KLA CORPORATION SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
may be forward-looking statements. You can identify these and other
forward-looking statements by the use of words such as "may," "will," "could,"
"would," "should," "expects," "plans," "anticipates," "relies," "believes,"
"estimates," "predicts," "intends," "potential," "continues," "thinks," "seeks,"
or the negative of such terms, or other comparable terminology. Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing statements. Such forward-looking statements include those regarding,
among others: the future impacts of the COVID-19 pandemic; forecasts of the
future results of our operations, including profitability; orders for our
products and capital equipment generally; sales of semiconductors; the
investments by our customers in advanced technologies and new materials; growth
of revenue in the semiconductor industry, the semiconductor capital equipment
industry and our business; technological trends in the semiconductor industry;
future developments or trends in the global capital and financial markets; our
future product offerings and product features; the success and market acceptance
of new products; timing of shipment of order backlog; our future product
shipments and product and service revenues; our future gross margins; our future
research and development ("R&D") expenses and selling, general and
administrative ("SG&A") expenses; international sales and operations; our
ability to maintain or improve our existing competitive position; success of our
product offerings; creation and funding of programs for R&D; results of our
investment in leading edge technologies; the effects of hedging transactions;
the effect of the sale of trade receivables and promissory notes from customers;
our future effective income tax rate; our recognition of tax benefits; the
effects of any audits or litigation; future payments of dividends to our
stockholders; the completion of any acquisitions of third parties, or the
technology or assets thereof; benefits received from any acquisitions and
development of acquired technologies; sufficiency of our existing cash balance,
investments, cash generated from operations and the unfunded portion of our
Revolving Credit Facility (as defined below) to meet our operating and working
capital requirements, including debt service and payment thereof; future
dividends, and stock repurchases; our compliance with the financial covenants
under the Credit Agreement (as defined below) for our Revolving Credit Facility;
the adoption of new accounting pronouncements; and our repayment of our
outstanding indebtedness.
Our actual results may differ significantly from those projected in the forward-looking statements in this report. Factors that might cause or contribute to such differences include, but are not limited to:
•The impact of the COVID-19 pandemic on the global economy and on our business, financial condition and results of operations, including the supply chain constraints we are experiencing as a result of the pandemic;
•Economic, political and social conditions in the countries in which we, our customers and our suppliers operate, including global trade policies;
•Disruption to our manufacturing facilities or other operations, or the operations of our customers, due to natural catastrophic events, health epidemics or terrorism;
•Ongoing changes in the technology industry, and the semiconductor industry in particular, including future growth rates, pricing trends in end-markets, or changes in customer capital spending patterns;
•Our ability to timely develop new technologies and products that successfully anticipate or address changes in the semiconductor industry;
•Our ability to maintain our technology advantage and protect our proprietary rights;
•Our ability to compete with new products introduced by our competitors;
•Our ability to attract, onboard and retain key personnel;
•Cybersecurity threats, cyber incidents affecting our and our customers, suppliers and other service providers' systems and networks and our and their ability to access critical information systems for daily business operations;
•Liability to our customers under indemnification provisions if our products fail to operate properly or contain defects or our customers are sued by third parties due to our products;
•Exposure to a highly concentrated customer base;
•Availability and cost of the wide range of materials used in the production of our products;
•Our ability to operate our business in accordance with our business plan;
•Legal, regulatory and tax environments in which we perform our operations and conduct our business and our ability to comply with relevant laws and regulations;
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•Our ability to pay interest and repay the principal of our current indebtedness is dependent upon our ability to manage our business operations, our credit rating and the ongoing interest rate environment, among other factors;
•Instability in the global credit and financial markets;
•Our exposure to currency exchange rate fluctuations, or declining economic conditions in those countries where we conduct our business;
•Changes in our effective tax rate resulting from changes in the tax rates imposed by jurisdictions where our profits are determined to be earned and taxed, expiration of tax holidays in certain jurisdictions, resolution of issues arising from tax audits with various authorities or changes in tax laws or the interpretation of such tax laws; and
•Our ability to identify suitable acquisition targets and successfully integrate and manage acquired businesses.
