders’ equity	$	12,122,765			$	12,264,315

(1) Adjusted for effects of retrospective implementation of ASU 2015-3; see Note 3 and Note 13 for additional information.

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2017 10-K 52

LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,697,763			$	914,049			$	655,577
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	306,905				291,028				277,920
Deferred income taxes	104,936				(49,003		)		5,551
Impairment of long-lived assets	—				—				9,821
Equity-based compensation expense	149,975				142,348				135,354
Income tax benefit (expense) on equity-based compensation plans	38,747				(1,023		)		11,316
Excess tax (benefits) expense on equity-based compensation plans	(38,635		)		1,020				(11,398		)
Loss on extinguishment of debt, net	36,252				—				—
Amortization of note discounts and issuance costs	25,282				70,522				37,550
Gain on sale of business	—				—				(7,431		)
Gain on sale of assets	(163		)		(15,223		)		—
Goodwill impairment	—				—				79,444
Other, net	19,052				48,788				12,656
Changes in operating asset and liability accounts:
Accounts receivable, net of allowance	(411,287		)		(169,034		)		(294,155		)
Inventories	(307,875		)		(66,371		)		(207,462		)
Prepaid expenses and other assets	(27,269		)		(46,664		)		(52,496		)
Trade accounts payable	126,819				41,645				76,617
Deferred profit	258,473				27,129				86,146
Accrued expenses and other liabilities	50,307				161,066				(29,507		)
Net cash provided by operating activities	2,029,282				1,350,277				785,503
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and intangible assets	(157,419		)		(175,330		)		(198,265		)
Business acquisitions, net of cash acquired	—				—				(1,137		)
Purchases of available-for-sale securities	(4,581,851		)		(874,998		)		(3,086,808		)
Sales and maturities of available-for-sale securities	2,697,965				1,673,826				2,137,068
Purchase of other investments	—				—				(2,500		)
Proceeds from sale of assets	1,291				79,730				—
Proceeds from sale of business	—				—				41,212
Transfer of restricted cash and investments	(5,784		)		(112,381		)		356
Other, net	(12,815		)		1,636				3,978
Net cash (used by) provided by investing activities	(2,058,613		)		592,483				(1,106,096		)

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	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations and payments for debt issuance costs	(1,688,313		)		(451,497		)		(1,515		)
Net proceeds from issuance of long-term debt	—				2,338,144				992,225
Excess tax benefits (expense) on equity-based compensation plans	38,635				(1,020		)		11,398
Treasury stock purchases	(811,672		)		(158,389		)		(573,240		)
Dividends paid	(243,495		)		(190,402		)		(116,059		)
Reissuances of treasury stock related to employee stock purchase plan	59,663				55,992				48,803
Proceeds from issuance of common stock	12,913				3,405				17,520
Other, net	(125		)		(488		)		(660		)
Net cash (used for) provided by financing activities	$	(2,632,394	)		$	1,595,745			$	378,472
Effect of exchange rate changes on cash and cash equivalents	$	(63	)		$	(722	)		$	(9,017	)
Net (decrease) increase in cash and cash equivalents	(2,661,788		)		3,537,783				48,862
Cash and cash equivalents at beginning of year	5,039,322				1,501,539				1,452,677
Cash and cash equivalents at end of year	$	2,377,534			$	5,039,322			$	1,501,539
Schedule of non-cash transactions
Accrued payables for stock repurchases	$	—			$	—			$	3,255
Accrued payables for capital expenditures	17,285				27,953				22,436
Dividends payable	72,738				48,052				47,659
Transfers of finished goods inventory to property and equipment, net	46,855				37,822				4,547
Supplemental disclosures:
Cash payments for interest	$	104,619			$	58,810			$	26,393
Cash payments for income taxes, net	28,104				39,745				114,512

See Notes to Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock Shares			Common Stock				Additional Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Income(Loss)				Retained Earnings				Total
Balance at June 29, 2014	162,350			$	162			$	5,239,567			$	(3,757,076	)		$	(28,655	)		$	3,575,737			$	5,029,735
Sale of common stock	2,876			4				17,519				—				—				—				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 stock	943			1				21,477				27,325				—				—				48,803
Equity-based compensation expense	—			—				135,354				—				—				—				135,354
Reclassification from temporary to permanent equity	—			—				(58,460		)		—				—				—				(58,460		)
Net income	—			—				—				—				—				655,577				655,577
Other comprehensive income	—			—				—				—				(29,141		)		—				(29,141		)
Cash dividends declared ($0.84 per common share)	—			—				—				—				—				(134,459		)		(134,459		)
Balance at June 28, 2015	158,531			159				5,366,773				(4,302,847		)		(57,796		)		4,096,855				5,103,144
Sale of common stock	2,863			2				3,403				—				—				—				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 stock	937			1				27,329				28,662				—				—				55,992
Equity-based compensation expense	—			—				142,348				—				—				—				142,348
Effect of conversion of convertible notes	—			—				(188		)		—				—				—				(188		)
Reclassification from temporary to permanent equity	—			—				34,256				—				—				—				34,256
Net income	—			—				—				—				—				914,049				914,049
Other comprehensive income	—			—				—				—				(11,537		)		—				(11,537		)
Cash dividends declared ($1.20 per common share)	—			—				—				—				—				(190,795		)		(190,795		)
Balance at June 26, 2016	160,201			160				5,572,898				(4,429,317		)		(69,333		)		4,820,109				5,894,517
Sale of common stock	2,661			3				12,910				—				—				—				12,913
Purchase of treasury stock	(5,322	)		(5		)		—				(811,667		)		—				—				(811,672		)
Income tax benefits on equity-based compensation plans	—			—				38,747				—				—				—				38,747
Reissuance of treasury stock	825			1				34,865				24,797				—				—				59,663
Equity-based compensation expense	—			—				149,975				—				—				—				149,975
Effect of conversion of convertible notes, net of income tax benefit	1,388			1				(1,596		)		—				—				—				(1,595		)
Exercise of warrants	1,970			2				(5		)		—				—				—				(3		)
Reclassification to temporary from permanent equity, net	—			—				37,691				—				—				—				37,691
Net income	—			—				—				—				—				1,697,763				1,697,763
Other comprehensive income	—			—				—				—				7,633				—				7,633
Cash dividends declared ($1.65 per common share)	—			—				—				—				—				(268,181		)		(268,181		)
Balance at June 25, 2017	161,723			$	162			$	5,845,485			$	(5,216,187	)		$	(61,700	)		$	6,249,691			$	6,817,451

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2017 10-K 55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 25, 2017

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 manufacturing, our customers’ business, involves the complete fabrication of multiple dies or integrated circuits on a wafer. This involves the repetition of a set of core processes and can require hundreds of individual steps. Fabricating these devices requires highly sophisticated process technologies to integrate an increasing array of new materials with precise control at the atomic scale. Along with meeting technical requirements, wafer processing equipment must deliver high productivity and be cost-effective.

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

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 2017, 2016, and 2015 may not necessarily be indicative of future operating results.

Note 2: Summary of Significant Accounting Policies

The preparation of financial statements in conformity with 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 ongoing 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 and Employee Stock Plans: The Company recognizes the fair value of equity-based compensation expense. The Company determines the fair value of its 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 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 this 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 determination is made. Likewise, if the Company later determines that it is more-likely-than-not that the deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.

