KLAC 10Q 3/31/14
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 000-09992
KLA-Tencor Corporation
(Exact name of registrant as specified in its charter)
  
Delaware
 
04-2564110
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One Technology Drive, Milpitas, California
 
95035
(Address of Principal Executive Offices)
 
(Zip Code)
(408) 875-3000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No  x
As of April 11, 2014, there were 165,826,885 shares of the registrant’s Common Stock, $0.001 par value, outstanding.


Table of Contents

INDEX
 
 
 
Page
Number
 
 
 
PART I
FINANCIAL INFORMATION
 
Item 1
 
 
 
 
 
 
Item 2
Item 3
Item 4
 
 
 
PART II
OTHER INFORMATION
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 
 
 
 
 
 


 

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
 
(In thousands)
March 31,
2014
 
June 30,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
776,223

 
$
985,390

Marketable securities
2,250,601

 
1,933,491

Accounts receivable, net
557,661

 
524,610

Inventories
680,919

 
634,448

Deferred income taxes
182,899

 
198,525

Other current assets
94,026

 
75,039

Total current assets
4,542,329

 
4,351,503

Land, property and equipment, net
326,049

 
305,281

Goodwill
335,246

 
326,635

Purchased intangibles, net
31,988

 
34,515

Other non-current assets
251,239

 
269,423

Total assets
$
5,486,851

 
$
5,287,357

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
120,771

 
$
115,680

Deferred system profit
173,595

 
157,965

Unearned revenue
46,179

 
60,838

Other current liabilities
547,102

 
527,049

Total current liabilities
887,647

 
861,532

Non-current liabilities:
 
 
 
Long-term debt
747,783

 
747,376

Pension liabilities
58,408

 
57,959

Income tax payable
59,765

 
59,494

Unearned revenue
57,818

 
42,228

Other non-current liabilities
35,502

 
36,616

Total liabilities
1,846,923

 
1,805,205

Commitments and contingencies (Note 12 and Note 13)

 

Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
1,206,377

 
1,159,565

Retained earnings
2,464,901

 
2,359,233

Accumulated other comprehensive income (loss)
(31,350
)
 
(36,646
)
Total stockholders’ equity
3,639,928

 
3,482,152

Total liabilities and stockholders’ equity
$
5,486,851

 
$
5,287,357

 
See accompanying notes to condensed consolidated financial statements (unaudited).

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Table of Contents

KLA-TENCOR CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
March 31,
 
March 31,
(In thousands, except per share data)
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Product
$
670,083

 
$
579,746

 
$
1,716,006

 
$
1,676,847

Service
161,516

 
149,283

 
479,059

 
445,902

Total revenues
831,599

 
729,029

 
2,195,065

 
2,122,749

Costs and operating expenses:
 
 
 
 
 
 
 
Costs of revenues
342,826

 
309,508

 
906,297

 
930,648

Engineering, research and development
134,161

 
118,788

 
401,021

 
360,138

Selling, general and administrative
93,449

 
98,487

 
288,691

 
289,913

Total costs and operating expenses
570,436

 
526,783

 
1,596,009

 
1,580,699

Income from operations
261,163

 
202,246

 
599,056

 
542,050

Interest income and other, net
3,479

 
3,338

 
9,168

 
11,884

Interest expense
13,396

 
13,469

 
40,369

 
40,403

Income before income taxes
251,246

 
192,115

 
567,855

 
513,531

Provision for income taxes
47,665

 
25,733

 
113,831

 
105,152

Net income
$
203,581

 
$
166,382

 
$
454,024

 
$
408,379

Net income per share:
 
 
 
 
 
 
 
Basic
$
1.22

 
$
1.00

 
$
2.73

 
$
2.46

Diluted
$
1.21

 
$
0.98

 
$
2.70

 
$
2.41

Cash dividends declared per share
$
0.45

 
$
0.40

 
$
1.35

 
$
1.20

Weighted-average number of shares:
 
 
 
 
 
 
 
Basic
166,253

 
166,234

 
166,184

 
166,297

Diluted
167,989

 
169,180

 
168,355

 
169,425

 
See accompanying notes to condensed consolidated financial statements (unaudited).

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Table of Contents

KLA-TENCOR CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three months ended
 
Nine months ended
 
March 31,
 
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Net income
$
203,581

 
$
166,382

 
$
454,024

 
$
408,379

Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments:
 
 
 
 
 
 
 
Change in currency translation adjustments
(13
)
 
(10,753
)
 
3,908

 
(5,257
)
Change in income tax benefit or expense
113

 
1,223

 
(661
)
 
(1,489
)
Net change related to currency translation adjustments
100

 
(9,530
)
 
3,247

 
(6,746
)
Cash flow hedges:
 
 
 
 
 
 
 
Change in net unrealized gains or losses
(1,752
)
 
842

 
1,821

 
2,843

Reclassification adjustments for gains or losses included in net income
(934
)
 
(848
)
 
(3,472
)
 
116

Change in income tax benefit or expense
962

 
2

 
591

 
(1,054
)
Net change related to cash flow hedges
(1,724
)
 
(4
)
 
(1,060
)
 
1,905

Net change related to unrecognized losses and transition obligations in connection with defined benefit plans
142

 
155

 
542

 
473

Available-for-sale securities:
 
 
 
 
 
 
 
Change in net unrealized gains or losses
844

 
105

 
5,641

 
3,054

Reclassification adjustments for gains or losses included in net income
(281
)
 
(712
)
 
(1,728
)
 
(2,069
)
Change in income tax benefit or expense
(183
)
 
217

 
(1,346
)
 
(301
)
Net change related to available-for-sale securities
380

 
(390
)
 
2,567

 
684

Other comprehensive income (loss)
(1,102
)
 
(9,769
)
 
5,296

 
(3,684
)
Total comprehensive income
$
202,479

 
$
156,613

 
$
459,320

 
$
404,695


See accompanying notes to condensed consolidated financial statements (unaudited).

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Table of Contents

KLA-TENCOR CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
454,024

 
$
408,379

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
61,062

 
67,109

Asset impairment charges
1,374

 
1,327

Net gain on sale of assets

 
(1,160
)
Non-cash stock-based compensation expense
46,812

 
52,478

Excess tax benefit from equity awards
(20,187
)
 
(13,965
)
Net gain on sale of marketable securities and other investments
(1,728
)
 
(2,069
)
Changes in assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable, net
(34,193
)
 
232,347

Decrease (increase) in inventories
(47,481
)
 
671

Decrease in other assets
8,470

 
3,367

Increase (decrease) in accounts payable
5,121

 
(30,866
)
Increase (decrease) in deferred system profit
15,630

 
(10,402
)
Increase in other liabilities
41,342

 
30,403

Net cash provided by operating activities
530,246

 
737,619

Cash flows from investing activities:
 
 
 
Acquisition of cost method investment
(1,345
)
 

Acquisition of business
(18,000
)
 

Capital expenditures, net
(54,436
)
 
(55,663
)
Proceeds from sale of assets

 
1,838

Purchase of available-for-sale securities
(1,156,107
)
 
(1,283,177
)
Proceeds from sale of available-for-sale securities
723,225

 
910,535

Proceeds from maturity of available-for-sale securities
110,924

 
200,853

Purchase of trading securities
(53,046
)
 