For a more detailed discussion of these and other risk factors that might cause or contribute to differences from the forward-looking statements in this report, see Part II, Item 1A, "Risk Factors" in this report as well as Part I, Item 1, "Business" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedJune 30, 2021 . You should carefully review these risks and also review the risks described in other documents we file from time to time with theSecurities and Exchange Commission ("SEC"). You are cautioned not to place undue reliance on these forward-looking statements, and we expressly assume no obligation and do not intend to update the forward-looking statements in this report after the date hereof.
EXECUTIVE SUMMARY
We are a leading supplier of process control and yield management solutions and
services for the semiconductor and related electronics industries. Our broad
portfolio of inspection and metrology products, and related service, software
and other offerings, support R&D and manufacturing of integrated circuits
("IC"), wafers and reticles. Our products, services and expertise are used by
our customers to measure, detect, analyze and resolve critical and nanometric
level product defects, helping them to manage manufacturing process challenges
and to obtain higher finish product yields at lower cost. We also offer advanced
technology solutions to address various manufacturing needs of Printed Circuit
Boards ("PCB"), Flat Panel Displays ("FPD"), Specialty Semiconductor Devices and
other electronic components, including advanced packaging, light-emitting
diodes, power devices, compound semiconductors, and data storage, as well as
general materials research.
The pervasive and increasing needs for semiconductors in many consumer and
industrial products, the rapid proliferation of new applications for more
advanced semiconductor devices, and the increasing complexity associated with
leading edge semiconductor manufacturing drives demand for our process control
and yield management solutions, and this demand is expected to continue for the
foreseeable future. At the same time, technology is transforming how we live and
work, and the data driven economy is fundamentally changing how businesses
operate and deliver value. This digital transformation is enabling secular
demand drivers such as High-Performance Computing, Artificial Intelligence,
Machine Learning, and rapid growth in new automotive electronics and 5G
communications markets. Each trend is driving investments and innovation in
advanced Logic and Memory semiconductor devices, as well as new and increasingly
more complex advanced packaging and PCB technologies. The favorable end-market
dynamics are driving our customers to make increased investments in our process
control and yield management solutions as part of their overall capital
investment plans. These trends also drive demand for our other products such as
those used in PCB, FPD and Specialty Semiconductor manufacturing, where the
increase in technology complexity is expected to continue and further accelerate
as more devices become interconnected and dependent on other electronic devices.
As a result of these factors, we saw a general strengthening of demand for our
products throughout fiscal 2021 and fiscal 2022. We continue to focus on our
close collaborative relationships with our customers, which allows us improved
insight into customer demand to more efficiently manage our business, ranging
from product development to balancing inventory levels, in order to meet their
needs.
We are organized into four reportable segments. We manage our Specialty Semiconductor Process and PCB, Display and Component Inspection reporting segments within our Electronics, Packaging and Components ("EPC") group.
•Semiconductor Process Control ("SPC"): a comprehensive portfolio of inspection,
metrology and data analytics products as well as related service offerings that
help IC manufacturers achieve target yields throughout the semiconductor
fabrication process.
•Specialty Semiconductor Process: advanced vacuum deposition and etching process tools used by a broad range of specialty semiconductor customers.
•PCB, Display and Component Inspection: a range of inspection, testing and measurement, and direct imaging for patterning products used by manufacturers of PCBs, FPDs, advanced packaging, microelectromechanical systems and other electronic components.
•Other: products that do not fall into the three segments above.
