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, 2014

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 $15.4 million, $13.1 million and $12.6 million in the fiscal years ended June 30, 2014, 2013 and 2012, 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 in its statement of financial position. 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, 2014 and 2013.

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)	2014			2013
Change in projected benefit obligation:
Projected benefit obligation as of the beginning of the fiscal year	$	71,276		$	65,426
Service cost	4,054			3,399
Interest cost	1,401			1,320
Contributions by plan participants	102			85
Adjustment	—			(1,878		)
Actuarial loss	1,927			8,792
Benefit payments	(1,910		)	(767		)
Foreign currency exchange rate changes	185			(5,101		)
Projected benefit obligation as of the end of the fiscal year	$	77,035		$	71,276

	Year ended June 30,
(In thousands)	2014			2013
Change in fair value of plan assets:
Fair value of plan assets as of the beginning of the fiscal year	$	13,317		$	11,709
Actual return on plan assets	274			202
Employer contributions	3,229			2,083
Benefit and expense payments	(1,910		)	(767		)
Foreign currency exchange rate changes	253			90
Fair value of plan assets as of the end of the fiscal year	$	15,163		$	13,317



	As of June 30,
(In thousands)	2014		2013
Underfunded status	$	61,872	$	57,959

	As of June 30,
(In thousands)	2014		2013
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation	$	47,122	$	45,181
Projected benefit obligation	$	77,035	$	71,276
Plan assets at fair value	$	15,163	$	13,317



	Year ended June 30,
	2014	2013	2012
Weighted-average assumptions:
Discount rate	1.5%-3.5%	1.5%-3.5%	1.3%-5.5%
Expected rate of return on assets	1.8%-3.8%	1.8%-4.0%	1.8%-4.5%
Rate of compensation increases	3.0%-5.5%	3.0%-5.0%	3.0%-4.5%

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) related to the Company's foreign defined benefit pension plans:



	Year ended June 30,
(In thousands)	2014		2013
Unrecognized transition obligation	$	772	$	1,029
Unrecognized prior service cost	225		278
Unrealized net loss	23,645		22,633
Amount of losses recognized	$	24,642	$	23,940

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, 2015 are as follows:



(In thousands)	Year ending June 30, 2015
Unrecognized transition obligation	$	262
Unrecognized prior service cost	51
Unrealized net loss	1,005
Amount of losses expected to be recognized	$	1,318

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)	2014			2013			2012
Components of net periodic pension cost
Service cost	$	4,054		$	3,399		$	3,355
Interest cost	1,401			1,320			1,406
Return on plan assets	(321		)	(315		)	(309		)
Amortization of transitional obligation	262			372			380
Amortization of prior service cost	52			58			64
Amortization of net loss	1,021			633			292
Adjustment	—			(1,436		)	—
Net periodic pension cost	$	6,469		$	4,031		$	5,188

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, 2014, 2013 and 2012.

The expected aggregate employer contribution for the foreign plans during the fiscal year ending June 30, 2015 is $1.7 million.

The total benefits to be paid from the foreign pension plans are not expected to exceed $3.2 million in any year through the fiscal year ending June 30, 2024.

Foreign plan assets measured at fair value on a recurring basis consisted of the following investment categories as of June 30, 2014:



(In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	11,061	$	11,061	$	—
Government and municipal securities and other investments	4,102		—		4,102
Total assets measured at fair value	$	15,163	$	11,061	$	4,102

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, 2014, the Company did not have concentrations of plan asset investment risk in any single entity, manager, counterparty, sector, industry or country.