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, 2012

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. Through March 31, 2011, the Company matched a portion of each participating eligible employee's 401(k) contribution equal to 50% of the first $6,000 of the employee’s contribution (i.e., a maximum of $3,000) during each fiscal year. The Company's Board of Directors approved an amendment to the Company's 401(k) plan effective April 1, 2011 to increase the employer match amount to 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 $12.6 million, $11.6 million and $6.4 million in the fiscal years ended June 30, 2012, 2011 and 2010, 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 with an offsetting amount in accumulated other comprehensive income (loss). 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, 2012 and 2011.

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)	2012			2011
Change in projected benefit obligation
Projected benefit obligation as of the beginning of the fiscal year	$	56,810		$	46,344
Service cost, including plan participant contributions	3,355			3,184
Interest cost	1,406			1,270
Contributions by plan participants	132			126
Adjustment	148			9
Actuarial loss	6,582			1,363
Benefit payments	(789		)	(1,357		)
Foreign currency exchange rate changes	(2,218		)	5,871
Projected benefit obligation as of the end of the fiscal year	$	65,426		$	56,810

	Year ended June 30,
(In thousands)	2012			2011
Change in fair value of plan assets
Fair value of plan assets as of the beginning of the fiscal year	$	11,035		$	8,692
Actual return on plan assets	68			78
Employer contributions	1,926			2,024
Benefit and expense payments	(541		)	(1,010		)
Foreign currency exchange rate changes	(779		)	1,251
Fair value of plan assets as of the end of the fiscal year	$	11,709		$	11,035



	As of June 30,
(In thousands)	2012			2011
Funded status
Ending funded status	$	(53,717	)	$	(45,775	)
Net amount recognized	$	(53,717	)	$	(45,775	)

	As of June 30,
(In thousands)	2012			2011
Plans with accumulated benefit obligations in excess of plan assets
Accumulated benefit obligation	$	28,844		$	39,748
Projected benefit obligation	$	65,426		$	56,810
Plan assets at fair value	$	11,709		$	11,035



	Year ended June 30,
	2012	2011	2010
Weighted-average assumptions
Discount rate	1.3%-5.5%	1.8%-5.5%	1.8%-4.9%
Expected return on assets	1.8%-4.5%	1.8%-4.5%	1.8%-4.5%
Rate of compensation increases	3.0%-4.5%	3.0%-4.0%	3.0%-4.0%

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.

Amounts recognized in accumulated other comprehensive income (loss) consist of:



	Year ended June 30,
(In thousands)	2012		2011
Unrecognized transition obligation	$	1,868	$	2,318
Unrecognized prior service cost	392		450
Unrealized net loss	15,408		9,288
Amount recognized	$	17,668	$	12,056

Amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the fiscal year ending June 30, 2013 are as follows:



(In thousands)	Year ending June 30, 2013
Unrecognized transition obligation	$	374
Unrecognized prior service cost	65
Unrealized net loss	580
Amount expected to be recognized	$	1,019

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)	2012			2011			2010
Components of net periodic pension cost
Service cost, net of plan participant contributions	$	3,355		$	3,184		$	2,249
Interest cost	1,406			1,270			1,020
Return on plan assets	(309		)	(289		)	(215		)
Amortization of transitional obligation	380			366			28
Amortization of prior service cost	64			61			44
Amortization of net loss	292			178			98
Acquisitions	—			—			313
Adjustment	—			—			3,154
Net periodic pension cost	$	5,188		$	4,770		$	6,691

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 that may be used to measure fair value of plan assets are as follows:



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.

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, 2012, 2011 and 2010.

Expected employer contribution for the foreign plans during the fiscal year ending June 30, 2013 is $1.4 million.

The total benefits to be paid from the foreign pension plans are not expected to exceed $3.7 million in any year through 2022.

Foreign plan assets measured at fair value on a recurring basis consisted of the following investment categories as of June 30, 2012:



(In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	8,405	$	8,405	$	—
Government, municipal securities, and other	3,304		—		3,304
Total assets measured at fair value	$	11,709	$	8,405	$	3,304

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, 2012, the Company did not have concentrations of risk in any single entity, manager, counterparty, sector, industry or country.