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Lam Research Corporation 2017 10-K 57

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 25, 2017, and June 26, 2016. 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.

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

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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 lifecycle 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 any impairment charge on indefinite-lived assets during the years ended June 25, 2017, June 26, 2016, or June 28, 2015.

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 years ended June 25, 2017, or June 26, 2016. The Company recorded a $9.8 million impairment loss on long-lived assets during the year ended June 28, 2015.

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 25, 2017, June 26, 2016, and June 28, 2015, 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 (1) the extent to which the fair value is less than cost basis, (2) the financial condition and near-term prospects of the issuer, (3) the length of time a security is in an unrealized loss position, and (4) 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

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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 dollars, 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.

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

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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

Recently Adopted

In April 2015, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“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 adopted this standard starting in the first quarter of fiscal 2017, with retrospective application to the June 26, 2016 Consolidated Balance Sheet. The adoption did not have a material impact to the 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 Company adopted this standard in the first quarter of fiscal 2017, with no impact to the Consolidated Financial Statements.

Updates Not Yet Effective

In May 2014, the FASB released ASU 2014-9, “Revenue from Contracts with Customers,” to supersede nearly all existing revenue recognition guidance under GAAP. The FASB issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016 within ASU 2015–14, ASU 2016–08, ASU 2016–10, ASU 2016–12 and ASU 2016–20, respectively.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 these standards starting in the first quarter of fiscal year 2019 using either of two methods: (1) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the standard or (2) 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. The Company is continuing its evaluation of the impact that the new standard will have on its Consolidated Financial Statements and disclosures, business processes, systems, and controls. While the Company’s evaluation of the impact of the standard on its financial statements with respect to its spare parts and service revenue has not been completed, the Company believes that the timing of revenue recognition for certain of its systems will generally be earlier than under existing revenue recognition guidance. The Company continues to evaluate the impact to our revenues related to our pending adoption of these standards and our preliminary assessments are subject to change.

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. Additionally, the new guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company plans to adopt the guidance prospectively in its first quarter of fiscal year 2018 with an anticipated reclassification from current assets and liabilities to non-current assets and liabilities on its Consolidated Balance Sheet.

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In January 2016, the 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, the 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, the 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 additional paid in capital (“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 in the first quarter of fiscal year 2018. The Company expects the provisions for the change in the recognition of future excess tax benefits or deficiencies and statement of cash flow changes regarding the same measure will be adopted prospectively, and the provisions for the change in recognition of excess tax benefits for all years prior to the year of adoption will be applied using a modified retrospective approach with a cumulative adjustment to retained earnings. The Company plans to continue to estimate the number of forfeitures. The Company is currently in the process of evaluating the impact of adoption on its Consolidated Financial Statements.

In June 2016, the 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.

In August 2016, the FASB released ASU 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.” The amendment provides and clarifies guidance on the classification of certain cash receipts and cash payments in the statement of cash flows to eliminate diversity in practice. The Company is required to adopt the standard update in the first quarter of fiscal year 2020, with a retrospective transition method required. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Consolidated Financial Statements.

In October 2016, the FASB released ASU 2016-16, “Income Tax – Intra-Entity Transfers of Assets Other than Inventory.” This standard update improves the accounting for the income tax consequences of intra-entity

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transfers of assets other than inventory. Early adoption is permitted. The Company is required to adopt the standard in the first quarter of fiscal year 2019. The Company is currently in the process of evaluating the impact of adoption on its Consolidated Financial Statements.

In November 2016, the FASB released ASU 2016-18, “Statement of Cash Flows – Restricted Cash.” This standard update requires that restricted cash and restricted cash equivalents be included in cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. The Company is required to adopt this standard in the first quarter of fiscal year 2019, with a retrospective transition method required. 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 the Company’s 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.

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

	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
Equity-based compensation expense	$	149,975			$	142,348			$	135,354
Income tax benefit recognized related to equity-based compensation	$	38,381			$	37,814			$	23,660
Income tax benefit realized from the exercise and vesting of options and RSUs	$	92,749			$	67,756			$	40,401

The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting terms 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. As of June 25, 2017, there were a total of 11,893,338 shares available for future issuance under the Stock Plans.

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A summary of stock plan transactions is as follows:

	Options Outstanding							Restricted Stock Units Outstanding
Number of Shares			Weighted-Average Exercise Price				Number of Shares			Weighted-Average Fair Market Value at Grant
June 29, 2014	1,331,886			$	32.20			5,635,469			$	45.83
Granted	76,659			$	80.60			1,804,937			$	79.74
Exercised	(564,558	)		$	31.05			N/A			N/A
Canceled	(8,155	)		$	29.32			(174,879	)		$	50.16
Vested restricted stock	N/A			N/A				(2,311,439	)		$	41.17
June 28, 2015	835,832			$	37.44			4,954,088			$	60.13
Granted	196,167			$	75.57			2,230,851			$	71.87
Exercised	(123,726	)		$	24.92			N/A			N/A
Canceled	(862	)		$	21.43			(110,131	)		$	69.17
Vested restricted stock	N/A			N/A				(2,739,704	)		$	54.04
June 26, 2016	907,411			$	47.41			4,335,104			$	69.30
Granted	90,128			$	119.67			1,660,571			$	113.75
Exercised	(389,460	)		$	33.92			N/A			N/A
Canceled	(14,020	)		$	69.81			(175,975	)		$	73.31
Vested restricted stock	N/A			N/A				(2,269,639	)		$	63.24
June 25, 2017	594,059			$	66.69			3,550,061			$	90.03

As of June 25, 2017, there were a total of 4,144,120 shares subject to options and RSUs issued and outstanding under the Company’s Stock Plans.

Outstanding and exercisable options presented by price range at June 25, 2017, were as follows:

Range of Exercise Prices	Options Outstanding									Options Exercisable
Number of Options Outstanding			Weighted-Average Remaining Life (Years)		Weighted-Average Exercise Price				Number of Options Exercisable			Weighted-Average Exercise Price
$11.09-$23.59	57,020			3.62		$	18.04			57,020			$	18.04
$28.73-$35.68	52,606			3.63		$	31.18			52,606			$	31.18
$42.61-$51.76	150,539			3.37		$	49.21			150,539			$	49.21
$75.57-$119.67	333,894			5.75		$	88.46			94,399			$	77.77
$11.09-$119.67	594,059			4.63		$	66.69			354,564			$	49.13

Stock Options

The fair value of the Company’s stock options granted during fiscal years 2017, 2016, and 2015 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 25, 2017			June 26, 2016			June 28, 2015
Expected volatility	28.85	%		33.08	%		34.45	%
Risk-free interest rate	1.92	%		1.27	%		1.46	%
Expected term (years)	4.75			4.79			4.80
Dividend yield	1.50	%		1.59	%		0.89	%

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The year-end intrinsic value relating to stock options for fiscal years 2017, 2016, and 2015 is presented below:

	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
Intrinsic value - options outstanding	$	50,551			$	31,643			$	37,961
Intrinsic value - options exercisable	$	36,396			$	29,112			$	33,360
Intrinsic value - options exercised	$	29,674			$	6,562			$	26,806

As of June 25, 2017, the Company had $4.7 million of total unrecognized compensation expense related to unvested stock options granted and outstanding which is expected to be recognized over a weighted-average remaining period of 2.2 years.