(33,917
)
Proceeds from sale of trading securities
53,400

 
34,492

Net cash used in investing activities
(395,385
)
 
(225,039
)
Cash flows from financing activities:
 
 
 
Issuance of common stock
92,100

 
95,542

Tax withholding payments related to vested and released restricted stock units
(51,556
)
 
(29,160
)
Common stock repurchases
(180,686
)
 
(204,943
)
Payment of dividends to stockholders
(224,405
)
 
(199,712
)
Excess tax benefit from equity awards
20,187

 
13,965

Net cash used in financing activities
(344,360
)
 
(324,308
)
Effect of exchange rate changes on cash and cash equivalents
332

 
(5,365
)
Net increase (decrease) in cash and cash equivalents
(209,167
)
 
182,907

Cash and cash equivalents at beginning of period
985,390

 
751,294

Cash and cash equivalents at end of period
$
776,223

 
$
934,201

Supplemental cash flow disclosures:
 
 
 
Income taxes paid, net
$
76,877

 
$
87,245

Interest paid
$
26,436

 
$
27,119

Non-cash investing activities:
 
 
 
Purchase of land, property and equipment
$
4,103

 
$

 
See accompanying notes to condensed consolidated financial statements (unaudited).

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Table of Contents

KLA-TENCOR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION
Basis of Presentation. The condensed consolidated financial statements have been prepared by KLA-Tencor Corporation (“KLA-Tencor” or the “Company”) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited interim financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair statement of the financial position, results of operations, comprehensive income, and cash flows for the periods indicated. These financial statements and notes, however, should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013, filed with the SEC on August 8, 2013.
The condensed consolidated financial statements include the accounts of KLA-Tencor and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The results of operations for the nine months ended March 31, 2014 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending June 30, 2014.
Certain reclassifications have been made to the prior year’s Condensed Consolidated Balance Sheet and notes to conform to the current year presentation. The reclassifications had no effect on the Condensed Consolidated Statements of Operations or Cash Flows.
Management Estimates. The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying the Company's accounting policies that affect the reported amounts of assets and liabilities (and related disclosure of contingent assets and liabilities) at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition. KLA-Tencor recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured. The Company derives revenue from three sources—sales of systems, spare parts and services. In general, the Company recognizes revenue for systems when the system has been installed, is operating according to predetermined specifications and is accepted by the customer. When a customer delays installation for delivered products for which the Company has demonstrated a history of successful installation and acceptance, the Company recognizes revenue upon customer acceptance. Under certain circumstances, however, the Company recognizes revenue prior to acceptance from the customer, as follows:
When the customer fab has previously accepted the same tool, with the same specifications, and when the Company can objectively demonstrate that the tool meets all of the required acceptance criteria.
When system sales to independent distributors have no installation requirement, contain no acceptance agreement, and 100% payment is due based upon shipment.
When the installation of the system is deemed perfunctory.
When the customer withholds acceptance due to issues unrelated to product performance, in which case revenue is recognized when the system is performing as intended and meets predetermined specifications.
In circumstances in which the Company recognizes revenue prior to installation, the portion of revenue associated with installation is deferred based on estimated fair value, and that revenue is recognized upon completion of the installation.

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Table of Contents

In many instances, products are sold in stand-alone arrangements. Services are sold separately through renewals of annual maintenance contracts. The Company also allows for multiple element revenue arrangements in cases where certain elements of a sales arrangement are not delivered and accepted in one reporting period. To determine the relative fair value of each element in a revenue arrangement, the Company allocates arrangement consideration based on the selling price hierarchy. For substantially all of the arrangements with multiple deliverables pertaining to products and services, the Company uses vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) to allocate the selling price to each deliverable. The Company determines TPE based on historical prices charged for products and services when sold on a stand-alone basis. When the Company is unable to establish relative selling price using VSOE or TPE, the Company uses estimated selling price (“ESP”) in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. ESP could potentially be used for new or customized products. The Company regularly reviews relative selling prices and maintains internal controls over the establishment and updates of these estimates. In a multiple element revenue arrangement, the Company defers revenue recognition associated with the relative fair value of each undelivered element until that element is delivered to the customer. To be considered a separate element, the product or service in question must represent a separate unit of accounting, which means that such product or service must fulfill the following criteria: (a) the delivered item(s) has value to the customer on a stand-alone basis; and (b) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. If the arrangement does not meet all the above criteria, the entire amount of the sales contract is deferred until all elements are accepted by the customer.
Trade-in rights are occasionally granted to customers to trade in tools in connection with subsequent purchases. The Company estimates the value of the trade-in right and reduces the revenue recognized on the initial sale. This amount is recognized at the earlier of the exercise of the trade-in right or the expiration of the trade-in right.
 Spare parts revenue is recognized when the product has been shipped, risk of loss has passed to the customer and collection of the resulting receivable is probable.
Service and maintenance contract revenue is recognized ratably over the term of the maintenance contract. Revenue from services performed in the absence of a maintenance contract, including consulting and training revenue, is recognized when the related services are performed and collectibility is reasonably assured.
The Company sells stand-alone software that is subject to the software revenue recognition guidance issued by the Financial Accounting Standards Board (“FASB”). The Company periodically reviews selling prices to determine whether VSOE exists, and in some situations where the Company is unable to establish VSOE for undelivered elements such as post-contract service, revenue is recognized ratably over the term of the service contract.
The Company also defers the fair value of non-standard warranty bundled with equipment sales as unearned revenue. Non-standard warranty includes services incremental to the standard 40-hour per week coverage for 12 months. Non-standard warranty is recognized ratably as revenue when the applicable warranty term period commences.
The deferred system profit balance equals the amount of deferred system revenue that was invoiced and due on shipment, less applicable product and warranty costs. Deferred system revenue represents the value of products that have been shipped and billed to customers which have not met the Company's revenue recognition criteria. Deferred system profit does not include the profit associated with product shipments to customers in Japan, to whom title does not transfer until customer acceptance. Shipments to customers in Japan are classified as inventory at cost until the time of acceptance.

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Table of Contents

Recent Accounting Pronouncements. In July 2013, the FASB issued an accounting standard update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. Under the new standard update, in most circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the Company's financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. This accounting standard update will be effective for the Company's interim period ending September 30, 2014 and applied prospectively with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
NOTE 2 – FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities are measured and recorded at fair value, except for equity investments in privately-held companies. These equity investments are accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. The Company’s non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.
Fair Value of Financial Instruments. KLA-Tencor has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of the Company's cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their carrying amounts due to the relatively short maturity of these items.
Fair Value Hierarchy. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1
  
Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
 
 
 
Level 2
  
Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
 
 
 
Level 3
  
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
All of the Company’s financial instruments were classified within Level 1 or Level 2 of the fair value hierarchy as of March 31, 2014, because they were valued using quoted market prices, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. As of March 31, 2014, the types of instruments valued based on quoted market prices in active markets included money market funds, U.S. Treasury securities and certain U.S. Government agency securities and sovereign securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
As of March 31, 2014, the types of instruments valued based on other observable inputs included corporate debt securities, municipal securities and certain U.S. Government agency securities and sovereign securities. The market inputs used to value these instruments generally consist of market yields, reported trades and broker/dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.
The principal market in which the Company executes its foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. The Company’s foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