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China is emerging as a major region for manufacturing of logic and memory chips, adding to its role as the world's largest consumer of ICs. Additionally, a significant portion of global FPD and PCB manufacturing has migrated toChina . Government initiatives are propellingChina to expand its domestic manufacturing capacity and attracting investment from semiconductor manufacturers fromTaiwan ,Korea ,Japan andthe United States . AlthoughChina is currently seen as an important long-term growth region for the semiconductor and electronics capital equipment sector, theUnited States Department of Commerce ("Commerce") has added certainChina -based entities to theU.S. Entity List, restricting our ability to provide products and services to such entities without a license. In addition, Commerce has imposed export licensing requirements onChina -based customers engaged in military end uses, as well as requiring our customers to obtain an export license when they use certain semiconductor capital equipment based onU.S. technology to manufacture products connected to Huawei or its affiliates. While these rules have not significantly impacted our operations to date, such actions by theU.S. government or another country could impact our ability to provide our products and services to existing and potential customers and adversely affect our business. For additional information regarding risks related to our international operations, see Part II, Item 1A, "Risk Factors" in this report. The following table sets forth some of our key quarterly unaudited financial information: Three Months Ended (In thousands, except net income March 31, December 31, September 30, June 30, March 31, per share) 2022 2021 2021 2021 2021 Total revenues$ 2,288,676 $ 2,352,630 $ 2,083,838 $ 1,925,471 $ 1,803,773 Costs of revenues$ 892,091 $ 908,162 $ 813,624 $ 772,241 $ 709,629 Gross margin 61 % 61 % 61 % 60 % 61 % Net income attributable to KLA(1)$ 730,572 $ 717,444 $ 1,068,417 $ 632,978 $ 567,496 Diluted net income per share attributable to KLA(2)$ 4.83 $ 4.71 $ 6.96 $ 4.10 $ 3.66 __________________ (1)Our net income attributable to KLA increased to$730.6 million in the three months endedMarch 31, 2022 compared to the three months endedDecember 31, 2021 and the three months endedMarch 31, 2021 . While revenues and costs of revenues decreased slightly from the quarter endedDecember 31, 2021 and operating expenses trended at a higher rate, the reduction in income taxes contributed to an increase in net income attributable to KLA. The increase from the third quarter of fiscal 2021 was primarily due to higher revenues partially offset by higher operating expenses. Refer to the sections below for further information.
(2)Diluted net income per share is computed independently for each of the quarters presented based on the weighted-average fully diluted shares outstanding for each quarter. Therefore, the sum of quarterly diluted net income per share information may not equal annual (or other multiple-quarter calculations of) diluted net income per share.
Impact of COVID-19
Events surrounding the ongoing COVID-19 pandemic had resulted in a reduction in
economic activity across the globe in calendar year 2020 and early 2021.
Vaccinations and pandemic containment measures have now created an environment
that is driving economic growth, even as the pace of economic recovery remains
uneven in various geographies. The resumption of growth has caused us to
experience new constraints in our supply chain. Supply chain lead times are
extended and shortages have sometimes required us to plan further ahead and
increase our purchase commitments to secure critical components on a timely
basis. We continue to monitor our supply chain and work with our suppliers to
identify and mitigate potential gaps to ensure continuity of supply.
While all of our global manufacturing sites are currently operational, any local
pandemic outbreaks or advent of new variants could require us to temporarily
curtail production levels or temporarily cease operations based on government
mandates or due to outbreaks affecting our manufacturing employees. We remain
committed to the health and safety of our employees, contractors, suppliers,
customers and communities, and are following government policies and
recommendations designed to slow the spread of COVID-19.
We are working with government authorities in the jurisdictions where we
operate, and continue to monitor our operations in an effort to ensure we follow
government requirements, relevant regulations, industry standards, and best
practices to help safeguard our team members, while safely continuing operations
to the extent possible at our sites across the globe.
We may take further actions or alter our business operations that we determine
are in the best interests of our employees, customers, partners, suppliers, and
stakeholders, or as required by federal, state, or local authorities.
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience and evaluate them on an ongoing basis to ensure that they remain reasonable under current conditions. Actual results could differ from those estimates. We discuss the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors on a quarterly basis, and the Audit Committee has reviewed our related disclosure in this Quarterly Report on Form 10-Q. There have been no material changes in our critical accounting estimates and policies since our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 . Refer to Note 1 "Basis of Presentation" to our Condensed Consolidated Financial Statements for additional details. In addition, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year endedJune 30, 2021 for a complete description of our critical accounting policies and estimates.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including those recently
adopted and the expected dates of adoption as well as estimated effects, if any,
on our Condensed Consolidated Financial Statements of those not yet adopted, see
Note 1 "Basis of Presentation" to our Condensed Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Revenues and Gross Margin
Revenues
Our business is affected by the concentration of our customer base and our
customers' capital equipment procurement schedules as a result of their
investment plans. Our product revenues in any particular period are
significantly impacted by the amount of new orders we receive during that period
and, depending upon the duration of manufacturing and installation cycles, in
the preceding period. Revenue is also impacted by average customer pricing,
customer revenue deferrals associated with volume purchase agreements, and the
effect of fluctuations in foreign currency exchange rates.
