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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM
10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 000-09992
KLA CORPORATION
(Exact name of registrant as specified in its charter)
  
Delaware
 
04-2564110
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
One Technology Drive,
Milpitas,
California
 
95035
(Address of Principal Executive Offices)
 
(Zip Code)
(408) 875-3000
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value per share
KLAC
The Nasdaq Stock Market, LLC
 
 
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No  
Large accelerated filer
 
 
 
Accelerated filer 
Non-accelerated filer
 
 
 
Smaller reporting company
 
 
 
 
 
Emerging growth company

As of January 17, 2020, there were 156,772,198 shares of the registrant’s Common Stock, $0.001 par value, outstanding.



INDEX
 
 
 
Page
Number
 
 
 
PART I
FINANCIAL INFORMATION
 
Item 1
 
 
 
 
 
 
 
Item 2
Item 3
Item 4
 
 
 
PART II
OTHER INFORMATION
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 
 
 
 
 
 


 

2


PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS
KLA CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
 
(In thousands)
December 31,
2019
 
June 30,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
939,864

 
$
1,015,994

Marketable securities
737,658

 
723,391

Accounts receivable, net
1,191,035

 
990,113

Inventories
1,251,400

 
1,262,500

Other current assets
257,486

 
323,077

Total current assets
4,377,443

 
4,315,075

Land, property and equipment, net
489,980

 
448,799

Goodwill
2,299,781

 
2,211,858

Deferred income taxes
213,255

 
206,141

Purchased intangible assets, net
1,492,450

 
1,560,670

Other non-current assets
377,811

 
265,973

Total assets
$
9,250,720

 
$
9,008,516

LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
256,646

 
$
202,416

Deferred system revenue
247,103

 
282,348

Deferred service revenue
204,284

 
206,669

Current portion of long-term debt

 
249,999

Other current liabilities
1,010,210

 
827,054

Total current liabilities
1,718,243

 
1,768,486

Non-current liabilities:
 
 
 
Long-term debt
3,399,877

 
3,173,383

Deferred tax liabilities
680,929

 
702,285

Deferred service revenue
99,969

 
98,772

Other non-current liabilities
663,732

 
587,897

Total liabilities
6,562,750

 
6,330,823

Commitments and contingencies (Note 14 and Note 15)

 

Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
2,017,521

 
2,017,312

Retained earnings
719,001

 
714,825

Accumulated other comprehensive income (loss)
(66,758
)
 
(73,029
)
Total KLA stockholders’ equity
2,669,764

 
2,659,108

Non-controlling interest in consolidated subsidiaries
18,206

 
18,585

Total stockholders’ equity
2,687,970

 
2,677,693

Total liabilities and stockholders’ equity
$
9,250,720

 
$
9,008,516

 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

3


KLA CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(In thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Product
$
1,144,550

 
$
852,201

 
$
2,202,525

 
$
1,681,428

Service
364,903

 
267,697

 
720,342

 
531,730

Total revenues
1,509,453

 
1,119,898

 
2,922,867

 
2,213,158

Costs and expenses:
 
 
 
 
 
 
 
Costs of revenues
633,618

 
408,260

 
1,237,859

 
789,647

Research and development
220,751

 
165,903

 
431,331

 
319,433

Selling, general and administrative
192,253

 
112,462

 
380,598

 
226,900

Interest expense
40,472

 
26,538

 
80,822

 
52,900

Other expense (income), net
(2,568
)
 
(9,228
)
 
(4,186
)
 
(19,253
)
Income before income taxes
424,927

 
415,963

 
796,443

 
843,531

Provision for income taxes
44,622

 
46,863

 
69,742

 
78,487

Net income
380,305

 
369,100

 
726,701

 
765,044

Less: Net loss attributable to non-controlling interest
(250
)
 

 
(379
)
 

Net income attributable to KLA
$
380,555

 
$
369,100

 
$
727,080

 
$
765,044

Net income per share attributable to KLA
 
 
 
 
 
 
 
Basic
$
2.42

 
$
2.43

 
$
4.60

 
$
4.98

Diluted
$
2.40

 
$
2.42

 
$
4.56

 
$
4.96

Weighted-average number of shares:
 
 
 
 
 
 
 