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Table of Contents

Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis as of the date indicated below were presented on the Company’s Condensed Consolidated Balance Sheet as follows:
As of March 31, 2014 (In thousands)
Total
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
U.S. Treasury securities
$
118,951

 
$
118,951

 
$

U.S. Government agency securities
7,000

 
7,000

 

Corporate debt securities
62,054

 

 
62,054

Money market and other
463,828

 
463,828

 

Sovereign securities
8,383

 

 
8,383

Marketable securities:
 
 
 
 
 
U.S. Treasury securities
183,474

 
183,474

 

U.S. Government agency securities
790,643

 
762,644

 
27,999

Municipal securities
101,894

 

 
101,894

Corporate debt securities
1,119,198

 

 
1,119,198

Sovereign securities
53,899

 
17,742

 
36,157

Total cash equivalents and marketable securities(1)
2,909,324

 
1,553,639

 
1,355,685

Other current assets:
 
 
 
 
 
Derivative assets
2,653

 

 
2,653

Other non-current assets:
 
 
 
 
 
Executive Deferred Savings Plan
156,047

 
105,024

 
51,023

Total financial assets(1)
$
3,068,024

 
$
1,658,663

 
$
1,409,361

Liabilities
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
Derivative liabilities
$
(960
)
 
$

 
$
(960
)
Executive Deferred Savings Plan
(156,417
)
 
(106,644
)
 
(49,773
)
Total financial liabilities
$
(157,377
)
 
$
(106,644
)
 
$
(50,733
)
________________
(1) Excludes cash of $86.5 million held in operating accounts and time deposits of $31.0 million as of March 31, 2014.


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Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis as of the date indicated below were presented on the Company’s Condensed Consolidated Balance Sheet as follows:  
As of June 30, 2013 (In thousands)
Total
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Corporate debt securities
$
3,800

 
$

 
$
3,800

Money market and other
817,608

 
817,608

 

Marketable securities:
 
 
 
 
 
U.S. Treasury securities
93,787

 
93,787

 

U.S. Government agency securities
598,031

 
598,031

 

Municipal securities
103,455

 

 
103,455

Corporate debt securities
1,099,525

 

 
1,099,525

Sovereign securities
33,805

 
13,559

 
20,246

Total cash equivalents and marketable securities(1)
2,750,011

 
1,522,985

 
1,227,026

Other current assets:
 
 
 
 
 
Derivative assets
4,016

 

 
4,016

Other non-current assets:
 
 
 
 
 
Executive Deferred Savings Plan
136,461

 
96,180

 
40,281

Total financial assets(1)
$
2,890,488

 
$
1,619,165

 
$
1,271,323

Liabilities
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
Derivative liabilities
$
(2,173
)
 
$

 
$
(2,173
)
Executive Deferred Savings Plan
(137,849
)
 
(97,570
)
 
(40,279
)
Total financial liabilities
$
(140,022
)
 
$
(97,570
)
 
$
(42,452
)
________________
(1) Excludes cash of $125.5 million held in operating accounts and time deposits of $43.4 million as of June 30, 2013.
There were no transfers in and out of Level 1 and Level 2 fair value measurements during the three and nine months ended March 31, 2014. The Company did not have any assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of March 31, 2014 or June 30, 2013.



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NOTE 3 – FINANCIAL STATEMENT COMPONENTS
Balance Sheet Components
(In thousands)
As of
March 31, 2014
 
As of
June 30, 2013
Accounts receivable, net:
 
 
 
Accounts receivable, gross
$
579,510

 
$
546,745

Allowance for doubtful accounts
(21,849
)
 
(22,135
)
 
$
557,661

 
$
524,610

Inventories:
 
 
 
Customer service parts
$
197,373

 
$
180,749

Raw materials
241,773

 
229,233

Work-in-process
178,409

 
176,704

Finished goods
63,364

 
47,762

 
$
680,919

 
$
634,448

Other current assets:
 
 
 
Prepaid expenses
$
32,645

 
$
31,997

Prepaid income taxes
47,435

 
25,825

Other current assets
13,946

 
17,217

 
$
94,026

 
$
75,039

Land, property and equipment, net:
 
 
 
Land
$
41,848

 
$
41,850

Buildings and leasehold improvements
289,411

 
272,920

Machinery and equipment
506,655

 
476,747

Office furniture and fixtures
20,654

 
20,701

Construction-in-process
17,299

 
16,604

 
875,867

 
828,822

Less: accumulated depreciation and amortization
(549,818
)
 
(523,541
)
 
$
326,049

 
$
305,281

Other non-current assets:
 
 
 
Executive Deferred Savings Plan(1)
$
156,047

 
$
136,461

Deferred tax assets – long-term
78,133

 
114,833

Other non-current assets
17,059

 
18,129

 
$
251,239

 
$
269,423

Other current liabilities:
 
 
 
Warranty
$
41,149

 
$
42,603

Executive Deferred Savings Plan(1)
156,417

 
137,849

Compensation and benefits
188,028

 
195,793

Income taxes payable
9,422

 
11,076

Interest payable
21,706

 
8,769

Other accrued expenses
130,380

 
130,959

 
$
547,102

 
$
527,049


12

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________________
(1)
KLA-Tencor has a non-qualified deferred compensation plan whereby certain executives and non-employee directors may defer a portion of their compensation. Participants are credited with returns based on their allocation of their account balances among measurement funds. The Company controls the investment of these funds, and the participants remain general creditors of KLA-Tencor. Distributions from the plan commence the quarter following a participant’s retirement or termination of employment, except in cases where such distributions are required to be delayed in order to avoid a prohibited distribution under Internal Revenue Code Section 409A. As of March 31, 2014, the Company had a deferred compensation plan related asset and liability included as a component of other non-current assets and other current liabilities on the Condensed Consolidated Balance Sheet.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) (“OCI”) as of the dates indicated below were as follows:
(In thousands)
Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Securities
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Defined Benefit Plans
 
Total
Balance as of June 30, 2013
$
(22,467
)
 
$
(602
)
 
$
1,594

 
$
(15,171
)
 
$
(36,646
)
Other comprehensive income before reclassifications
3,908

 
5,641

 
1,821

 

 
11,370

Amounts reclassified from accumulated OCI

 
(1,728
)
 
(3,472
)
 
880

 
(4,320
)
Tax (benefits) expense
(661
)
 
(1,346
)
 
591

 
(338
)
 
(1,754
)
Other comprehensive income (loss)
3,247

 
2,567

 
(1,060
)
 
542

 
5,296

Balance as of March 31, 2014
$
(19,220
)
 
$
1,965

 
$
534

 
$
(14,629
)
 
$
(31,350
)
The effects on net income of amounts reclassified from accumulated OCI to the Condensed Consolidated Statement of Operations for the indicated periods were as follows (in thousands):
 
 
 
 
Three months ended
March 31,
 
Nine months ended
March 31,
Accumulated OCI Components
 
Location
 
2014
 
2014
Gains on cash flow hedges from foreign exchange contracts
 
Revenues
 
$
895

 
$
3,217

 
 
Costs of revenues
 
39

 
255

 
 