Service revenues are generated from product maintenance and support services, as
well as billable time and material service calls made to our customers. The
amount of our service revenues is typically a function of the number of systems
installed at our customers' sites and the utilization of those systems, but it
is also impacted by other factors, such as our rate of service contract
renewals, the types of systems being serviced and fluctuations in foreign
currency exchange rates.
Three Months Ended March 31, Q3 FY22
vs.
(Dollar amounts in thousands) 2022 2021 Q3 FY21
Revenues:
Product $ 1,800,659 $ 1,375,320 $ 425,339 31 %
Service 488,017 428,453 59,564 14 %
Total revenues $ 2,288,676 $ 1,803,773 $ 484,903 27 %
Costs of revenues $ 892,091 $ 709,629 $ 182,462 26 %
Gross margin 61.0 % 60.7 %
Nine Months Ended March 31, Q3 FY22 YTD
vs.
(Dollar amounts in thousands) 2022 2021 Q3 FY21 YTD
Revenues:
Product $ 5,326,316 $ 3,758,838 $ 1,567,478 42 %
Service 1,398,828 1,234,425 164,403 13 %
Total revenues $ 6,725,144 $ 4,993,263 $ 1,731,881 35 %
Costs of revenues $ 2,613,877 $ 1,999,924 $ 613,953 31 %
Gross margin 61.1 % 59.9 %
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Product revenues during the three and nine months endedMarch 31, 2022 increased compared to the three and nine months endedMarch 31, 2021 , respectively, primarily due to strong demand for many of our products, especially our inspection and metrology portfolios, as well as increases from continued growth in the advanced packaging and specialty semiconductor markets. Service revenues during the three and nine months endedMarch 31, 2022 increased compared to the three and nine months endedMarch 31, 2021 , primarily due to an increase in our installed base. Revenues by segment(1) Three Months Ended March 31, Q3 FY22 vs. (Dollar amounts in thousands) 2022 2021 Q3 FY21 Revenues: SPC$ 1,979,295 $ 1,506,140 $ 473,155 31 % Specialty Semiconductor Process 117,253 91,724 25,529 28 % PCB, Display and Component Inspection 192,533 205,202 (12,669) (6) % Other - 149 (149) (100) % Total revenues for reportable segments$ 2,289,081 $ 1,803,215 $ 485,866 27 % Nine Months Ended March 31, Q3 FY22 YTD vs. (Dollar amounts in thousands) 2022 2021 Q3 FY21 YTD
Revenues:
SPC$ 5,810,580 $ 4,154,278 $ 1,656,302 40 % Specialty Semiconductor Process 332,020 271,264 60,756 22 % PCB, Display and Component Inspection 583,318 565,646 17,672 3 % Other - 739 (739) (100) % Total revenues for reportable segments$ 6,725,918 $ 4,991,927 $ 1,733,991 35 % __________ (1)Segment revenues exclude corporate allocations and the effects of changes in foreign currency exchange rates. For additional details, refer to Note 18 "Segment Reporting and Geographic Information" to our Condensed Consolidated Financial Statements. Revenues from our SPC segment during the three and nine months endedMarch 31, 2022 increased compared to the three and nine months endedMarch 31, 2021 , respectively, primarily due to strong demand for many of our products especially from our inspection and metrology portfolios. Revenues in the Specialty Semiconductor Process segment during the three and nine months endedMarch 31, 2022 increased compared to the three and nine months endedMarch 31, 2021 , respectively, primarily due to continued growth in advanced packaging and specialty semiconductor markets. Revenues in the PCB, Display and Component Inspection segment during the three months endedMarch 31, 2022 decreased compared to the three months endedMarch 31, 2021 , primarily due to recent COVID-19 driven lockdowns in theAsia Pacific region and delays of certain projects in the mobile application sector. Revenues in the PCB, Display and Component Inspection segment during the nine months endedMarch 31, 2022 increased compared to the nine months endedMarch 31, 2021 , primarily due to recovery in the flat panel display market after softer demand and oversupply in fiscal 2021. 44