Basic
157,290

 
152,148

 
157,994

 
153,684

Diluted
158,620

 
152,648

 
159,314

 
154,389


See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

4


KLA CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(In thousands)
2019
 
2018
 
2019
 
2018
Net income
$
380,305

 
$
369,100

 
$
726,701

 
$
765,044

Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments:
 
 
 
 
 
 
 
Cumulative currency translation adjustments
2,844

 
(991
)
 
406

 
(4,073
)
Income tax (provision) benefit
(247
)
 

 
146

 

Net change related to currency translation adjustments
2,597

 
(991
)
 
552

 
(4,073
)
Cash flow hedges:
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
2,290

 
(18,982
)
 
1,548

 
(5,188
)
Reclassification adjustments for net (gains) losses included in net income
125

 
(1,736
)
 
1,652

 
(2,773
)
Income tax (provision) benefit
(412
)
 
4,475

 
(436
)
 
1,180

Net change related to cash flow hedges
2,003

 
(16,243
)
 
2,764

 
(6,781
)
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans
(51
)
 
413

 
678

 
555

Available-for-sale securities:
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
616

 
2,649

 
1,799

 
4,759

Reclassification adjustments for net (gains) losses included in net income
82

 
469

 
86

 
950

Income tax (provision) benefit
(150
)
 
(577
)
 
392

 
(1,079
)
Net change related to available-for-sale securities
548

 
2,541

 
2,277

 
4,630

Other comprehensive income (loss)
5,097

 
(14,280
)
 
6,271

 
(5,669
)
Less: Comprehensive loss attributable to non-controlling interest
(250
)
 

 
(379
)
 

Total comprehensive income attributable to KLA
$
385,652

 
$
354,820

 
$
733,351

 
$
759,375


See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

5


KLA CORPORATION
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
Common Stock and
Capital in Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total KLA
Stockholders’
Equity
 
Non-Controlling Interest
 
Total Stockholders’ Equity
(In thousands, except per share amounts)
Shares
 
Amount
 
Balance as of June 30, 2019
159,475

 
$
2,017,312

 
$
714,825

 
$
(73,029
)
 
$
2,659,108

 
$
18,585

 
$
2,677,693

Net income attributable to KLA

 

 
346,525

 

 
346,525

 

 
346,525

Other comprehensive income

 

 

 
1,174

 
1,174

 

 
1,174

Net loss attributable to non-controlling interest

 

 

 

 

 
(129
)
 
(129
)
Net issuance under employee stock plans
281

 
(23,423
)
 

 

 
(23,423
)
 

 
(23,423
)
Repurchase of common stock
(1,659
)
 
(20,988
)
 
(207,508
)
 

 
(228,496
)
 

 
(228,496
)
Cash dividends ($0.75 per share) and dividend equivalents declared

 

 
(120,669
)
 

 
(120,669
)
 

 
(120,669
)
Stock-based compensation expense

 
26,944

 

 

 
26,944

 

 
26,944

Balance as of September 30, 2019
158,097

 
1,999,845

 
733,173

 
(71,855
)
 
2,661,163

 
18,456

 
2,679,619

Net income attributable to KLA

 

 
380,555

 

 
380,555

 

 
380,555

Other comprehensive income

 

 

 
5,097

 
5,097

 

 
5,097

Net loss attributable to non-controlling interest

 

 

 

 

 
(250
)
 
(250
)
Net issuance under employee stock plans
442

 
12,262

 

 

 
12,262

 

 
12,262

Repurchase of common stock
(1,690
)
 
(21,375
)
 
(259,218
)
 

 
(280,593
)
 

 
(280,593
)
Cash dividends ($0.85 per share) and dividend equivalents declared

 

 
(135,509
)
 

 
(135,509
)
 

 
(135,509
)
Stock-based compensation expense

 
26,789

 

 

 
26,789

 

 
26,789

Balance as of December 31, 2019
156,849

 
$
2,017,521

 
$
719,001

 
$
(66,758
)
 
$
2,669,764

 
$
18,206

 
$
2,687,970


 
Common Stock and
Capital in Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total KLA
Stockholders’
Equity
 
Non-Controlling Interest
 
Total Stockholders’ Equity
(In thousands, except per share amounts)
Shares
 
Amount
 
Balance as of June 30, 2018
156,048

 
$
617,999

 
$
1,056,445

 
$
(53,933
)
 