Total before tax
 
934

 
3,472

Unrealized gains (losses) on available-for-sale securities
 
Interest income and other, net
 
281

 
1,728

Unrealized losses on defined benefit plans
 
Total before tax
 
$
(253
)
 
$
(880
)
Total amount reclassified from accumulated OCI
 
 
 
$
962

 
$
4,320


13

Table of Contents


NOTE 4 – MARKETABLE SECURITIES
The amortized cost and fair value of marketable securities as of the dates indicated below were as follows:
As of March 31, 2014 (In thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
$
302,408

 
$
112

 
$
(95
)
 
$
302,425

U.S. Government agency securities
797,451

 
656

 
(464
)
 
797,643

Municipal securities
101,846

 
120

 
(72
)
 
101,894

Corporate debt securities
1,178,548

 
3,025

 
(321
)
 
1,181,252

Money market and other
463,828

 

 

 
463,828

Sovereign securities
62,261

 
38

 
(17
)
 
62,282

Subtotal
2,906,342

 
3,951

 
(969
)
 
2,909,324

Add: Time deposits(1)
31,011

 

 

 
31,011

Less: Cash equivalents
689,740

 

 
(6
)
 
689,734

Marketable securities
$
2,247,613

 
$
3,951

 
$
(963
)
 
$
2,250,601

As of June 30, 2013 (In thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
$
93,940

 
$
53

 
$
(206
)
 
$
93,787

U.S. Government agency securities
598,471

 
569

 
(1,009
)
 
598,031

Municipal securities
103,686

 
71

 
(302
)
 
103,455

Corporate debt securities
1,103,438

 
2,353

 
(2,466
)
 
1,103,325

Money market and other
817,608

 

 

 
817,608

Sovereign securities
33,799

 
25

 
(19
)
 
33,805

Subtotal
2,750,942

 
3,071

 
(4,002
)
 
2,750,011

Add: Time deposits(1)
43,413

 

 

 
43,413

Less: Cash equivalents
859,933

 

 

 
859,933

Marketable securities
$
1,934,422

 
$
3,071

 
$
(4,002
)
 
$
1,933,491

________________
(1)
Time deposits excluded from fair value measurements.
KLA-Tencor’s investment portfolio consists of both corporate and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings. The Company has the ability to realize the full value of all of these investments upon maturity. The following table summarizes the fair value and gross unrealized losses of the Company’s investments that were in an unrealized loss position as of the date indicated below:
 
As of March 31, 2014 (In thousands)
Fair Value
 
Gross
Unrealized
Losses(1)
U.S. Treasury securities
$
61,901

 
$
(93
)
U.S. Government agency securities
229,366

 
(464
)
Municipal securities
36,699

 
(72
)
Corporate debt securities
217,279

 
(318
)
Sovereign securities
31,455

 
(16
)
Total
$
576,700

 
$
(963
)
__________________ 
(1)
Of the total gross unrealized losses, the amount of total gross unrealized losses related to investments that had been in a continuous loss position for 12 months or more was immaterial.

14

Table of Contents


The contractual maturities of securities classified as available-for-sale, regardless of their classification on the Company's Condensed Consolidated Balance Sheet, as of the date indicated below were as follows:
As of March 31, 2014 (In thousands)
Amortized Cost
 
Fair Value
Due within one year
$
725,478

 
$
726,799

Due after one year through three years
1,522,135

 
1,523,802

 
$
2,247,613

 
$
2,250,601

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Realized gains on available-for-sale securities for the three months ended March 31, 2014 and March 31, 2013 were $0.3 million and $0.7 million, respectively. Realized gains on available-for-sale securities for the nine months ended March 31, 2014 and March 31, 2013 were $1.8 million and $2.1 million, respectively. Realized losses on available-for-sale securities for the three and nine months ended March 31, 2014 and March 31, 2013 were immaterial.
NOTE 5 – BUSINESS COMBINATIONS
On March 28, 2014, the Company acquired certain assets and liabilities of a privately-held company that developed and sold software to mask manufacturers, semiconductor fabs and mask inspection and review equipment manufacturers, for a total purchase consideration of $18 million in cash.
The following table represents the preliminary purchase price allocation and summarizes the aggregate estimated fair values of the net assets acquired on the closing date of the acquisition on March 28, 2014:
(In thousands)
Preliminary Purchase Price Allocation
Property and equipment
$
108

Intangibles
9,400

Goodwill
8,622

Liabilities assumed
(130
)
Cash consideration - paid
$
18,000

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. The $8.6 million of goodwill was assigned to the Defect Inspection reporting unit.
NOTE 6 – GOODWILL AND PURCHASED INTANGIBLE ASSETS
Goodwill
The following table presents goodwill balances and the movements during the nine months ended March 31, 2014:
(In thousands)
As of
March 31, 2014
As of June 30, 2013
$
326,635

Acquisition
8,622

Adjustments
(11
)
As of March 31, 2014
$
335,246

The changes in the gross goodwill balance since June 30, 2013 resulted from the acquisition of certain assets and liabilities of a privately-held company and foreign currency translation adjustments.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.

15

Table of Contents

The Company has four reporting units: Defect Inspection, Metrology, Service and Other. As of March 31, 2014, substantially all of the goodwill balance resided in the Defect Inspection reporting unit. The goodwill from the acquisition during the three months ended March 31, 2014 was included in Defect Inspection reporting unit.
The Company performed a qualitative assessment of the goodwill by reporting unit as of November 30, 2013 during the three months ended December 31, 2013 and concluded that it was more likely than not that the fair value of each of the reporting units exceeded its carrying amount. As of December 31, 2013, the Company's assessment indicated that goodwill in the reporting units was not impaired. There have been no significant events or circumstances affecting the valuation of goodwill subsequent to the qualitative assessment performed in the second quarter of the fiscal year ending June 30, 2014. The next annual assessment of the goodwill by reporting unit will be performed in the second quarter of the fiscal year ending June 30, 2015.
Purchased Intangible Assets
The components of purchased intangible assets as of the dates indicated below were as follows:
(In thousands)
 
 
As of
March 31, 2014
 
As of
June 30, 2013
Category
Range of
Useful Lives
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and
Impairment
 
Net
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and
Impairment
 
Net
Amount
Existing technology
4-7 years
 
$
141,659

 
$
124,469

 
$
17,190

 
$
133,659

 
$
119,106

 
$
14,553

Patents
6-13 years
 
57,648

 
53,576

 
4,072

 
57,648

 
51,068

 
6,580

Trade name/Trademark
4-10 years
 
19,893

 
17,052

 
2,841

 
19,893

 
15,928

 
3,965

Customer relationships
6-7 years
 
54,680

 
48,194

 
6,486

 
54,680

 
45,263

 
9,417

Other
0-1 year
 
17,599

 
16,200

 
1,399

 
16,200

 
16,200

 

Total
 
 
$
291,479

 
$
259,491

 
$
31,988

 
$
282,080

 
$
247,565

 
$
34,515

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
For the three months ended March 31, 2014 and 2013, amortization expense for intangible assets was $3.5 million and $4.5 million, respectively. For the nine months ended March 31, 2014 and 2013, amortization expense for intangible assets was $11.9 million and $16.3 million, respectively. Based on the intangible assets recorded as of March 31, 2014, and assuming no subsequent additions to, or impairment of, the underlying assets, the remaining estimated amortization expense is expected to be as follows:
Fiscal year ending June 30:
Amortization
(In thousands)
2014 (remaining 3 months)
$
4,291

