Quarterly report pursuant to Section 13 or 15(d)

Revenue

v3.19.1
Revenue
 9 Months Ended
Mar. 31, 2019
Revenue from Contract with Customer [Abstract]  
REVENUE
NOTE 2 – REVENUE
New Revenue Accounting Standard
Method and Impact of Adoption
At the beginning of the fiscal year 2019, we adopted ASC 606 using the modified retrospective transition approach for all contracts completed and not completed as of the date of adoption. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with ASC 605. A cumulative effect of applying ASC 606 was recorded to the beginning retained earnings to reflect the impact of all existing arrangements under ASC 606.
The cumulative effect of applying ASC 606 represents a net decrease of $21.0 million as of July 1, 2018, which primarily related to the following:
•
A decrease of approximately $97.0 million in retained earnings related to the deferral of estimated fair value of the warranty services provided with our products for which revenue will be recognized in future periods under ASC 606. Further, upon adoption of ASC 606, we will recognize the standard warranty for a majority of products as a separate performance obligation, while in prior periods, we accounted for the estimated warranty cost as a charge to costs of sales when revenue was recognized. This was partially offset by an increase in retained earnings of approximately $37.0 million related to reversal of standard warranty expense, which was charged to cost of revenues in prior periods.
•
An increase in retained earnings of approximately $26.0 million due to a change in the timing of transfer of control over products to the customers.
Under ASC 606, revenue is recognized earlier than it would have been recognized under legacy guidance primarily due to our assessment of timing of transfer of control. Additionally, we render standard warranty coverage on our products for 12 months, providing labor and parts necessary to repair and maintain the products during the warranty period. Prior to adoption of ASC 606, we accounted for the estimated warranty cost as a charge to costs of sales when revenue was recognized. Upon adoption of ASC 606, the standard warranty for the majority of products is recognized as a separate performance obligation in service revenue.
Orbotech adopted ASC 606 on January 1, 2018, and the effect of adopting the ASC 606 on Orbotech’s revenues and operating income was not material. Orbotech’s contracts under ASC 606 supports the recognition of revenue at a point in time for the majority of its contracts, which is consistent with its legacy revenue recognition model. Revenue on the majority of Orbotech’s contracts will continue to be recognized upon delivery because this represents the point in time at which control is transferred to the customers. Revenues derived from performance obligations such as warranty and service contracts will continue to be recognized over the period of the service.
The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our condensed consolidated balance sheet as of March 31, 2019:
March 31, 2019 (In thousands)
As reported under
ASC 606
 
Prior to
adoption of
ASC 606
 
Effect of changes
ASSETS
 
 
 
 
 
Accounts receivable, net
$
958,021

 
$
1,064,002

 
$
(105,981
)
Other current assets
270,079

 
130,172

 
139,907

Deferred income taxes
205,820

 
197,392

 
8,428

LIABILITIES
 
 
 
 
 
Deferred system revenue
$
228,745

 
$
—

 
$
228,745

Deferred service revenue
182,119

 
97,190

 
84,929

Deferred system profit
—

 
323,107

 
(323,107
)
Other current liabilities
833,747

 
866,870

 
(33,123
)
Deferred service revenue, non-current
90,610

 
82,176

 
8,434

STOCKHOLDERS’ EQUITY
 
 
 
 
 
Retained earnings
$
928,086

 
$
851,740

 
$
76,346

Accumulated other comprehensive income (loss)
(68,907
)
 
(69,038
)
 
131


The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our condensed consolidated statements of operations for the three months ended March 31, 2019:
Three months ended March 31, 2019 (In thousands, except per share amounts)
As reported under
ASC 606
 
Prior to
adoption of
ASC 606
 
Effect of changes
Revenues:
 
 
 
 
 
Product
$
793,224

 
$
854,393

 
$
(61,169
)
Service
304,087

 
266,333

 
37,754

Costs and expenses:
 
 
 
 
 
