KLA Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Equity and Long-Term Incentive Compensation Plans

Equity and Long-Term Incentive Compensation Plans

12 Months Ended

Jun. 30, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS

NOTE 8 — EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS

Equity Incentive Program

As of June 30, 2017, the Company had two plans under which the Company was able to issue equity incentive awards, such as restricted stock units and stock options, to its employees, consultants and members of its Board of Directors: the 2004 Equity Incentive Plan (the “2004 Plan”) and the 1998 Director Plan (the “Outside Director Plan”).

2004 Plan:

The 2004 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock units, performance shares, performance units and deferred stock units to the Company’s employees, consultants and members of its Board of Directors. As of June 30, 2017, 3.1 million shares were available for issuance under the 2004 Plan.

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.

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

Outside Director Plan

The Outside Director Plan only permits the issuance of stock options to the non-employee members of the Board of Directors. As of June 30, 2017, 1.7 million shares were available for grant under the Outside Director Plan.

Equity Incentive Plans - General Information

The following table summarizes the combined activity under the Company’s equity incentive plans for the indicated periods:



(In thousands)	Available For Grant
Balances as of June 30, 2014	8,804
Restricted stock units granted⁽¹⁾⁽³⁾	(1,191	)
Restricted stock units canceled⁽¹⁾	196
Options canceled/expired/forfeited	11
Plan shares expired⁽²⁾	(10	)
Balances as of June 30, 2015⁽⁴⁾	7,810
Restricted stock units granted⁽¹⁾⁽³⁾	(1,541	)
Restricted stock units canceled⁽¹⁾	509
Balances as of June 30, 2016	6,778
Restricted stock units granted⁽¹⁾⁽³⁾	(2,169	)
Restricted stock units canceled⁽¹⁾	101
Balances as of June 30, 2017	4,710

__________________


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

(2)

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 and 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, expired or forfeited under any other Company equity incentive plan do not result in additional shares being available to the Company for future grant.

(3)

Includes restricted stock units granted to senior management 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 June 30, 2017, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied. Therefore, this line item includes all performance-based restricted stock units granted during the fiscal year, reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (84 thousand shares, 0.7 million shares and 0.6 million shares for the fiscal years ended June 30, 2017, 2016 and 2015, respectively, after application of the 1.8x or 2.0x multiplier described above).

(4)

During the fiscal year ended June 30, 2015, the Company adjusted the number of shares subject to outstanding options under the 2004 Plan by an aggregate of 4,245 shares pursuant to a proportionate and equitable adjustment for the effect of the special cash dividend, as required by the 2004 Plan. The total number of outstanding options under the 2004 Plan as well as the associated exercise prices were adjusted to ensure the aggregate intrinsic value remained the same after considering the effect of the special cash dividend. As the adjustment was required by the 2004 Plan, under the authoritative guidance, the adjustment to the outstanding awards did not result in any incremental compensation expense. Additionally, the adjustment did not have an impact on the shares available for future issuance under the 2004 Plan.

The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For restricted stock units granted without “dividend equivalent” rights, fair value is calculated using the closing price of the Company’s common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on those restricted stock units. The fair value for restricted stock units granted with “dividend equivalent” rights is determined using the closing price of the Company’s common stock on the grant date. As of June 30, 2017, the Company accrued $13.8 million of dividends payable, which included both a special cash dividend and quarterly cash dividends for the unvested restricted stock units outstanding as of the dividend record date. The fair value for purchase rights under the Company’s Employee Stock Purchase Plan is determined using a Black-Scholes valuation model.

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



	Year ended June 30,
(In thousands)	2017		2016		2015
Stock-based compensation expense by:
Costs of revenues	$	5,338	$	4,689	$	7,242
Research and development	8,089		8,618		12,259
Selling, general and administrative	37,516		31,743		35,801
Total stock-based compensation expense	$	50,943	$	45,050	$	55,302

As a result of the early adoption of the accounting standard update on accounting for share-based payment awards in the first quarter of its fiscal year ended June 30, 2017, the Company recorded excess tax benefits in the provision for income taxes of $6.6 million. See Note 1, “Description of Business and Summary of Significant Accounting Policies” for additional details.

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



(In thousands)	As of June 30,
(In thousands)	2017		2016
Inventory	$	2,820	$	2,685

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 fiscal year ended June 30, 2017 and restricted stock units outstanding as of June 30, 2017 and 2016:



Restricted Stock Units	Shares (In thousands) ⁽¹⁾		Weighted-Average Grant Date Fair Value
Outstanding restricted stock units as of June 30, 2016⁽²⁾	1,849		$	56.41
Granted⁽²⁾	1,085		$	78.83
Vested and released	(383	)	$	52.73
Withheld for taxes	(259	)	$	52.73
Forfeited	(51	)	$	59.77
Outstanding restricted stock units as of June 30, 2017⁽²⁾	2,241		$	68.24

__________________


(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 1.8x or 2.0x (depending on the grant date of the award) to calculate the impact of the award on the share reserve under the 2004 Plan.