2015
15,802

2016
7,564

2017
2,806

2018
1,525

Total
$
31,988


16

Table of Contents


NOTE 7 – LONG-TERM DEBT
In April 2008, the Company issued $750 million aggregate principal amount of 6.90% senior, unsecured long-term debt due in 2018 with an effective interest rate of 7.00%. The discount on the debt amounted to $5.4 million and is being amortized over the life of the debt using the straight-line method as opposed to the interest method due to immateriality. Interest is payable semi-annually on November 1 and May 1. The debt indenture includes covenants that limit the Company’s ability to grant liens on its facilities and to enter into sale and leaseback transactions, subject to significant allowances under which certain sale and leaseback transactions are not restricted. The Company was in compliance with all of its covenants as of March 31, 2014.
In certain circumstances involving a change of control followed by a downgrade of the rating of the Company’s senior notes, the Company will be required to make an offer to repurchase the senior notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. The Company’s ability to repurchase the senior notes in such event may be limited by law, by the indenture associated with the senior notes, by the Company’s then-available financial resources or by the terms of other agreements to which the Company may be party at such time. If the Company fails to repurchase the senior notes as required by the indenture, it would constitute an event of default under the indenture governing the senior notes which, in turn, may also constitute an event of default under other obligations.
Based on the trading prices of the debt on the applicable dates, the fair value of the debt as of March 31, 2014 and June 30, 2013 was $881.7 million and $872.3 million, respectively. While the debt is recorded at cost, the fair value of the long-term debt was determined based on quoted prices in markets that are not active; accordingly, the long-term debt is categorized as Level 2 for purposes of the fair value measurement hierarchy.

NOTE 8 – EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS
Equity Incentive Program
Under the Company’s current equity incentive program, the Company issues equity awards from its 2004 Equity Incentive Plan (the “2004 Plan”), which provides for the grant of options to purchase shares of its common stock, stock appreciation rights, restricted stock units, performance shares, performance units and deferred stock units to its employees, consultants and members of its Board of Directors. The 2004 Plan currently permits the issuance of up to 34.9 million shares of common stock, including 2.9 million additional shares approved by the Company's stockholders on November 6, 2013. Any 2004 Plan awards of restricted stock units, performance shares, performance units or deferred stock units with a per share or unit purchase price lower than 100% of fair market value on the grant date are counted against the total number of shares issuable under the 2004 Plan as follows, based on the grant date of the applicable award: (a) for any such awards granted before November 6, 2013, the awards counted against the 2004 Plan share reserve as 1.8 shares for every one share subject thereto; and (b) for any such awards granted on or after November 6, 2013, the awards count against the 2004 Plan share reserve as 2.0 shares for every one share subject thereto.
The following table summarizes the combined activity under the Company's equity incentive plans for the indicated period:
(In thousands)
Available
For Grant
Balances as of June 30, 2013(1)
6,696

Plan shares increased
2,900

Restricted stock units granted(2)(3)
(1,267
)
Restricted stock units canceled(2)
422

Options canceled/expired/forfeited
57

Plan shares expired(4)
(48
)
Balances as of March 31, 2014(1)
8,760


17

Table of Contents


__________________ 
(1)
Includes shares available for issuance under the 2004 Plan, as well as under the Company’s 1998 Outside Director Option Plan (the “Outside Director Plan”), which only permits the issuance of stock options to the Company’s non-employee members of the Board of Directors. As of March 31, 2014, 1.7 million shares were available for grant under the Outside Director Plan.
(2)
The number of restricted stock units provided in this row reflects the application of the full value award multiplier described above (1.8x or 2.0x depending on the grant date of the applicable award).
(3)
Includes 0.3 million (reflected as 0.6 million shares in this table due to the application of the 1.8x multiple described above, as all of these awards were granted before November 6, 2013) restricted stock units granted to senior management during the nine months ended March 31, 2014 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of March 31, 2014, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units granted during the nine months ended March 31, 2014, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.
(4)
Represents the portion of shares listed as “Options canceled/expired/forfeited” above that were issued under the Company’s equity incentive plans other than the 2004 Plan or the Outside Director Plan. Because the Company is only currently authorized to issue equity awards under the 2004 Plan and the Outside Director Plan, any equity awards that are canceled, expire or are forfeited under any other Company equity incentive plans do not result in additional shares being available to the Company for future grant.
Except for stock options granted to non-employee Board members as part of their regular compensation package for service through the end of the first quarter of fiscal year 2008, the Company has granted only restricted stock units under its equity incentive program since September 2006. For the preceding several years until September 30, 2006, stock options were granted at the market price of the Company’s common stock on the date of grant (except for the previously disclosed retroactively priced options which were granted primarily prior to the fiscal year ended June 30, 2002), generally with a vesting period of five years and an exercise period not to exceed seven years (ten years for options granted prior to July 1, 2005) from the date of issuance. Restricted stock units may be granted with varying criteria such as service-based and/or performance-based vesting.
The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. The fair value is determined using a Black-Scholes valuation model for purchase rights under the Company’s Employee Stock Purchase Plan and using the closing price of the Company’s common stock on the grant date for restricted stock units, adjusted to exclude the present value of dividends which do not accrue on restricted stock units granted by the Company to date. In November 2013, the Company's stockholders approved amendments to the 2004 Plan that included, among other things, giving the plan administrator the ability to grant "dividend equivalent" rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units, which represent the right to receive cash in lieu of dividends on such awards once the underlying awards vest. As of March 31, 2014, the Company had not granted dividend equivalent rights in connection with any such awards.
The following table shows pre-tax stock-based compensation expense for the indicated periods: 
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Stock-based compensation expense by:
 
 
 
 
 
 
 
Costs of revenues
$
1,688

 
$
2,912

 
$
7,186

 
$
8,811

Engineering, research and development
3,512

 
5,068

 
12,797

 
14,801

Selling, general and administrative
7,523

 
10,556

 
26,829

 
28,866

Total stock-based compensation expense
$
12,723

 
$
18,536

 
$
46,812

 
$
52,478


18

Table of Contents


The following table shows stock-based compensation capitalized as inventory as of the dates indicated below: 
(In thousands)
As of
March 31, 2014
 
As of
June 30, 2013
Inventory
$
8,524

 
$
8,098

Stock Options
The following table summarizes the activity and weighted-average exercise price for stock options under all plans during the nine months ended March 31, 2014: 
Stock Options
Shares
(In thousands)
 
Weighted-Average
Exercise Price
Outstanding stock options as of June 30, 2013
1,663

 
$
48.97

Granted

 
$

Exercised
(1,389
)
 
$
50.09

Canceled/expired/forfeited
(57
)
 
$
53.16

Outstanding stock options as of March 31, 2014 (all outstanding and all vested and exercisable)
217