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Revenues by region
The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods:
Three Months Ended March 31, Nine Months Ended March 31,
(Dollar amounts in
thousands) 2022 2021 2022 2021
China $ 709,502 31 % $ 353,393 20 % $ 1,939,195 29 % $ 1,221,639 24 %
Taiwan 515,097 22 % 401,797 22 % 1,918,623 29 % 1,151,683 23 %
Korea 474,019 21 % 557,514 31 % 1,036,297 16 % 1,094,979 22 %
North America 219,267 10 % 174,728 10 % 668,601 10 % 559,712 11 %
Europe and Israel 164,246 7 % 95,080 5 % 426,881 6 % 278,398 6 %
Japan 132,829 6 % 161,190 9 % 504,278 7 % 482,330 10 %
Rest of Asia 73,716 3 % 60,071 3 % 231,269 3 % 204,522 4 %
Total $ 2,288,676 100 % $ 1,803,773 100 % $ 6,725,144 100 % $ 4,993,263 100 %
A significant portion of our revenues continues to be generated in
Gross margin
Our gross margin fluctuates with revenue levels and product mix and is affected
by variations in costs related to manufacturing and servicing our products,
including our ability to scale our operations efficiently and effectively in
response to prevailing business conditions.
The following table summarizes the major factors that contributed to the changes
in gross margin:
Gross Margin
Three Months Ended Nine Months Ended
March 31, 2021 60.7% 59.9%
Revenue volume of products and services 1.8% 2.5%
Mix of products and services sold 1.0% 0.3%
Manufacturing labor, overhead and efficiencies (0.5)% (0.3)%
Other service and manufacturing costs (2.0)% (1.3)%
March 31, 2022 61.0% 61.1%
Changes in gross margin, which are driven by the revenue volume of products and
services, reflect our ability to leverage existing infrastructure to generate
higher revenues. Changes in gross margin from the mix of products and services
sold reflect the impact of changes within the composition of product and service
offerings. Changes in gross margin from manufacturing labor, overhead and
efficiencies reflect our ability to manage costs and drive productivity as we
scale our manufacturing activity to respond to customer requirements, and
amortization of intangible assets. Changes in gross margin from other service
and manufacturing costs include the impact of customer support costs, including
the efficiencies with which we deliver services to our customers, and the
effectiveness with which we manage our production plans and inventory risk.
The increase in our gross margin during the comparative periods presented is
primarily due to a higher revenue volume of products and services sold and a
more profitable mix, partially offset by an increase in service and
manufacturing costs, including higher shipping costs.
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Segment gross profit(1)
Three Months Ended March 31, Q3 FY22
vs.
(Dollar amounts in thousands) 2022 2021 Q3 FY21
Segment gross profit:
SPC $ 1,284,450 $ 982,511 $ 301,939 31 %
Specialty Semiconductor Process 61,521 51,720 9,801 19 %
PCB, Display and Component Inspection 93,298 100,311 (7,013) (7) %
Other - 40 (40) (100) %
$ 1,439,269 $ 1,134,582 $ 304,687 27 %
Nine Months Ended March 31, Q3 FY22 YTD
vs.
(Dollar amounts in thousands) 2022 2021 Q3 FY21 YTD
Segment gross profit:
SPC $ 3,789,316 $ 2,681,411 $ 1,107,905 41 %
Specialty Semiconductor Process 176,516 152,819 23,697 16 %
PCB, Display and Component Inspection 270,096 275,064 (4,968) (2) %
Other - (68) 68 100 %
$ 4,235,928 $ 3,109,226 $ 1,126,702 36 %
________________
(1) Segment gross profit is calculated as segment revenues less segment costs
of revenues and excludes corporate allocations, amortization of intangible
assets, inventory fair value adjustments, acquisition related costs, and the
effects of changes in foreign currency exchange rates. For additional details,
refer to Note 18 "Segment Reporting and Geographic Information" to our Condensed
Consolidated Financial Statements.