(2)

Includes restricted stock units granted to senior management 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 June 30, 2017, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied. Therefore, this line item includes all performance-based restricted stock units, reported at the maximum possible number of shares (i.e., 42 thousand shares the fiscal years ended June 30, 2017 and 0.3 million shares for each of the fiscal years ended June 30, 2016 and 2015) that may ultimately be issuable 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 generally vest (a) with respect to awards with only service-based vesting criteria, in three or four equal installments 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 to the independent members of the board of directors vest on the first anniversary of the date of grant.

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



(In thousands, except for weighted-average grant date fair value)	Year ended June 30,
	2017		2016		2015
Weighted-average grant date fair value per unit	$	78.83	$	51.12	$	74.48
Grant date fair value of vested restricted stock units	$	33,820	$	51,992	$	38,859
Tax benefits realized by the Company in connection with vested and released restricted stock units	$	15,829	$	27,412	$	26,250

As of June 30, 2017, the unrecognized stock-based compensation expense balance related to restricted stock units was $99.4 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 June 30, 2017 was $205.1 million.

Cash-Based Long-Term Incentive Compensation

The Company has adopted a cash-based long-term incentive (“Cash LTI”) program for many of its employees as part of the Company’s employee compensation program. During the fiscal years ended June 30, 2017 and 2016, the Company approved Cash LTI awards of $96.7 million and $49.3 million, respectively, 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 three or four equal installments, with one-third or one-fourth of the aggregate amount of the Cash LTI award vesting on each anniversary of the grant date over a three or four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date. Executives and non-employee Board members are not participating in this program. During the fiscal years ended June 30, 2017, 2016 and 2015, the Company recognized $48.8 million, $44.6 million and $39.6 million, respectively, in compensation expense under the Cash LTI Plan. As of June 30, 2017, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $127.7 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).

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:



	Year ended June 30,
	2017		2016		2015
Stock purchase plan:
Expected stock price volatility	23.4	%	25.4	%	24.5	%
Risk-free interest rate	0.5	%	0.2	%	0.1	%
Dividend yield	2.8	%	3.3	%	2.8	%
Expected life (in years)	0.50		0.50		0.50

The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, the tax benefits realized by 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)	Year ended June 30,
	2017		2016		2015
Total cash received from employees for the issuance of shares under the ESPP	$	45,358	$	38,295	$	41,116
Number of shares purchased by employees through the ESPP	705		735		759
Tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP	$	1,999	$	2,194	$	1,741
Weighted-average fair value per share based on Black-Scholes model	$	15.16	$	12.48	$	14.55

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 June 30, 2017, a total of 684 thousand shares were reserved and available for issuance under the ESPP.

Quarterly cash dividends

On May 4, 2017, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.54 per share on the outstanding shares of the Company’s common stock, which was paid on June 1, 2017 to the stockholders of record as of the close of business on May 15, 2017. The total amount of regular quarterly cash dividends paid by the Company during the fiscal years ended June 30, 2017 and 2016 was $335.4 million and $324.5 million, respectively. The amount of accrued dividends payable for regular quarterly cash dividends on unvested restricted stock units with dividend equivalent rights was $4.8 million and $2.7 million as of June 30, 2017 and 2016, respectively. These amounts will be paid upon vesting of the underlying restricted stock units. Refer to Note 19, “Subsequent Events” for additional information regarding the declaration of the quarterly cash divided announced subsequent to June 30, 2017.

Special cash dividend

On November 19, 2014, the Company’s Board of Directors declared a special cash dividend of $16.50 per share, which was paid on December 9, 2014 to the stockholders of record as of the close of business on December 1, 2014. Additionally, in connection with the special cash dividend, the Company’s Board of Directors and the Compensation Committee of the Board of Directors approved a proportionate and equitable adjustment to outstanding equity awards (restricted stock units and stock options), as required under the 2004 Plan, subject to the vesting requirements of the underlying awards. As the adjustment was required by the 2004 Plan, the adjustment to the outstanding awards did not result in any incremental compensation expense due to modification of such awards, under the authoritative guidance. Under the authoritative guidance, the dividend when declared is recognized as a reduction of retained earnings, to the extent available, with any shortfall recognized as a reduction of additional paid-in-capital. The special cash dividend reduced the retained earnings by $2.11 billion as of the special cash dividend declaration date, reducing the retained earnings amount to zero and the excess amount of the special cash dividend of $646.5 million was charged against additional paid-in capital. The declaration and payment of the special cash dividend were part of the Company’s leveraged recapitalization transaction under which the special cash dividend was financed through a combination of existing cash and proceeds from the debt financing disclosed in Note 7, “Debt” that was completed during the three months ended December 31, 2014. The total amount of the special cash dividend accrued by the Company during the three months ended December 31, 2014 was approximately $2.76 billion, substantially all of which was paid out during the three months ended December 31, 2014, except for the aggregate special cash dividend of $43.0 million that was accrued for the unvested restricted stock units. As of June 30, 2017 and 2016, the Company had a total of $9.0 million and $16.9 million, respectively, of accrued dividends payable for the special cash dividend with respect to outstanding unvested restricted stock units, which will be paid when such underlying unvested restricted stock units vest. The Company paid a special cash dividend with respect to vested restricted stock units during the fiscal years ended June 30, 2017 and 2016 of $8.6 million and $21.8 million respectively. Other than the special cash dividend declared during the three months ended December 31, 2014, the Company historically has not declared any special cash dividend.