Costs of revenues
486,945

 
499,209

 
(12,264
)
Other expense (income), net
(9,282
)
 
(9,041
)
 
(241
)
Provision for income taxes
28,745

 
29,755

 
(1,010
)
Net income attributable to KLA-Tencor
192,728

 
202,627

 
(9,899
)
Net income per share attributable to KLA-Tencor
 
 
 
 
 
Basic
$
1.23

 
$
1.30

 
$
(0.07
)
Diluted
$
1.23

 
$
1.29

 
$
(0.06
)
The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our condensed consolidated statements of operations for the nine months ended March 31, 2019:
Nine months ended March 31, 2019 (In thousands, except per share amounts)
As reported under
ASC 606
 
Prior to
adoption of
ASC 606
 
Effect of changes
Revenues:
 
 
 
 
 
Product
$
2,474,652

 
$
2,430,481

 
$
44,171

Service
835,817

 
726,976

 
108,841

Costs and expenses:
 
 
 
 
 
Costs of revenues
1,276,592

 
1,233,999

 
42,593

Other expense (income), net
(28,535
)
 
(28,253
)
 
(282
)
Provision for income taxes
107,232

 
94,090

 
13,142

Net income attributable to KLA-Tencor
957,772

 
860,212

 
97,560

Net income per share attributable to KLA-Tencor:
 
 
 
 
 
Basic
$
6.20

 
$
5.57

 
$
0.63

Diluted
$
6.17

 
$
5.54

 
$
0.63



Contract Balances
 
As of
 
As of
 
 
 
 
(In thousands, except for percentage)
March 31, 2019
 
July 1, 2018
 
$ Change
 
% Change
Accounts receivable, net
$
958,021

 
$
635,878

 
$
322,143

 
51
 %
Contract assets
$
91,518

 
$
14,727

 
$
76,791

 
521
 %
Contract liabilities
$
501,474

 
$
556,691

 
$
(55,217
)
 
(10
)%

Our payment terms and conditions vary by contract type, although terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of shipment, with the remainder payable within 30 days of acceptance.
The change in contract assets during the nine months ended March 31, 2019 was mainly due to an increase in contract assets of $71.1 million from the Orbotech Acquisition in the third quarter of fiscal year 2019 and $19.4 million of revenue recognized in excess of the amounts billed to the customers, partially offset by $14.7 million of contract assets reclassified to net accounts receivable as our right to consideration for these contract assets became unconditional. Contract assets are included in Other current assets on our condensed consolidated balance sheet.
During the nine months ended March 31, 2019, we recognized revenue of $422.3 million that was included in contract liabilities as of July 1, 2018. This was partially offset by an increase in contract liabilities of $28.8 million from the Orbotech Acquisition in the third quarter of fiscal year 2019, and the value of products and services billed to customers for which control of the products and service has not transferred to the customers. Contract liabilities are included in current and non-current liabilities on our condensed consolidated balance sheets.

Remaining Performance Obligations
As of March 31, 2019, we had $1.73 billion of remaining performance obligations, which represents our obligation to deliver products and services, and consists primarily of sales orders where written customer requests have been received. We expect to recognize approximately 5% to 15% of these performance obligations as revenue beyond the next twelve months, subject to risk of delays, pushouts, and cancellation by the customer, usually with limited or no penalties.
Refer to Note 17 “Segment Reporting and Geographic Information” for information related to revenue by geographic region as well as significant product and service offerings.
Practical expedients
We apply the following practical expedients:
•
We account for shipping and handling costs as activities to fulfill the promise to transfer the goods, instead of a promised service to our customer.
•
We have elected to not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less.
•
We have elected to expense costs to obtain a contract as incurred because the expected amortization period is one year or less.
•
We have elected to reflect the aggregate effect of all modifications that occurred before July 1, 2018 in determining the transaction price, identifying the satisfied and unsatisfied performance obligations, and allocating the transaction price to the performance obligations.