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

Annual report pursuant to Section 13 and 15(d)

Employee Benefit Plans

Employee Benefit Plans

12 Months Ended

Jun. 30, 2017

NOTE 11 — EMPLOYEE BENEFIT PLANS

KLA-Tencor has a profit sharing program for eligible employees, which distributes, on a quarterly basis, a percentage of the Company’s pre-tax profits. In addition, the Company has an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Since April 1, 2011, the employer match amount was 50% of the first $8,000 of an eligible employee’s contribution (i.e., a maximum of $4,000) during each fiscal year.

The total expenses under the profit sharing and 401(k) programs aggregated $15.3 million, $15.3 million and $14.2 million in the fiscal years ended June 30, 2017, 2016 and 2015, respectively. The Company has no defined benefit plans in the United States. In addition to the profit sharing plan and the United States 401(k), several of the Company’s foreign subsidiaries have retirement plans for their full-time employees, several of which are defined benefit plans. Consistent with the requirements of local law, the Company deposits funds for certain of these plans with insurance companies, with third-party trustees or into government-managed accounts and/or accrues for the unfunded portion of the obligation. The assumptions used in calculating the obligation for the foreign plans depend on the local economic environment.

The Company applies authoritative guidance that requires an employer to recognize the funded status of each of its defined pension and post-retirement benefit plans as a net asset or liability on its balance sheets. Additionally, the authoritative guidance requires an employer to measure the funded status of each of its plans as of the date of its year-end statement of financial position. The benefit obligations and related assets under the Company’s plans have been measured as of June 30, 2017 and 2016.

Summary data relating to the Company’s foreign defined benefit pension plans, including key weighted-average assumptions used, is provided in the following tables:



	Year ended June 30,
(In thousands)	2017			2016
Change in projected benefit obligation:
Projected benefit obligation as of the beginning of the fiscal year	$	89,923		$	75,928
Service cost	4,015			3,349
Interest cost	1,117			1,322
Contributions by plan participants	76			163
Actuarial loss	2,991			9,029
Benefit payments	(1,363		)	(2,517		)
Foreign currency exchange rate changes and others, net	506			2,649
Projected benefit obligation as of the end of the fiscal year	$	97,265		$	89,923

	Year ended June 30,
(In thousands)	2017			2016
Change in fair value of plan assets:
Fair value of plan assets as of the beginning of the fiscal year	$	18,894		$	17,038
Actual return on plan assets	241			588
Employer contributions	3,330			4,330
Benefit and expense payments	(1,363		)	(2,517		)
Foreign currency exchange rate changes and others, net	678			(545		)
Fair value of plan assets as of the end of the fiscal year	$	21,780		$	18,894



	As of June 30,
(In thousands)	2017		2016
Underfunded status	$	75,485	$	71,029

	As of June 30,
(In thousands)	2017		2016
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation	$	56,967	$	53,198
Projected benefit obligation	$	97,265	$	89,923
Plan assets at fair value	$	21,780	$	18,894



	Year ended June 30,
	2017	2016	2015
Weighted-average assumptions:
Discount rate	0.8%-1.9%	0.5%-2.0%	1.3%-2.0%
Expected rate of return on assets	1.5%-2.9%	1.8%-2.5%	1.8%-2.5%
Rate of compensation increases	3.0%-5.8%	3.0%-5.8%	3.0%-5.5%

The assumptions for expected rate of return on assets were developed by considering the historical returns and expectations of future returns relevant to the country in which each plan is in effect and the investments applicable to the corresponding plan. The discount rate for each plan was derived by reference to appropriate benchmark yields on high quality corporate bonds, allowing for the approximate duration of both plan obligations and the relevant benchmark index.

The following table presents losses recognized in accumulated other comprehensive income (loss) before tax related to the Company’s foreign defined benefit pension plans:



	Year ended June 30,
(In thousands)	2017		2016
Unrecognized transition obligation	$	190	$	108
Unrecognized prior service cost	51		113
Unrealized net loss	33,477		31,739
Amount of losses recognized	$	33,718	$	31,960

Losses in accumulated other comprehensive income (loss) related to the Company’s foreign defined benefit pension plans expected to be recognized as components of net periodic benefit cost over the fiscal year ending June 30, 2018 are as follows:



(In thousands)	Year ending June 30, 2018
Unrecognized transition obligation	$	—
Unrecognized prior service cost	26
Unrealized net loss	1,436
Amount of losses expected to be recognized	$	1,462

The components of the Company’s net periodic cost relating to its foreign subsidiaries’ defined pension plans are as follows:



	Year ended June 30,
(In thousands)	2017			2016			2015
Components of net periodic pension cost:
Service cost	$	4,015		$	3,349		$	3,905
Interest cost	1,117			1,322			1,562
Return on plan assets	(393		)	(406		)	(450		)
Amortization of transitional obligation	251			249			259
Amortization of prior service cost	46			46			46
Amortization of net loss	1,617			1,132			1,014
Adjustment	—			—			(177		)
Net periodic pension cost	$	6,653		$	5,692		$	6,159

Fair Value of Plan Assets

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of inputs used to measure fair value of plan assets are described in Note 2, “Fair Value Measurements.”

The foreign plans’ investments are managed by third-party trustees consistent with the regulations or market practice of the country where the assets are invested. The Company is not actively involved in the investment strategy, nor does it have control over the target allocation of these investments. These investments made up 100% of total foreign plan assets in the fiscal years ended June 30, 2017 and 2016.

The expected aggregate employer contribution for the foreign plans during the fiscal year ending June 30, 2018 is $2.1 million.

The total benefits to be paid from the foreign pension plans are not expected to exceed $3.0 million in any year through the fiscal year ending June 30, 2027.

Foreign plan assets measured at fair value on a recurring basis consisted of the following investment categories as of June 30, 2017 and 2016, respectively:



As of June 30, 2017 (In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	13,784	$	13,784	$	—
Bonds, equity securities and other investments	7,996		—		7,996
Total assets measured at fair value	$	21,780	$	13,784	$	7,996

As of June 30, 2016 (In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	11,950	$	11,950	$	—
Bonds, equity securities and other investments	6,944		—		6,944
Total assets measured at fair value	$	18,894	$	11,950	$	6,944

Concentration of Risk

The Company manages a variety of risks, including market, credit and liquidity risks, across its plan assets through its investment managers. The Company defines a concentration of risk as an undiversified exposure to one of the above-mentioned risks that increases the exposure of the loss of plan assets unnecessarily. The Company monitors exposure to such risks in the foreign plans by monitoring the magnitude of the risk in each plan and diversifying the Company’s exposure to such risks across a variety of instruments, markets and counterparties. As of June 30, 2017, the Company did not have concentrations of plan asset investment risk in any single entity, manager, counterparty, sector, industry or country.