Restricted Stock Units

During the fiscal years 2017, 2016, and 2015, the Company issued both service-based RSUs and market-based performance RSUs (“PRSUs”).

The fair value of the Company’s service-based RSUs was calculated based on fair market value of the Company’s stock at the date of grant, discounted for dividends, using the following assumptions:

	Year Ended
June 25, 2017			June 26, 2016			June 28, 2015
Risk-free interest rate	1.51	%		0.98	%		0.97	%
Expected term (years)	2.97			3.00			2.83
Dividend yield	1.48	%		1.59	%		0.89	%

Market-based PRSUs generally vest three years from the grant date if certain performance criteria are achieved and require continued employment. 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 25, 2017, 862,455 of the 3,550,061 RSU’s outstanding are market-based PRSUs.

The fair value of the Company’s market-based PRSUs granted during fiscal years 2017, 2016, and 2015 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 25, 2017			June 26, 2016			June 28, 2015
Expected volatility	27.48	%		29.81	%		27.93	%
Risk-free interest rate	1.55	%		0.97	%		1.05	%
Expected term (years)	2.92			2.92			2.98
Dividend yield	1.50	%		1.59	%		0.89	%

As of June 25, 2017, the Company had $245.7 million of total unrecognized compensation expense related to all unvested RSUs granted which is expected to be recognized over a weighted-average remaining period of 2.2 years.

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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 fourteen months and comprises two 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 2017, 2016, and 2015, there was no increase to the number of shares of Lam Research Common Stock reserved for issuance under the 1999 ESPP.

During fiscal year 2017, a total of 825,486 shares of the Company’s Common Stock were sold to employees under the 1999 ESPP. At June 25, 2017, 5,672,571 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 2017, 2016, and 2015, the 1999 ESPP was valued using the following weighted-average assumptions:

	Year Ended
June 25, 2017			June 26, 2016			June 28, 2015
Expected term (years)	0.73			0.67			0.67
Expected stock price volatility	31.74	%		35.48	%		27.60	%
Risk-free interest rate	0.41	%		0.29	%		0.07	%
Dividend yield	1.09	%		1.18	%		0.69	%

As of June 25, 2017, the Company had $6.5 million of total unrecognized compensation cost related to the 1999 ESPP which is expected to be recognized over a remaining period of four months.

Note 5: Other Income (Expense), Net

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

	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
Interest income	$	57,858			$	29,512			$	19,268
Interest expense	(117,734		)		(134,773		)		(73,682		)
Gains (losses) on deferred compensation plan related assets, net	17,880				(3,995		)		9,071
Loss on extinguishment of debt, net	(36,252		)		—				—
Foreign exchange (losses) gains, net	(569		)		308				2,331
Other, net	(11,642		)		(5,191		)		(4,177		)
	$	(90,459	)		$	(114,139	)		$	(47,189	)

Interest income in the year ended June 25, 2017, increased compared to the years ended June 26, 2016, and June 28, 2015, primarily as a result of higher average cash and investment balances and higher yield. Interest expense in the year ended June 25, 2017, decreased compared to the year ended June 26, 2016, primarily due to the retirement of the 2016 Convertible Note. Interest expense in the year ended June 26, 2016, increased compared to the year ended June 28, 2015, 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.

The gain on deferred compensation plan related assets, in fiscal year 2017, compared to a loss in fiscal year 2016 and gain in fiscal year 2015 was driven by a rally in the fair market value of the underlying funds at year end.

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Net loss on extinguishment of debt realized in the year ended June 25, 2017, is primarily a result of the special mandatory redemption of the Senior Notes due 2023 and 2026, as well as the termination of the Term Loan Agreement (refer to Note 13 and Note 19 for additional information regarding the Company’s debt redemptions and termination).

Note 6: Income Taxes

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

	Year Ended
	June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
United States	$	7,553			$	(113,607	)		$	72,728
Foreign	1,804,120				1,073,724				668,122
	$	1,811,673			$	960,117			$	740,850

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

	Year Ended
	June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
Federal:
Current	$	(70,858	)		$	1,426			$	16,795
Deferred	99,700				(38,616		)		12,115
	28,842				(37,190		)		28,910
State:
Current	(963		)		2,892				1,376
Deferred	(2,246		)		(7,600		)		158
	(3,209		)		(4,708		)		1,534
Foreign:
Current	85,479				90,752				61,551
Deferred	2,798				(2,786		)		(6,722		)
	88,277				87,966				54,829
Total provision for income taxes	$	113,910			$	46,068			$	85,273

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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 25, 2017				June 26, 2016
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	175,595			$	176,767
Allowances and reserves	170,752				128,416
Equity-based compensation	25,828				29,414
Inventory valuation differences	19,602				17,178
Prepaid cost sharing	133,831				88,522
Other	20,175				24,540
Gross deferred tax assets	545,783				464,837
Valuation allowance	(114,011		)		(101,689		)
Net deferred tax assets	431,772				363,148
Deferred tax liabilities:
Intangible assets	(30,944		)		(46,774		)
Convertible debt	(153,047		)		(151,483		)
Capital assets	(72,727		)		(61,845		)
Amortization of goodwill	(15,582		)		(14,176		)
Unremitted earnings of foreign subsidiaries	(302,663		)		(146,459		)
Other	(9,844		)		(8,594		)
Gross deferred tax liabilities	(584,807		)		(429,331		)
Net deferred tax liabilities	$	(153,035	)		$	(66,183	)

The change in the gross deferred tax assets, gross deferred tax liabilities, and valuation allowance between fiscal years 2017 and 2016 is primarily due to an increase related to allowances and reserves and an increase in deferred tax liabilities related to an accrual for future tax liabilities due to the expected repatriation of earnings of certain foreign subsidiaries.

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 $114.0 million primarily related to California, certain state, 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 25, 2017, the Company had federal net operating loss carryforwards of approximately $109.0 million. The majority of these losses will begin to expire in fiscal year 2019, and are subject to limitations on their utilization.

At June 25, 2017, the Company had state net operating loss carryforwards of approximately $85.4 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.

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Lam Research Corporation 2017 10-K 68

At June 25, 2017, the Company had federal tax credit carryforwards of approximately $236.2 million, of which $33.2 million of foreign tax credit will begin to expire in fiscal year 2018 and $201.2 million of research and development tax credit will begin to expire in fiscal year 2030. The remaining balance of $1.8 million of alternative minimum tax credit may be carried forward indefinitely.

At June 25, 2017, the Company had state tax credit carryforwards of approximately $296.0 million. Substantially all state tax credit carryforwards can be carried forward indefinitely.

At June 25, 2017, the Company had foreign net operating loss carryforwards of approximately $9.4 million, which will begin to expire in fiscal year 2018.