 
$
40.72

The Company has not issued any stock options since November 1, 2007. The weighted-average remaining contractual terms for total options outstanding under all plans, and for total options vested and exercisable under all plans, as of March 31, 2014 were each 0.5 years. The aggregate intrinsic values for total options outstanding under all plans, and for total options vested and exercisable under all plans, as of March 31, 2014 were each $6.2 million.
The authoritative guidance on stock-based compensation permits companies to select the option-pricing model used to estimate the fair value of their stock-based compensation awards. The Black-Scholes option-pricing model requires the input of assumptions, including the option’s expected term and the expected price volatility of the underlying stock. For purposes of the fair value estimates presented in this report, the Company has based its expected stock price volatility assumption on the market-based implied volatility from traded options of the Company’s common stock. As of March 31, 2014, the Company had no unrecognized stock-based compensation balance related to stock options.
The following table shows the total intrinsic value of options exercised, total cash received from employees and non-employee Board members as a result of stock option exercises and tax benefits realized by the Company in connection with these stock option exercises for the indicated periods: 
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Total intrinsic value of options exercised
$
4,626

 
$
8,462

 
$
15,940

 
$
13,236

Total cash received from employees and non-employee Board members as a result of stock option exercises
$
13,334

 
$
48,685

 
$
70,065

 
$
75,403

Tax benefits realized by the Company in connection with these exercises
$
1,147

 
$
2,872

 
$
4,825

 
$
4,451

The Company generally settles employee stock option exercises with newly issued common shares, except in certain tax jurisdictions where settling such exercises with treasury shares provides the Company or one of its subsidiaries with a tax benefit.

19

Table of Contents


Restricted Stock Units
The following table shows the applicable number of restricted stock units and weighted-average grant date fair value for restricted stock units granted, vested and released, withheld for taxes, and forfeited during the nine months ended March 31, 2014 and restricted stock units outstanding as of March 31, 2014 and June 30, 2013: 
Restricted Stock Units
Shares
(In thousands) (1)
 
Weighted-Average
Grant Date
Fair Value
Outstanding restricted stock units as of June 30, 2013(2)
5,374

 
$
34.39

Granted(3)
702

 
$
53.28

Vested and released
(1,576
)
 
$
33.20

Withheld for taxes
(864
)
 
$
33.20

Forfeited
(236
)
 
$
37.53

Outstanding restricted stock units as of March 31, 2014(2) (3)
3,400

 
$
38.93

__________________ 
(1)
Share numbers reflect actual shares subject to awarded restricted stock units. As described above, under the terms of the 2004 Plan, the number of shares subject to each award reflected in this number is multiplied by either 1.8 or 2.0 (depending on the grant date of the award) to calculate the impact of the award on the share reserve under the 2004 Plan.
(2)
Includes 0.3 million restricted stock units granted to senior management during the nine months ended March 31, 2013 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of March 31, 2014, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.
(3)
Includes 0.3 million restricted stock units granted to senior management during the nine months ended March 31, 2014 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of March 31, 2014, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.
The restricted stock units granted by the Company since the beginning of the fiscal year ended June 30, 2013 generally vest (a) with respect to awards with only service-based vesting criteria, in four equal installments on the first, second, third and fourth anniversaries of the grant date and (b) with respect to awards with both performance-based and service-based vesting criteria, in two equal installments on the third and fourth anniversaries of the grant date, in each case subject to the recipient remaining employed by the Company as of the applicable vesting date. The restricted stock units granted by the Company from the beginning of the fiscal year ended June 30, 2007 through the fiscal year ended June 30, 2012 generally vest in two equal installments on the second and fourth anniversaries of the grant date, subject to the recipient remaining employed by the Company as of the applicable vesting date. The fair value is determined using the closing price of the Company’s common stock on the grant date for restricted stock units, adjusted to exclude the present value of dividends which do not accrue on restricted stock units granted by the Company to date. In November 2013, the Company's stockholders approved amendments to the 2004 Plan that included, among other things, giving the plan administrator the ability to grant "dividend equivalent" rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units, which represent the right to receive cash in lieu of dividends on such awards once the underlying awards vest. As of March 31, 2014, the Company had not granted dividend equivalent rights in connection with any such awards.
The restricted stock units have been awarded under the 2004 Plan, and each unit will entitle the recipient to one share of the Company's common stock when the applicable vesting requirements for that unit are satisfied. However, for each share actually issued under the awarded restricted stock units, the share reserve under the 2004 Plan will be reduced by 1.8 shares (for awards granted before November 6, 2013) or 2.0 shares (for awards granted on or after November 6, 2013), as provided under the terms of the 2004 Plan.

20

Table of Contents


The following table shows the weighted-average grant date fair value per unit for the restricted stock units granted and tax benefits realized by the Company in connection with vested and released restricted stock units for the indicated periods: 
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands, except for weighted-average grant date fair value)
2014
 
2013
 
2014
 
2013
Weighted-average grant date fair value per unit
$
56.48

 
$
51.95

 
$
53.28

 
$
47.71

Tax benefits realized by the Company in connection with vested and released restricted stock units
$
1,793

 
$
747

 
$
43,884

 
$
28,771

As of March 31, 2014, the unrecognized stock-based compensation expense balance related to restricted stock units was $88.2 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of 1.4 years. The intrinsic value of outstanding restricted stock units as of March 31, 2014 was $235.1 million.
Cash-Based Long-Term Incentive Compensation
Starting in fiscal year 2013, the Company adopted a cash-based long-term incentive program for many of its employees as part of the Company's employee compensation program. During the nine months ended March 31, 2014, the Company approved cash-based long-term incentive (“Cash LTI”) awards of $65.3 million under the Company's Cash Long-Term Incentive Plan (“Cash LTI Plan”). Cash LTI awards issued to employees under the Cash LTI Plan will vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date. Executives and non-employee Board members are not participating in this program. During the three months ended March 31, 2014 and 2013, the Company recognized $7.3 million and $3.6 million, respectively, in compensation expense under the Cash LTI Plan. During the nine months ended March 31, 2014 and 2013, the Company recognized $18.7 million and $7.1 million, respectively, in compensation expense under the Cash LTI Plan. As of March 31, 2014, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $93.7 million.
Employee Stock Purchase Plan
KLA-Tencor’s Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 10% of their eligible earnings toward the semi-annual purchase of KLA-Tencor’s common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).
Effective January 1, 2010, the offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date.
The Company estimates the fair value of purchase rights under the ESPP using a Black-Scholes valuation model. The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted-average assumptions: 
 
Three months ended
March 31,
 
Nine months ended
March 31,
 
2014
 
2013
 
2014
 
2013
Stock purchase plan:
 
 
 
 
 
 
 
Expected stock price volatility
25.8
%
 
27.5
%
 
27.5
%
 
28.9
%
Risk-free interest rate
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
Dividend yield
2.8
%
 
3.2
%
 
2.9
%
 
3.3
%
Expected life of options (in years)
0.5

 
0.5

 
0.5

 
0.5


21

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 The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, the tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods: 
(In thousands, except for weighted-average fair value per share)
Three months ended
March 31,
 
Nine months ended
March 31,
2014
 
2013
 
2014
 
2013
Total cash received from employees for the issuance of shares under the ESPP
$

 
$

 
$
22,035

 
$
20,139

Number of shares purchased by employees through the ESPP

 