$
1,620,511

 
$

 
$
1,620,511

Adoption of ASC 606

 

 
(21,215
)
 
75

 
(21,140
)
 

 
(21,140
)
Reclassification of stranded tax effects

 

 
10,920

 
(10,920
)
 

 

 

Balance as of July 1, 2018
156,048

 
617,999

 
1,046,150

 
(64,778
)
 
1,599,371

 

 
1,599,371

Net income attributable to KLA

 

 
395,944

 

 
395,944

 

 
395,944

Other comprehensive income

 

 

 
8,611

 
8,611

 

 
8,611

Net issuance under employee stock plans
332

 
(26,961
)
 

 

 
(26,961
)
 

 
(26,961
)
Repurchase of common stock
(2,781
)
 
(11,010
)
 
(296,777
)
 

 
(307,787
)
 

 
(307,787
)
Cash dividends ($0.75 per share) and dividend equivalents declared

 

 
(117,947
)
 

 
(117,947
)
 

 
(117,947
)
Stock-based compensation expense

 
16,138

 

 

 
16,138

 

 
16,138

Balance as of September 30, 2018
153,599

 
596,166

 
1,027,370

 
(56,167
)
 
1,567,369

 

 
1,567,369

Net income attributable to KLA

 

 
369,100

 

 
369,100

 

 
369,100

Other comprehensive loss

 

 

 
(14,280
)
 
(14,280
)
 

 
(14,280
)
Net issuance under employee stock plans
321

 
17,323

 

 

 
17,323

 

 
17,323

Repurchase of common stock
(2,556
)
 
(9,919
)
 
(232,482
)
 

 
(242,401
)
 

 
(242,401
)
Cash dividends ($0.75 per share) and dividend equivalents declared

 

 
(115,184
)
 

 
(115,184
)
 

 
(115,184
)
Stock-based compensation expense

 
15,695

 

 

 
15,695

 

 
15,695

Balance as of December 31, 2018
151,364

 
$
619,265

 
$
1,048,804

 
$
(70,447
)
 
$
1,597,622

 
$

 
$
1,597,622


See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

6


KLA CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
December 31,
(In thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
726,701

 
$
765,044

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
187,122

 
31,893

Loss (gains) on unrealized foreign exchange and other
7,344

 
4,790

Stock-based compensation expense
53,733

 
31,833

Changes in assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:
 
 
 
Accounts receivable
(201,896
)
 
(19,790
)
Inventories
(6,568
)
 
(70,847
)
Other assets
(5,372
)
 
18,125

Accounts payable
54,143

 
(17,205
)
Deferred system revenue
(35,245
)
 
(99,533
)
Deferred service revenue
(3,117
)
 
(1,114
)
Other liabilities
107,131

 
20,381

Net cash provided by operating activities
883,976

 
663,577

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(78,530
)
 
(11,787
)
Capital expenditures
(67,440
)
 
(48,696
)
Proceeds from disposition of non-marketable securities
1,086

 

Purchases of available-for-sale securities
(408,482
)
 
(2,686
)
Proceeds from sale of available-for-sale securities
35,736

 
198,608

Proceeds from maturity of available-for-sale securities
357,450

 
382,809

Purchases of trading securities
(21,873
)
 
(32,100
)
Proceeds from sale of trading securities
27,212

 
37,334

Net cash (used in) provided by investing activities
(154,841
)
 
523,482

Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
250,000

 

Repayment of debt
(275,000
)
 

Common stock repurchases
(513,089
)
 
(550,187
)
Payment of dividends to stockholders
(256,332
)
 
(237,319
)
Issuance of common stock
24,613

 
20,556

Tax withholding payments related to vested and released restricted stock units
(35,775
)
 
(30,194
)
Payment of contingent consideration payable
(60
)
 

Net cash used in financing activities
(805,643
)
 
(797,144
)
Effect of exchange rate changes on cash and cash equivalents
378

 
(315
)
Net (decrease) increase in cash and cash equivalents
(76,130
)
 
389,600

Cash and cash equivalents at beginning of period
1,015,994

 
1,404,382

Cash and cash equivalents at end of period
$
939,864

 
$
1,793,982

Supplemental cash flow disclosures:
 
 
 
Income taxes paid
$
70,746

 
$
112,816

Interest paid
$
79,486

 
$
51,673

Non-cash activities:
 