A reconciliation of income tax expense provided at the federal statutory rate (35% in fiscal years 2017, 2016, and 2015) to actual income tax expense is as follows:

	Year Ended
	June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
Income tax expense computed at federal statutory rate	$	634,086			$	336,041			$	259,297
State income taxes, net of federal tax benefit	(11,973		)		(14,070		)		(8,611		)
Foreign income taxed at different rates	(352,860		)		(265,123		)		(175,581		)
Settlements and reductions in uncertain tax positions	(144,519		)		—				—
Tax credits	(37,713		)		(48,277		)		(24,416		)
State valuation allowance, net of federal tax benefit	12,070				17,948				8,594
Equity-based compensation	13,187				12,366				28,845
Other permanent differences and miscellaneous items	1,632				7,183				(2,855		)
	$	113,910			$	46,068			$	85,273

Effective from fiscal year 2014 through June 2023, the Company has a 10-year tax ruling in Switzerland for one of its foreign subsidiaries. The impact of the tax ruling decreased taxes by approximately $6.3 million, $4.3 million, and $4.8 million for fiscal years 2017, 2016, and 2015, respectively. The benefit of the tax ruling on diluted earnings per share was approximately $0.03 in fiscal year 2017, $0.02 in fiscal year 2016, and $0.03 in fiscal year 2015.

Earnings of the Company’s foreign subsidiaries included in consolidated retained earnings that are indefinitely reinvested in foreign operations aggregated to approximately $5.4 billion at June 25, 2017. If these earnings were remitted to the United States, they would be subject to U.S. and foreign withholding taxes of approximately $1.6 billion at current statutory rates. The Company’s federal income tax provision includes U.S. income taxes on certain foreign-based income.

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Lam Research Corporation 2017 10-K 69

As of June 25, 2017, the total gross unrecognized tax benefits were $339.4 million compared to $417.4 million as of June 26, 2016, and $363.6 million as of June 28, 2015. During fiscal year 2017, gross unrecognized tax benefits decreased by approximately $78.0 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $247.6 million, $323.4 million, and $276.8 million, as of June 25, 2017, June 26, 2016, and June 28, 2015, respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:

	(in thousands)
Balance as of June 29, 2014	$	352,112
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 periods	3,729
Decreases in balances related to tax positions taken during prior periods	(12,615		)
Increases in balances related to tax positions taken during current period	31,810
Balance as of June 28, 2015	363,552
Lapse of statute of limitations	(10,992		)
Increases in balances related to tax positions taken during prior periods	18,200
Decreases in balances related to tax positions taken during prior periods	(421		)
Increases in balances related to tax positions taken during current period	47,093
Balance as of June 26, 2016	417,432
Settlements and effective settlements with tax authorities	(6,691		)
Lapse of statute of limitations	(113,491		)
Increases in balances related to tax positions taken during prior periods	6,557
Decreases in balances related to tax positions taken during prior periods	(11,528		)
Increases in balances related to tax positions taken during current period	47,168
Balance as of June 25, 2017	$	339,447

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $15.7 million, $42.4 million, and $35.5 million cumulatively for gross interest and penalties as of June 25, 2017, June 26, 2016, and June 28, 2015, respectively.

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 25, 2017, tax years 2004-2016 remain subject to examination in the jurisdictions where the Company operates.

The Company is in various stages of 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 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of statute of limitations. The change in unrecognized tax benefits is not expected to be material.

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, and Convertible Notes.

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Lam Research Corporation 2017 10-K 70

The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share.

	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands, except per share data)
Numerator:
Net income	$	1,697,763			$	914,049			$	655,577
Denominator:
Basic average shares outstanding	162,222				158,919				159,629
Effect of potential dilutive securities:
Employee stock plans	2,058				2,120				3,193
Convertible notes	16,861				13,464				13,530
Warrants	2,629				656				715
Diluted average shares outstanding	183,770				175,159				177,067
Net income per share - basic	$	10.47			$	5.75			$	4.11
Net income per share - diluted	$	9.24			$	5.22			$	3.70

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 25, 2017			June 26, 2016			June 28, 2015
	(in thousands)
Number of options and RSUs excluded	34			149			330

Diluted shares outstanding do not include any effect resulting from note hedges associated with the Company’s 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 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.

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Lam Research Corporation 2017 10-K 71

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 its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and capital leases, and foreign currency related derivative instruments. The estimated fair value of cash, 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 Senior Notes and Convertible Notes.

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Lam Research Corporation 2017 10-K 72

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 25, 2017, and June 26, 2016:

	June 25, 2017
																(Reported Within)
Cost				Unrealized Gain				Unrealized (Loss)				Fair Value				Cash and Cash Equivalents				Investments				Restricted Cash & Investments				Other Assets
	(in thousands)
Cash	$	551,308			$	—			$	—			$	551,308			$	545,130			$	—			$	6,178			$	—
Level 1:
Time deposit	640,666				—				—				640,666				390,639				—				250,027				—
Money market funds	1,423,417				—				—				1,423,417				1,423,417				—				—				—
U.S. Treasury and agencies	783,848				684				(2,111		)		782,421				8,297				774,124				—				—
Mutual funds	53,247				3,007								56,254				—				—				—				56,254
Level 1 total	2,901,178				3,691				(2,111		)		2,902,758				1,822,353				774,124				250,027				56,254
Level 2:
Municipal notes and bonds	194,575				308				(7		)		194,876				—				194,876				—				—
U.S. Treasury and Agencies	12,795				—				(167		)		12,628				—				12,628				—				—
Government-sponsored enterprises	24,502				—				(6		)		24,496				—				24,496				—				—
Foreign government bonds	62,917				219				(114		)		63,022				—				63,022				—				—
Corporate notes and bonds	2,433,622				4,654				(1,840		)		2,436,436				10,051				2,426,385				—				—
Mortgage backed securities - residential	102,760				87				(489		)		102,358				—				102,358				—				—
Mortgage backed securities - commercial	65,828				9				(98		)		65,739				—				65,739				—				—
Level 2 total	2,896,999				5,277				(2,721		)		2,899,555				10,051				2,889,504				—				—
Total	$	6,349,485			$	8,968			$	(4,832	)		$	6,353,621			$	2,377,534			$	3,663,628			$	256,205			$	56,254

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Lam Research Corporation 2017 10-K 73

	June 26, 2016
																(Reported Within)
Cost				Unrealized Gain				Unrealized (Loss)				Fair Value				Cash and Cash Equivalents				Investments				Restricted Cash & Investments				Other Assets
	(in thousands)
Cash	$	418,216			$	—			$	—			$	418,216			$	412,573			$	—			$	5,643			$	—
Level 1:
Time deposit	904,243				—				—				904,243				659,465				—				244,778				—
Money market funds	3,904,288				—				—				3,904,288				3,904,288				—				—				—
U.S. Treasury and agencies	446,530				2,041				(2		)		448,569				62,996				385,573				—				—
Mutual funds	39,318				1,400				(397		)		40,321				—				—				—				40,321
Level 1 total	5,294,379				3,441				(399		)		5,297,421				4,626,749				385,573				244,778				40,321
Level 2:
Municipal notes and bonds	265,386				355				(16		)		265,725				—				265,725				—				—
U.S. Treasury and agencies	8,068				151				—				8,219				—				8,219				—				—
Government-sponsored enterprises	31,885				91				(13		)		31,963				—				31,963				—				—
Foreign government bonds	41,440				76				(4		)		41,512				—				41,512				—				—
Corporate notes and bonds	979,566				4,341				(566		)		983,341				—				983,341				—				—
Mortgage backed securities - residential	17,395				37				(152		)		17,280				—				17,280				—				—
Mortgage backed securities - commercial	55,129				30				(160		)		54,999				—				54,999				—				—
Level 2 total	1,398,869				5,081				(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

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. The Company did not recognize any losses on investments due to other-than-temporary impairments in fiscal year 2017, 2016, or 2015. Additionally, gross realized gains/(losses) from sales of investments were $3.6 million and $(2.4) million in fiscal year 2017, $2.0 million and $(3.0) million in fiscal year 2016, and $2.8 million and $(2.1) million in fiscal year 2015.

