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, 2013

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 $13.1 million, $12.6 million and $11.6 million in the fiscal years ended June 30, 2013, 2012 and 2011, 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, 2013 and 2012.

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)	2013			2012
Change in projected benefit obligation
Projected benefit obligation as of the beginning of the fiscal year	$	65,426		$	56,810
Service cost	3,399			3,355
Interest cost	1,320			1,406
Contributions by plan participants	85			132
Adjustment	(1,878		)	148
Actuarial loss	8,792			6,582
Benefit payments	(767		)	(789		)
Foreign currency exchange rate changes	(5,101		)	(2,218		)
Projected benefit obligation as of the end of the fiscal year	$	71,276		$	65,426

	Year ended June 30,
(In thousands)	2013			2012
Change in fair value of plan assets
Fair value of plan assets as of the beginning of the fiscal year	$	11,709		$	11,035
Actual return on plan assets	202			68
Employer contributions	2,083			1,926
Benefit and expense payments	(767		)	(541		)
Foreign currency exchange rate changes	90			(779		)
Fair value of plan assets as of the end of the fiscal year	$	13,317		$	11,709



	As of June 30,
(In thousands)	2013			2012
Funded status
Ending funded status	$	(57,959	)	$	(53,717	)
Net amount recognized	$	(57,959	)	$	(53,717	)

	As of June 30,
(In thousands)	2013			2012
Plans with accumulated benefit obligations in excess of plan assets
Accumulated benefit obligation	$	45,181		$	44,733
Projected benefit obligation	$	71,276		$	65,426
Plan assets at fair value	$	13,317		$	11,709



	Year ended June 30,
	2013	2012	2011
Weighted-average assumptions
Discount rate	1.5%-3.5%	1.3%-5.5%	1.8%-5.5%
Expected return on assets	1.8%-4.0%	1.8%-4.5%	1.8%-4.5%
Rate of compensation increases	3.0%-5.0%	3.0%-4.5%	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.

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)	2013		2012
Unrecognized transition obligation	$	1,029	$	1,868
Unrecognized prior service cost	278		392
Unrealized net loss	22,633		15,408
Amount recognized	$	23,940	$	17,668

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, 2014 are as follows:



(In thousands)	Year ending June 30, 2014
Unrecognized transition obligation	$	261
Unrecognized prior service cost	52
Unrealized net loss	884
Amount expected to be recognized	$	1,197

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)	2013			2012			2011
Components of net periodic pension cost
Service cost	$	3,399		$	3,355		$	3,184
Interest cost	1,320			1,406			1,270
Return on plan assets	(315		)	(309		)	(289		)
Amortization of transitional obligation	372			380			366
Amortization of prior service cost	58			64			61
Amortization of net loss	633			292			178
Adjustment	(1,436		)	—			—
Net periodic pension cost	$	4,031		$	5,188		$	4,770

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, 2013, 2012 and 2011.

The expected aggregate employer contribution for the foreign plans during the fiscal year ending June 30, 2014 is $1.6 million.

The total benefits to be paid from the foreign pension plans are not expected to exceed $2.6 million in any year through the fiscal year ending June 30, 2023.

Foreign plan assets measured at fair value on a recurring basis consisted of the following investment categories as of June 30, 2013:



(In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	9,688	$	9,688	$	—
Government, municipal securities, and other	3,629		—		3,629
Total assets measured at fair value	$	13,317	$	9,688	$	3,629

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, 2013, the Company did not have concentrations of risk in any single entity, manager, counterparty, sector, industry or country.