 
469

 
496

Tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP
$
1,150

 
$
724

 
$
2,023

 
$
1,398

Weighted-average fair value per share based on Black-Scholes model
$
13.04

 
$
10.36

 
$
12.29

 
$
10.46

The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which KLA-Tencor estimates will be required to be issued under the ESPP during the forthcoming fiscal year. As of March 31, 2014, after giving effect to the ESPP purchase that occurred on such date, a total of 1.2 million shares were reserved and available for issuance under the ESPP. As of the date of this report, no additional shares have been added to the ESPP with respect to the fiscal year ending June 30, 2014.
NOTE 9 – STOCK REPURCHASE PROGRAM
Since July 1997, the Board of Directors has authorized the Company to systematically repurchase in the open market up to 80.8 million shares of its common stock under a repurchase program, including 8.0 million shares authorized in November 2012. The intent of this program is to offset the dilution from KLA-Tencor’s equity incentive plans and employee stock purchase plan, as well as to return excess cash to the Company’s stockholders. Subject to market conditions, applicable legal requirements and other factors, the repurchases will be made from time to time in the open market in compliance with applicable securities laws, including the Securities Exchange Act of 1934 and the rules promulgated thereunder, such as Rule 10b-18. As of March 31, 2014, 2.9 million shares were available for repurchase under the Company’s repurchase program.
Share repurchases for the indicated periods (based on the settlement date of the applicable repurchase) were as follows:
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Number of shares of common stock repurchased
930

 
1,289

 
2,927

 
4,115

Total cost of repurchases
$
59,880

 
$
68,343

 
$
180,686

 
$
204,943


NOTE 10 – NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying the Company’s outstanding dilutive stock options and restricted stock units had been issued. The dilutive effect of outstanding options and restricted stock units is reflected in diluted net income per share by application of the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that is to be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

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The following table sets forth the computation of basic and diluted net income per share:
(In thousands, except per share amounts)
Three months ended
March 31,
 
Nine months ended
March 31,
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income
$
203,581

 
$
166,382

 
$
454,024

 
$
408,379

Denominator:
 
 
 
 
 
 
 
Weighted-average shares-basic, excluding unvested restricted stock units
166,253

 
166,234

 
166,184

 
166,297

Effect of dilutive options and restricted stock units
1,736

 
2,946

 
2,171

 
3,128

Weighted-average shares-diluted
167,989

 
169,180

 
168,355

 
169,425

Basic net income per share
$
1.22

 
$
1.00

 
$
2.73

 
$
2.46

Diluted net income per share
$
1.21

 
$
0.98

 
$
2.70

 
$
2.41

Anti-dilutive securities excluded from the computation of diluted net income per share

 
967

 

 
1,556

The total amount of dividends paid by the Company during the three months ended March 31, 2014 and 2013 was $74.8 million and $66.6 million, respectively. The total amount of dividends paid by the Company during the nine months ended March 31, 2014 and 2013 was $224.4 million and $199.7 million, respectively.
NOTE 11 – INCOME TAXES
The following table provides details of income taxes:

Three months ended March 31,
 
Nine months ended March 31,
(Dollar amounts in thousands)
2014
 
2013
 
2014
 
2013
Income before income taxes
$
251,246

 
$
192,115

 
$
567,855

 
$
513,531

Provision for income taxes
$
47,665

 
$
25,733

 
$
113,831

 
$
105,152

Effective tax rate
19.0
%
 
13.4
%
 
20.0
%
 
20.5
%
The Company’s estimated annual effective tax rate for the fiscal year ending June 30, 2014 is approximately 20.6%.
The difference between the actual effective tax rate of 19.0% during the the three months ended March 31, 2014 and the estimated annual effective tax rate of 20.6% is primarily due to a decrease in tax expense of $5.5 million related to a decrease in the Company's unrecognized tax benefits resulting from the expiration of the statute of limitations.
Tax expense was higher as a percentage of income before taxes during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to a decrease in tax expenses of $15.6 million during the three months ended March 31, 2013 related to the U.S. federal research credit. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which reinstated the research credit retroactive to January 1, 2012 and extended the credit through December 31, 2013, enabling the Company to recognize a retroactive tax credit for prior periods during the three months ended March 31, 2013.

23

Table of Contents


Tax expense as a percentage of income before taxes during the nine months ended March 31, 2014 was relatively flat compared to the nine months ended March 31, 2013 and was by impacted the following items:
Tax expense was decreased by $8.7 million during the nine months ended March 31, 2013 related to the U.S. federal research credit. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which reinstated the research credit retroactive to January 1, 2012 and extended the credit through December 31, 2013, enabling the Company to recognize a retroactive tax credit for prior periods during the nine months ended March 31, 2013; offset by a
Decrease in tax expense of $8.6 million during the nine months ended March 31, 2014 related to an increase in the proportion of the Company's earnings generated in jurisdictions with tax rates lower than the U.S. statutory tax rate.
In the normal course of business, the Company is subject to examination by tax authorities throughout the world. The Company is subject to U.S. federal income tax examination for all years beginning from the fiscal year ended June 30, 2011. The Company is subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2009. The Company is also subject to examinations in other major foreign jurisdictions, including Singapore, for all years beginning from the fiscal year ended June 30, 2009. It is possible that certain examinations may be concluded in the next twelve months. The Company believes it is possible that it may recognize up to $9.9 million of its existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of examinations with various tax authorities.
NOTE 12 – LITIGATION AND OTHER LEGAL MATTERS
The Company is named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of its business. Actions filed against the Company include commercial, intellectual property, customer, and labor and employment related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws. In general, legal proceedings and claims, regardless of their merit, and associated internal investigations (especially those relating to intellectual property or confidential information disputes) are often expensive to prosecute, defend or conduct and may divert management's attention and other company resources. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome. The Company believes the amounts provided in its condensed consolidated financial statements are adequate in light of the probable and estimated liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable, and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in the Company's condensed consolidated financial statements or will not have a material adverse effect on its financial condition, results of operations, comprehensive income or cash flows.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Factoring. KLA-Tencor has agreements (referred to as “factoring agreements”) with financial institutions to sell certain of its trade receivables and promissory notes from customers without recourse. The Company does not believe it is at risk for any material losses as a result of these agreements. In addition, the Company periodically sells certain letters of credit (“LCs”), without recourse, received from customers in payment for goods.
The following table shows total receivables sold under factoring agreements and proceeds from sales of LCs for the indicated periods:
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Receivables sold under factoring agreements
$
27,195

 
$
44,400

 
$
83,489

 
$
129,960

Proceeds from sales of LCs
$

 
$
3,804

 
$

 
$
3,804

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

24

Table of Contents


Facilities. KLA-Tencor leases certain of its facilities under arrangements that are accounted for as operating leases. Rent expense was $2.1 million and $2.4 million for the three months ended March 31, 2014 and 2013, respectively. Rent expense was $6.5 million and $7.0 million for the nine months ended March 31, 2014 and 2013, respectively.
The following is a schedule of expected operating lease payments:
Fiscal year ending June 30,
Amount
(In thousands)
2014 (remaining 3 months)
$
2,173