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Lam Research Corporation 2017 10-K 74

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

	June 25, 2017
Unrealized Losses Less than 12 Months								Unrealized Losses 12 Months or Greater								Total
Fair Value				Gross Unrealized Loss				Fair Value				Gross Unrealized Loss				Fair Value				Gross Unrealized Loss
	(in thousands)
U.S. Treasury and agencies	$	539,374			$	(2,278	)		$	—			$	—			$	539,374			$	(2,278	)
Municipal notes and bonds	7,905				(7		)		—				—				7,905				(7		)
Government-sponsored enterprises	20,104				(2		)		506				(4		)		20,610				(6		)
Foreign government bonds	26,227				(114		)		—				—				26,227				(114		)
Corporate notes and bonds	998,793				(1,840		)		127				—				998,920				(1,840		)
Mortgage backed securities - residential	86,870				(468		)		1,369				(21		)		88,239				(489		)
Mortgage backed securities - commercial	50,014				(94		)		1,339				(4		)		51,353				(98		)
	$	1,729,287			$	(4,803	)		$	3,341			$	(29	)		$	1,732,628			$	(4,832	)

The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities as of June 25, 2017, are as follows:

	Cost				Estimated Fair Value
	(in thousands)
Due in one year or less	$	2,701,107			$	2,700,908
Due after one year through five years	2,896,063				2,897,363
Due in more than five years	147,760				147,788
	$	5,744,930			$	5,746,059

The Company has the ability, if necessary, to liquidate its 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. In addition, the Company enters into interest rate swap arrangements to manage interest rate risk. The counterparties to these derivatives 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-U.S. 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 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 forward contracts and

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foreign currency options that generally expire within 12 months and no later than 24 months. These 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, during the year ended June 26, 2016, the Company entered into and settled forward-starting interest rate swap agreements to hedge against the variability of cash flows due to changes in certain benchmark interest rates on fixed rate debt. These instruments are designated as cash flow hedges at inception and are settled in conjunction with the issuance of debt. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive (loss) and is amortized 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 to both 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 25, 2017, or June 26, 2016, 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 associated with the forward contracts 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 25, 2017, the Company had gains of $1.1 million accumulated in other comprehensive income, net of tax, related to foreign exchange cash flow hedges which it expects to reclassify from other comprehensive income into earnings over the next 12 months. Additionally, the Company had a net loss of $1.9 million accumulated in other comprehensive income, net of tax, related to interest rate contracts which it expects to reclassify from other comprehensive income into earnings over the next 7.7 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 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 forward contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities, primarily cash, third-party accounts receivable, accounts payable, and intercompany receivables and payables. These forward 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 25, 2017, the Company had the following outstanding foreign currency contracts that were entered into under its cash flow and balance sheet hedge program:

	Notional Value
	Derivatives Designated as Hedging Instruments:								Derivatives Not Designated as Hedging Instruments:
	(in thousands)
Foreign currency forward contracts
	Buy Contracts				Sell Contracts				Buy Contracts				Sell Contracts
Japanese yen	$	—			$	670,162			$	—			$	269,518
Euro	58,854				—				18,417				—
Korean won	22,038				—				—				34,145
Taiwan dollar	—				—				11,168				—
Swiss franc	—				—				8,739				—
Chinese renminbi	—				—				7,169				—
	$	80,892			$	670,162			$	45,493			$	303,663
Foreign currency option contracts
	Buy Put				Sell Put				Buy Put (1)				Sell Put
Japanese yen	$	36,036			$	—			$	26,481			$	26,481

(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 25, 2017; changes in fair market value subsequent to de-designation effect current earnings.

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The fair value of derivative instruments in the Company’s Consolidated Balance Sheet as of June 25, 2017, and June 26, 2016, were as follows:

	June 25, 2017												June 26, 2016
Fair Value of Derivative Instruments (Level 2)												Fair Value of Derivative Instruments (Level 2)
Asset Derivatives						Liability Derivatives						Asset Derivatives						Liability Derivatives
Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value
	(in thousands)
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expense and other assets		$	8,061			Accrued expense and other current liabilities		$	2,916			Prepaid expense and other assets		$	249			Accrued expense and other current liabilities		$	16,585
Interest rate contracts, short-term			—				Accrued expense and other current liabilities		2,833				Prepaid expense and other assets		50				Accrued expense and other current liabilities		159
Interest rate contracts, long-term			—				Other long-term liabilities		7,269				Other assets		8,661						—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expense and other assets		213				Accrued expense and other current liabilities		342				Prepaid expense and other assets		107				Accrued expense and other current liabilities		1,529
Total derivatives			$	8,274					$	13,360					$	9,067					$	18,273

Under the master netting agreements with the respective counterparties to the Company’s derivative 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 on its balance sheet. As of June 25, 2017, the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be an offset to assets and liabilities by $5.9 million, resulting in a net derivative asset of $2.3 million and net derivative liability of $7.4 million. As of June 26, 2016, the potential effect of rights of offset 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 a net derivative liability of $11.9 million. The Company is not required to pledge, nor is the Company entitled to receive, cash collateral for these derivative transactions.

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The effect of derivative instruments designated as cash flow hedges on the Company’s Consolidated Statements of Operations, including accumulated other comprehensive income (“AOCI”), was as follows:

		Year Ended June 25, 2017												Year Ended June 26, 2016
	Location of Gain (Loss) Recognized in or Reclassified into Income	Effective Portion								Ineffective Portion and Amount Excluded from Effectiveness				Effective Portion								Ineffective Portion and Amount Excluded from Effectiveness
Derivatives Designated as Hedging Instruments	Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified from AOCI into Income				Gain (Loss) Recognized in Income				Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified from AOCI into Income				Gain (Loss) Recognized in Income
		(in thousands)
Foreign exchange contracts	Revenue	$	2,927			$	(12,000	)		$	6,982			$	(22,575	)		$	(2,950	)		$	1,009
Foreign exchange contracts	Cost of goods sold	2,859				666				(686		)		81				(2,423		)		(172		)
Foreign exchange contracts	Selling, general, and administrative	1,128				71				(267		)		188				5				(69		)
Foreign exchange contracts	Other expense, net	—				—				(82		)		—				—				(11		)
Interest rate contracts	Other expense, net	—				1,727				—				3,329				(360		)		96
		$	6,914			$	(9,536	)		$	5,947			$	(18,977	)		$	(5,728	)		$	853

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 25, 2017				June 26, 2016
Derivatives Not Designated as Hedging Instruments:	Location of (Loss) Gain Recognized in Income	Gain Recognized in Income				Loss Recognized in Income
		(in thousands)
Foreign exchange contracts	Other income	$	523			$	(16,208	)

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit at 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 overall portfolio of available-for-sale securities must maintain an average minimum rating of “AA-” or “Aa3” as rated by Standard and Poor’s, Fitch Ratings, or Moody’s Investor Services. To ensure diversification and minimize concentration, the Company’s policy limits the amount of credit exposure with any one financial institution or commercial issuer.