 
 
Business acquisition holdback amounts - investing activities
$

 
$
440

Contingent consideration payable - financing activities
$
5,825

 
$
2,529

Dividends payable - financing activities
$
3,190

 
$
5,404

Unsettled common stock repurchase - financing activities
$
4,000

 
$

Accrued purchases of land, property and equipment - investing activities
$
13,755

 
$
7,705

 See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

7


KLA CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION
Basis of Presentation. For purposes of this report, “KLA,” the “Company,” “we,” “our,” “us,” or similar references mean KLA Corporation, and its majority-owned subsidiaries unless the context requires otherwise. The Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair statement of the financial position, results of operations, comprehensive income, stockholders’ equity and cash flows for the periods indicated. These financial statements and notes, however, should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the SEC on August 16, 2019.
The Condensed Consolidated Financial Statements include the accounts of KLA and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The results of operations for the three and six months ended December 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending June 30, 2020.
Certain reclassifications have been made to the prior year’s Condensed Consolidated Financial Statements to conform to the current year presentation. The reclassifications did not have material effects on the prior year’s Condensed Consolidated Balance Sheets, Statements of Operations, Comprehensive Income and Cash Flows.
Acquisition of Orbotech, Ltd. On February 20, 2019 (the “Closing Date” or “Acquisition Date”), we completed the acquisition of Orbotech, Ltd. (“Orbotech”) for total consideration of $3.26 billion. The acquisition of Orbotech is referred to as the “Orbotech Acquisition”. The Orbotech Acquisition was accounted for by applying the acquisition method of accounting for business combinations. The unaudited Condensed Consolidated Financial Statements in this report include the financial results of Orbotech prospectively from the Acquisition Date. For additional details, refer to Note 6 “Business Combinations” of the Condensed Consolidated Financial Statements.
Management Estimates. The preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets and liabilities (and related disclosure of contingent assets and liabilities) at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Comparability. Effective July 1, 2019, we adopted ASC 842, Leases (“ASC 842”). Prior periods were not retrospectively restated, and accordingly, the Consolidated Balance Sheet as of June 30, 2019, and the Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2018 were prepared using accounting standards that were different than those in effect for the three and six months ended December 31, 2019.
Significant Accounting Policies. We updated our accounting policies for Leases. There have been no other material changes to our significant accounting policies in Note 1 “Description of Business and Summary of Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Leases. Under ASC 842, a contract is or contains a lease when we have the right to control the use of an identified asset for a period of time. We determine if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to, and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for our use. On the commencement date leases are evaluated for classification and assets and liabilities are recognized based on the present value of lease payments over the lease term.

8


The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The right-of-use (“ROU”) asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments and any lease incentives. Variable lease payments, consisting primarily of reimbursement of costs incurred by lessors for common area maintenance, real estate taxes, and insurance are not included in the lease liability and are recognized as they are incurred.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate at lease commencement to measure ROU assets and lease liabilities. The incremental borrowing rate used by us is based on baseline rates and adjusted by the credit spreads commensurate with our secured borrowing rate, over a similar term. We used the incremental borrowing rate on June 30, 2019 for all leases that commenced on or prior to that date. Operating lease expense is generally recognized on a straight-line basis over the lease term.
We have elected the practical expedient to account for the lease and non-lease components as a single lease component for the majority of our asset classes. For leases with a term of one year or less, we have elected not to record the ROU asset or liability.
Recent Accounting Pronouncements.
Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 842 which supersedes the lease recognition requirements in ASC 840, Leases, (“ASC 840”). The most prominent of the changes in ASC 842 is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases.
Consistent with ASC 840, leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. In July 2018, the FASB issued an accounting standard update which amended ASC 842 and offered an additional (and optional) transition method by which entities could elect not to recast the comparative periods presented in financial statements in the period of adoption.
KLA adopted the new standard on July 1, 2019, the first day of fiscal 2020, using the optional adoption method whereby we did not adjust comparative period financial statements. Consequently, prior period balances and disclosures have not been restated. KLA elected certain practical expedients, which among other things, allowed us to carry forward prior conclusions about lease identification and classification. The adoption of ASC 842 resulted in the balance sheet recognition of additional lease assets and lease liabilities of $110.7 million and