2015
8,107

2016
6,534

2017
5,089

2018
3,767

2019 and thereafter
3,739

Total minimum lease payments
$
29,409

Purchase Commitments. KLA-Tencor maintains certain open inventory purchase commitments with its suppliers to ensure a smooth and continuous supply for key components. The Company’s liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers. The Company’s open inventory purchase commitments were approximately $234.5 million as of March 31, 2014 and are primarily due within the next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.
Cash Long-Term Incentive Plan. As of March 31, 2014, the Company had committed $107.8 million for future payment obligations under its Cash LTI Plan. The calculation of compensation expense related to the Cash LTI Plan includes estimated forfeiture rate assumptions. Cash LTI awards issued to employees under the Cash LTI Plan vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date.
Warranties, Guarantees and Contingencies. KLA-Tencor provides standard warranty coverage on its systems for 40 hours per week for 12 months, providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost as a charge to costs of revenues when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. Utilizing actual service records, the Company calculates the average service hours and parts expense per system and applies the actual labor and overhead rates to determine the estimated warranty charge. The Company updates these estimated charges on a quarterly basis. The actual product performance and/or field expense profiles may differ, and in those cases the Company adjusts its warranty accruals accordingly.
The following table provides the changes in the product warranty accrual for the indicated periods:
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Beginning balance
$
41,599

 
$
41,918

 
$
42,603

 
$
46,496

Accruals for warranties issued during the period
10,799

 
11,539

 
36,096

 
32,047

Changes in liability related to pre-existing warranties
(841
)
 
1,167

 
(6,650
)
 
2,899

Settlements made during the period
(10,408
)
 
(13,568
)
 
(30,900
)
 
(40,386
)
Ending balance
$
41,149

 
$
41,056

 
$
41,149

 
$
41,056

The Company maintains guarantee arrangements available through various financial institutions for up to $27.3 million, of which $25.5 million had been issued as of March 31, 2014, primarily to fund guarantees to customs authorities for value-added tax (“VAT”) and other operating requirements of the Company’s subsidiaries in Europe and Asia.

25

Table of Contents

KLA-Tencor is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from, or provides customers with other remedies to protect against, bodily injury or damage to personal property caused by the Company's products, non-compliance with the Company's product performance specifications, infringement by the Company's products of third-party intellectual property rights and a breach of warranties, representations and covenants related to matters such as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to and cooperating with the Company pursuant to the procedures specified in the particular contract. This usually allows the Company to challenge the other party's claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, the Company's obligations under these agreements may be limited in terms of amounts, activity (typically at the Company's option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, the Company may have recourse against third parties and/or insurance covering certain payments made by the Company.
Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to the Company. These obligations arise under the terms of the Company's certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals' reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters.
In addition, the Company may in limited circumstances enter into agreements that contain customer-specific pricing, discount, rebate or credit commitments. Furthermore, the Company may give these customers limited audit or inspection rights to enable them to confirm that the Company is complying with these commitments. If a customer elects to exercise its audit or inspection rights, the Company may be required to expend significant resources to support the audit or inspection, as well as to defend or settle any dispute with a customer that could potentially arise out of such audit or inspection. To date, the Company has made no accruals in its condensed consolidated financial statements for this contingency. While the Company has not in the past incurred significant expenses for resolving disputes regarding these types of commitments, the Company cannot make any assurance that it will not incur any such liabilities in the future.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on its business, financial condition, results of operations or cash flows.
NOTE 14 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The authoritative guidance requires companies to recognize all derivative instruments and hedging activities, including foreign currency exchange contracts, as either assets or liabilities at fair value on the balance sheet. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are reflected in the Condensed Consolidated Statement of Operations. In accordance with the guidance, the Company designates foreign currency forward exchange and option contracts as cash flow hedges of certain forecasted foreign currency denominated sales and purchase transactions.
KLA-Tencor’s foreign subsidiaries operate and sell KLA-Tencor’s products in various global markets. As a result, KLA-Tencor is exposed to risks relating to changes in foreign currency exchange rates. KLA-Tencor utilizes foreign currency forward exchange contracts and option contracts to hedge against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro, the New Taiwan dollar and the Israeli new shekel. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These currency forward exchange contracts and options, designated as cash flow hedges, generally have maturities of less than 18 months. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of the Company’s hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, the Company may experience material losses.

26

Table of Contents

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gains or losses on the derivative is reported as a component of accumulated other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
For derivative instruments that are not designated as accounting hedges, gains and losses are recognized in interest income and other, net. The Company uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivatives are largely offset by the changes in the fair value of the assets or liabilities being hedged.
Derivatives in Cash Flow Hedging Relationships: Foreign Exchange Contracts
The locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the condensed consolidated financial statements for the indicated periods were as follows:
 
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
Location in Financial Statements
2014
 
2013
 
2014
 
2013
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
 
Gains (losses) in accumulated OCI on derivatives (effective portion)
Accumulated OCI
$
(1,752
)
 
$
842

 
$
1,821

 
$
2,843

Gains (losses) reclassified from accumulated OCI into income (effective portion):
Revenues
$
895

 
$
720

 
$
3,217

 
$
146

 
Costs of revenues
39

 
128

 
255

 
(262
)
 
Total gains (losses) reclassified from accumulated OCI into income (effective portion)
$
934

 
$
848

 
$
3,472

 
$
(116
)
Gains recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Interest income and other, net
$
38

 
$
61

 
$
64

 
$
73

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
Gains (losses) recognized in income
Interest income and other, net
$
(1,179
)
 
$
4,514

 
$
4,168

 
$
14,408

The U.S. dollar equivalent of all outstanding notional amounts of hedge contracts, with maximum maturity of 13 months, as of the dates indicated below was as follows: 
(In thousands)
As of
March 31, 2014
 
As of
June 30, 2013
Cash flow hedge contracts
 
 
 
Purchase
$
7,598

 
$
14,641

Sell
$
38,773

 
$
35,178

Other foreign currency hedge contracts
 
 
 
Purchase
$
122,156

 
$
99,175

Sell
$
143,774

 
$
97,901


27

Table of Contents

The locations and fair value amounts of the Company’s derivative instruments reported in its Condensed Consolidated Balance Sheets as of the dates indicated below were as follows: 
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
As of
March 31, 2014
 
As of
June 30, 2013
 
Balance Sheet Location
 
As of
March 31, 2014
 
As of
June 30, 2013
(In thousands)
 
Fair Value
 
 
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
460

 
$
362

 
Other current liabilities
 
$
115

 
$
384

Total derivatives designated as hedging instruments
 
 
$
460

 
$
362

 
 
 
$
115

 
$
384

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
2,193

 
$
3,654

 
Other current liabilities
 
$
845

 
$
1,789

Total derivatives not designated as hedging instruments
 
 
$
2,193

 
$
3,654

 
 
 
$
845

 
$
1,789

Total derivatives
 
 
$
2,653

 
$
4,016

 
 
 
$
960

 
$
2,173

The following table provides the balances and changes in accumulated OCI, before taxes, related to derivative instruments for the indicated periods:
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Beginning balance
$
3,519

 
$
2,003

 
$
2,484

 
$
(962
)
Amount reclassified to income
(934
)
 
(848
)
 
(3,472
)
 
116

Net change
(1,752
)
 
842

 
1,821

 
2,843

Ending balance
$
833

 
$
1,997

 
$
833

 
$
1,997


28

Table of Contents