The Company is exposed to credit losses in the event of nonperformance by counterparties on foreign currency and interest rate hedge contracts that are used to mitigate the effect of exchange rate and interest rate fluctuations and on contracts related to structured share repurchase arrangements. These counterparties are

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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 condition and payment performance. In general, the Company does not require collateral on sales.

As of June 25, 2017, four customers accounted for approximately 22%, 19%, 13%, and 12% of accounts receivable. As of June 26, 2016, three customers accounted for approximately 24%, 19%, 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 25, 2017				June 26, 2016
	(in thousands)
Raw materials	$	625,600			$	536,844
Work-in-process	213,066				151,406
Finished goods	394,250				283,661
	$	1,232,916			$	971,911

Note 10: Property and Equipment

Property and equipment, net, consist of the following:

	June 25, 2017				June 26, 2016
	(in thousands)
Manufacturing, engineering, and office equipment	$	841,284			$	824,532
Computer equipment and software	166,441				157,125
Land	46,155				46,047
Buildings	248,177				213,364
Leasehold improvements	109,904				96,649
Furniture and fixtures	30,914				23,609
	1,442,875				1,361,326
Less: accumulated depreciation and amortization	(757,280		)		(721,718		)
	$	685,595			$	639,608

Depreciation expense, including amortization of capital leases, during fiscal years 2017, 2016, and 2015, was $152.3 million, $134.7 million, and $120.3 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. No significant gains on sale were realized in fiscal years 2017 or 2015.

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Note 11: Goodwill and Intangible Assets

Goodwill

The balance of Goodwill was $1.4 billion as of June 25, 2017, and June 26, 2016. As of June 25, 2017, $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 2017 or 2016.

Intangible Assets

The following table provides details of the Company’s intangible assets, other than goodwill, as of June 25, 2017:

	Gross				Accumulated Amortization				Net
					(in thousands)
Customer relationships	$	615,164			$	(366,439	)		$	248,725
Existing technology	643,196				(487,056		)		156,140
Patents	36,553				(31,238		)		5,315
Other intangible assets	36,514				(35,699		)		815
Total intangible assets	$	1,331,427			$	(920,432	)		$	410,995

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

	Gross				Accumulated Amortization				Net
					(in thousands)
Customer relationships	$	615,272			$	(300,711	)		$	314,561
Existing technology	643,433				(401,036		)		242,397
Patents	36,053				(28,701		)		7,352
Other intangible assets	36,114				(35,503		)		611
Total intangible assets	$	1,330,872			$	(765,951	)		$	564,921

The Company recognized $154.6 million, $156.3 million, and $157.7 million in intangible asset amortization expense during fiscal years 2017, 2016, and 2015, respectively. During the fiscal year 2017, the Company transferred ownership of the development rights previously recognized 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. No impairments were recognized in fiscal year 2017 or 2016.

The estimated future amortization expense of intangible assets, as of June 25, 2017, was as follows:

Fiscal Year	Amount
	(in thousands)
2018	$	153,523
2019	115,236
2020	50,457
2021	47,773
2022	44,006
	$	410,995

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Note 12: Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

	June 25, 2017				June 26, 2016
	(in thousands)
Accrued compensation	$	447,363			$	331,528
Warranty reserves	161,981				100,321
Income and other taxes payable	95,127				86,723
Dividend payable	72,738				48,052
Other	192,152				206,286
	$	969,361			$	772,910

Note 13: Long Term Debt and Other Borrowings

As of June 25, 2017, and June 26, 2016, the Company’s outstanding debt consisted of the following:

	June 25, 2017							June 26, 2016
	Amount (in thousands)				Effective Interest Rate			Amount (in thousands)				Effective Interest Rate
Fixed-rate 1.25% Convertible Notes Due May 15, 2018 (“2018 Notes”)	447,436			(1)	5.27	%		449,954			(2)	5.27	%
Fixed-rate 2.75% Senior Notes Due March 15, 2020 (“2020 Notes”)	500,000				2.88	%		500,000				2.88	%
Fixed-rate 2.80% Senior Notes Due June 15, 2021 (“2021 Notes”)	800,000				2.95	%		800,000				2.95	%
Fixed-rate 3.45% Senior Notes Due June 15, 2023 (“2023 Notes”)	—				—	%		600,000				3.60	%
Fixed-rate 3.80% Senior Notes Due March 15, 2025 (“2025 Notes”)	500,000				3.87	%		500,000				3.87	%
Fixed-rate 3.90% Senior Notes Due June 15, 2026 (“2026 Notes”)	—				—	%		1,000,000				4.01	%
Fixed-rate 2.625% Convertible Notes Due May 15, 2041 (“2041 Notes”)	631,074			(1)	4.28	%		699,895			(2)	4.28	%
Total debt outstanding, at par	2,878,510							4,549,849
Unamortized discount	(178,589		)					(232,727		)
Fair value adjustment - interest rate contracts	(10,102		)					8,552
Unamortized bond issuance costs	(3,161		)					(7,213		)	(3)
Total debt outstanding, at carrying value	$	2,686,658						$	4,318,461
Reported as:
Current portion of long-term debt	$	907,827		(4)				$	940,537		(4)
Long-term debt	1,778,831							3,377,924
Total debt outstanding, at carrying value	$	2,686,658						$	4,318,461

---

(1) As of June 25, 2017, these notes were convertible at the option of the bondholder, as a result of the condition described in (4) below. Upon closure of the conversion period, the 2041 Notes not converted will be reclassified back into noncurrent liabilities and the temporary equity will be reclassified into permanent equity.

(2) As of June 26, 2016, these notes were convertible at the option of the bond holder, as a result of the condition described in (4) below.

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(3) The Company adopted ASU 2015-3, regarding the simplification of the presentation of bond issuance costs, which requires that bond issuance costs related to a recognized liability be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The Company applied the accounting standard update on a retrospective basis by reclassifying the presentation of bond issuance costs totaling $1.76 million which was originally included in prepaid assets and other current assets against current portion of convertible notes and capital leases, and $5.45 million which was originally included in other assets against senior notes, convertible notes and capital leases, less current portion on the Consolidated Balance Sheets for June 26, 2016. There is no impact to the Company’s Consolidated Statements of Operation, Stockholders’ Equity, or Cash Flows for the fiscal year ended June 26, 2016.

(4) 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.

The Company’s contractual cash obligations relating to its outstanding debt as of June 25, 2017, were as follows:

Payments Due by Fiscal Year:	Long-Term Debt
	(in thousands)
2018 (1)	$	1,078,510
2019	—
2020	500,000
2021	800,000
2022	—
Thereafter	500,000
Total	$	2,878,510

(1) As noted above, the conversion period for the 2041 Notes is open as of June 25, 2017. As there is the potential for conversion at the option of the holder, the principal balance of the 2041 Notes has been included in the one-year payment period.

Convertible Senior Notes

In May 2011, the Company issued and sold $450 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 1.25%, on a semi-annual basis on May 15 and November 15 of each year.

In June 2012, with the acquisition of Novellus, the Company assumed $700 million in aggregate principal amount of 2.625% Convertible Senior Notes due May 2041 (the “2041 Notes,” and collectively with 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 debt 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 table below, respectively. 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 table below. Conversions in the fiscal year ended June 25, 2017, were $71.3 million principal value of Convertible Notes. During the quarter ended June 25, 2017 and in the subsequent period through August 10, 2017, the Company received notice of conversion for an additional $301.7 million principal value of Convertible Notes, which will settle in the quarter ending September 24, 2017.

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Selected additional information regarding the Convertible Notes outstanding as of June 25, 2017, and June 26, 2016, is as follows:

	June 25, 2017							June 26, 2016
	2018 Notes				2041 Notes				2018 Notes				2041 Notes
	(in thousands, except years, percentages, conversion rate, and conversion price)
Carrying amount of permanent equity component, net of tax	$	89,604			$	156,374			$	72,992			$	152,397
Carrying amount of temporary equity component, net of tax	$	15,186			$	154,675			$	31,894			$	175,658
Remaining amortization period (years)	0.8				23.8				1.9				24.9
Fair value of notes (Level 2)	$	1,125,561			$	2,809,857
Conversion rate (shares of common stock per $1,000 principal amount of notes)	16.5702				29.7371
Conversion price (per share of common stock)	$	60.35			$	33.63
If-converted value in excess of par value	$	677,876			$	2,217,277
Estimated share dilution using average quarterly stock price of $145.28 per share	4,334				14,423

Convertible Note Hedges and Warrants

Concurrent with the issuance of the 2018 Notes and $450 million of notes that matured in May of 2016 (the “2016 Notes”), the Company purchased a convertible note hedge and sold warrants. The warrants settlement is contractually defined as net share settlement. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock. During the year ended June 25, 2017, warrants associated with the 2016 Notes were exercised resulting in the issuance of approximately 2.0 million shares of the Company’s Common Stock. As of June 25, 2017, the warrants associated with the 2018 Notes had not been exercised and remained outstanding.

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 2018 Notes in full. The convertible note hedge transactions will be settled in net shares and will terminate upon the earlier of the maturity date or 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 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 2018 Notes. 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 25, 2017:

	2018 Notes
	(shares in thousands)
Warrants:
Underlying shares	7,457
Estimated share dilution using average quarterly stock price $145.28 per share	3,716
Exercise price	$	72.88
Expiration date range	August 15 - October 24, 2018
Convertible note hedge:
Number of shares available from counterparties	7,414
Exercise price	$	60.35

Senior Notes

On March 12, 2015, the Company completed a public offering of $500 million aggregate principal amount of the Company’s Senior Notes due March 2020 (the “2020 Notes”) and $500 million aggregate principal amount of the

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Company’s Senior Notes due March 2025 (the “2025 Notes”, together with the 2020 Notes, the “Senior Notes”). The Company pays interest at an annual rate of 2.75% and 3.80% on the 2020 Notes and 2025 Notes, respectively, on a semi-annual basis on March 15 and September 15 of each year. 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 million aggregate principal amount of Senior Notes due June 2021 (the “2021 Notes”, together with the 2020, and 2025 Notes, the “Senior Notes”), $600 million aggregate principal amount of Senior Notes due June 2023 (the “2023 Notes”) and $1,000 million aggregate principal amount of Senior Notes due June 2026 (the “2026 Notes”). The Company pays interest at an annual rate of 2.80%, 3.45%, and 3.90% on the 2021 Notes, 2023 Notes and 2026 Notes, respectively, on a semi-annual basis on June 15 and December 15 of each year.

As a result of the October 5, 2016, termination of the Agreement and Plan of Merger and Reorganization with KLA-Tencor (see Note 19 for additional information), the 2023 Notes and the 2026 Notes were redeemed on October 13, 2016, under the special mandatory redemption terms of the indenture governing these Notes. The Company was 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 of approximately $21.0 million from the date of initial issuance. In addition, in conjunction with the special mandatory redemption of the 2023 Notes and the 2026 Notes in the three months ended December 25, 2016, the Company recognized approximately $2.5 million of loan issuance costs to other expense, net. The 2021 Notes are not subject to special mandatory redemption.

The Company may redeem the 2021 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 and accrued and unpaid interest before May 15, 2021. The Company may redeem the 2021 Notes at par, plus accrued and unpaid interest at any time on or after May 15, 2021. 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 at a price equal to 101% of the principal amount of the respective note, plus accrued and unpaid interest.

Selected additional information regarding the Senior Notes outstanding as of June 25, 2017, is as follows:

	Remaining Amortization period		Fair Value of Notes (Level 2)
	(years)		(in thousands)
2020 Notes	2.7		$	508,035
2021 Notes	4.0		$	814,632
2025 Notes	7.7		$	516,750

Term Loan Agreement

On May 13, 2016, the Company entered into an Amended and Restated Term Loan Agreement (the “Amended and Restated Term Loan Agreement”), which amends and restates the Term Loan Agreement entered into on November 10, 2015, with a syndicate of lenders. The Amended and Restated Term Loan Agreement provides for a commitment of $1,530.0 million senior unsecured term loan facility composed of two tranches (the “Commitments”): (1) a $1,005.0 million tranche of three-year senior unsecured loans and (2) a $525.0 million tranche of five-year senior unsecured loans. The Commitments automatically terminated on October 5, 2016, upon termination of the Agreement and Plan of Merger and Reorganization with KLA-Tencor Corporation (see

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Note 19 for additional detail). In conjunction with the termination of the Commitments, the Company released approximately $3.7 million of loan issuance costs to loss on extinguishment of debt, a component of other expense, net in the year ended June 25, 2017.

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.

Interest on amounts borrowed under the credit facility is, at the Company’s option, based on (1) 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 (2) 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 25, 2017, the Company had no borrowings outstanding under the credit facility and was in compliance with all financial covenants.

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 Convertible Notes, the Senior Notes, the term loan agreement, and the revolving credit facility during the fiscal years ended June 25, 2017, June 26, 2016, and June 28, 2015.

	Year Ended
	June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
Contractual interest coupon	$	95,195			$	63,053			$	36,074
Amortization of interest discount	22,873				35,206				34,886
Amortization of issuance costs	2,414				35,315				2,435
Amortization of interest rate contract	(4,756		)		359				113
Total interest cost recognized	$	115,726			$	133,933			$	73,508

The increase in interest expense during the 12 months ended June 25, 2017, is primarily the result of the issuance of $2.4 billion of Senior Notes in June 2016, $1.6 billion of which was extinguished in October 2016. The decrease in amortization of issuance costs is primarily due to the termination of the bridge loan financing. The variation in amortization of interest rate contracts is primarily related to the interest rate contracts associated with the $1.6 billion senior notes extinguished in October 2016.

The increase in interest expense during the 12 months 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 12 months ended June 26, 2016, is primarily due the amortization of bridge loan financing issuance costs in connection with the KLA-Tencor merger of approximately $31.9 million.

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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 $15.2 million, $13.2 million, and $11.8 million, in fiscal years 2017, 2016, and 2015, respectively.

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 25, 2017, and June 26, 2016, the liability of the Company to the plan participants was $155.7 million and $122.9 million, respectively, which was recorded in accrued expenses and other current liabilities on the Consolidated Balance Sheets. As of June 25, 2017, and June 26, 2016, the Company had investments in the aggregate amount of $180.2 million and $149.8 million, respectively, which correlate to the deferred compensation obligations, which were recorded in other assets on the Consolidated Balance Sheets.

Post-Retirement Healthcare Plan

The Company maintains a post-retirement 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 $39.9 million and $37.0 million as of June 25, 2017, and June 26, 2016, 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 $120.2 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.

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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 25, 2017, were as follows:

Payments Due by Fiscal Year:	Capital Leases
	(in thousands)
2018	$	744
2019	738
2020	719
2021	662
2022	4,338
Total	7,201
Interest on capital leases	446
Current portion of capital leases	612
Long-term portion of capital leases	$	6,143

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 2017, 2016, and 2015 was $20.2 million, $16.3 million, and $15.0 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 $250.0 million in separate interest-bearing accounts as 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 25, 2017.

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 $220.4 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 $250.0 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 25, 2017, were as follows:

Payments Due by Fiscal Year:	Operating Leases
	(in thousands)
2018	$	50,798
2019	44,227
2020	16,226
2021	12,131
2022	7,508
Thereafter	25,955
Total	$	156,845

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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 25, 2017, 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 25, 2017, the maximum potential amount of future payments that the Company could be required to make under these arrangements and letters of credit was $15.7 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 25, 2017, 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 25, 2017, were as follows:

Payments Due by Fiscal Year:	Purchase Obligations
	(in thousands)
2018	$	274,574
2019	3,471
2020	3,471
2021	1,622
2022	1,439
Thereafter	227
Total	$	284,804

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.

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

	Year Ended
June 25, 2017				June 26, 2016
	(in thousands)
Balance at beginning of period	$	100,321			$	93,209
Warranties issued during the period	188,813				124,582
Settlements made during the period	(135,213		)		(114,008		)
Changes in liability for pre-existing warranties	8,060				(3,462		)
Balance at end of period	$	161,981			$	100,321

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. Based on current information, the Company does not believe that a material loss from known matters is probable and therefore has not recorded an accrual for litigation or other contingencies related to existing legal proceedings.

Note 16: Stock Repurchase Program

In November 2016, the Board Directors authorized the repurchase of up to $1 billion 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 onshore cash and onshore cash generation. This repurchase program has no termination date and may be suspended or discontinued at any time.

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

Period	Total Number of Shares Repurchased			Total Cost of Repurchase				Average Price Paid per Share(1)				Amount Available Under Repurchase Program
	(in thousands, except per share data)
Available balance as of June 26, 2016												$	229,094
Quarter ended September 25, 2016	—			$	—			$	—			$	229,094
Board authorization, November 2016												$	1,000,000
Quarter ended December 25, 2016	619			$	65,014			$	105.01			$	934,986
Quarter ended March 26, 2017	1,223			$	139,760			$	114.30			$	795,226
Quarter ended June 25, 2017	2,672			$	513,085			$	128.29			$	282,141

(1) Average price paid per share excludes effect of accelerated share repurchases, see additional disclosure below regarding our accelerated share repurchase activity during the fiscal year.

In addition to shares repurchased under the Board-authorized repurchase program shown above, the Company acquired 809,427 shares at a total cost of $93.8 million during the 12 months ended June 25, 2017, 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.

On April 19, 2017, the Company entered into two separate accelerated share repurchase agreements (collectively, the “ASR”) with two financial institutions to repurchase a total of $500 million of Common Stock. The

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Company took an initial delivery of approximately 2,570,000 shares, which represented 70% of the prepayment amount divided by the Company’s closing stock price on April 19, 2017. The total number of shares to be received under the ASR is based upon the average daily volume weighted average price of our Common Stock during the repurchase period, less an agreed upon discount. Following the fiscal year end, the counterparties designated June 30, 2017, as the termination date, at which time the Company settled the ASR. Approximately 780,000 shares were received at final settlement, which resulted in a weighted-average share price of approximately $149.16 for the transaction period.

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 Adjustment				Accumulated Unrealized Holding Gain (Loss) on Cash Flow Hedges				Accumulated Unrealized Holding Gain (Loss) on Available-For-Sale Investments				Accumulated Unrealized Components of Defined Benefit Plans				Total
	(in thousands)
Balance as of June 26, 2016	$	(39,528	)		$	(15,623	)		$	4,896			$	(19,078	)		$	(69,333	)
Other comprehensive (loss) income before reclassifications	(3,091		)		5,841				(3,789		)		(546		)		(1,585		)
Losses (gains) reclassified from accumulated other comprehensive income (loss) to net income	248			(2)	8,971			(1)	(1		)	(2)	—				9,218
Net current-period other comprehensive (loss) income	(2,843		)		14,812				(3,790		)		(546		)		7,633
Balance as of June 25, 2017	$	(42,371	)		$	(811	)		$	1,106			$	(19,624	)		$	(61,700	)

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(1)	Amount of after-tax gain reclassified from accumulated other comprehensive income into net income located in revenue: $10,668 loss; cost of goods sold: $540 gain; selling, general, and administrative expenses: $56 gain; and other income and expense: $1,101 gain.

(2)	Amount of after-tax gain reclassified from accumulated other comprehensive income into net income located in other expense, net.

Tax related to other comprehensive income, and the components there to, for the years ended June 25, 2017, June 26, 2016 and June 28, 2015 were not material.

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, China, Europe, Japan, Korea, Southeast Asia, and Taiwan. 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.

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

	Year Ended
June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
Revenue:
Korea	$	2,480,329			$	1,057,331			$	1,406,617
Taiwan	2,095,669				1,485,037				1,084,239
Japan	1,041,969				983,821				623,575
China	1,023,195				1,039,951				661,094
United States	629,937				495,123				890,891
Southeast Asia	401,877				605,236				278,350
Europe	340,644				219,394				314,546
Total revenue	$	8,013,620			$	5,885,893			$	5,259,312

	June 25, 2017				June 26, 2016				June 28, 2015
	(in thousands)
Long-lived assets:
United States	$	575,264			$	529,316			$	505,814
Europe	77,211				81,377				86,779
Korea	19,982				17,281				18,230
Taiwan	7,970				8,647				8,908
Southeast Asia	2,179				668				349
China	1,906				1,339				960
Japan	1,083				980				378
	$	685,595			$	639,608			$	621,418

In fiscal year 2017, five customers accounted for approximately 23%, 16%, 12%, 11%, and 10% of total revenues. 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. 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 Corporation. On October 5, 2016, the Company and KLA-Tencor announced that they had mutually agreed to terminate their previously announced Agreement and Plan of Merger and Reorganization. No termination fee was incurred by either the Company or KLA-Tencor.

During the years ended June 25, 2017, and June 26, 2016, the Company expensed as incurred acquisition-related costs of $9.8 million and $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 25, 2017, and June 26, 2016, and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders' equity for each of the three years in the period ended June 25, 2017. 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. 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 25, 2017 and June 26, 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 25, 2017, 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 25, 2017, 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 15, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

August 15, 2017

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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 25, 2017, 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 25, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2017 consolidated financial statements of Lam Research Corporation and our report dated August 15, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

August 15, 2017

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