Gross profit in the SPC segment during the three and nine months ended March 31,
2022 increased compared to the three and nine months ended March 31, 2021 ,
respectively, primarily due to a higher revenue volume of products and services
sold, partially offset by an increase in other service and manufacturing costs
including higher shipping costs. Gross profit in the Specialty Semiconductor
Process segment during the three and nine months ended March 31, 2022 increased
compared to the three and nine months ended March 31, 2021 , respectively,
primarily due to higher revenue volume, partially offset by a less favorable mix
of products and services sold as well as an increase in other service and
manufacturing costs. Gross profit in the PCB, Display and Component Inspection
segment during the three and nine months ended March 31, 2022 decreased compared
to the three and nine months ended March 31, 2021 primarily due to a less
favorable mix of products and services sold, as well as an increase in other
service and manufacturing costs.
Research and Development
R&D expenses may fluctuate with product development phases and project timing as
well as our R&D efforts. As technological innovation is essential to our
success, we may incur significant costs associated with R&D projects, including
compensation for engineering talent, engineering material costs and other
expenses.
Three Months Ended March 31, Q3 FY22
vs.
(Dollar amounts in thousands) 2022 2021 Q3 FY21
R&D expenses $ 285,189 $ 238,957 $ 46,232 19 %
R&D expenses as a percentage of total
revenues 12 % 13 %
R&D expenses during the three months endedMarch 31, 2022 increased compared to the three months endedMarch 31, 2021 primarily due to an increase in employee-related expenses of$40.4 million as a result of additional engineering headcount as well as higher employee compensation and benefit costs, and an increase in engineering project material costs of$3.1 million . 46
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Nine Months Ended March 31, Q3 FY22 YTD
vs.
(Dollar amounts in thousands) 2022 2021 Q3 FY21 YTD
R&D expenses $ 808,373 $ 687,059 $ 121,314 18 %
R&D expenses as a percentage of total
revenues 12 % 14 %
R&D expenses during the nine months endedMarch 31, 2022 increased compared to the nine months endedMarch 31, 2021 primarily due to an increase in employee-related expenses of$110.6 million as a result of additional engineering headcount as well as higher employee compensation and benefit costs, an in-process R&D write-off of$6.0 million , and an increase in consulting costs of$6.0 million , partially offset by a decrease in engineering project material costs of$7.4 million . Our future operating results will depend significantly on our ability to produce products and provide services that have a competitive advantage in our marketplace. To do this, we believe we must continue to make substantial and focused investments in our R&D. We remain committed to product development in new and emerging technologies.
Selling, General and Administrative
Three Months Ended March 31, Q3 FY22
vs.
(Dollar amounts in thousands) 2022 2021 Q3 FY21
SG&A expenses $ 216,489 $ 183,040 $ 33,449 18 %
SG&A expenses as a percentage of total
revenues 9 % 10 %
SG&A expenses during the three months endedMarch 31, 2022 increased compared to the three months endedMarch 31, 2021 primarily due to increases in the following: employee-related expenses of$9.6 million as a result of additional headcount as well as higher employee compensation and benefit costs, depreciation expense of$8.6 million , facilities-related expense of$5.0 million , consulting costs of$3.9 million and promotional expense of$2.7 million . Nine Months Ended March 31, Q3 FY22 YTD vs. (Dollar amounts in thousands) 2022 2021 Q3 FY21 YTD SG&A expenses$ 623,229 $ 537,580 $ 85,649 16 % SG&A expenses as a percentage of total revenues 9 %
11 %
SG&A expenses during the nine months endedMarch 31, 2022 increased compared to the nine months endedMarch 31, 2021 primarily due to increases in the following: employee-related expenses of$42.3 million as a result of additional headcount as well as higher employee compensation and benefit costs, depreciation expense of$11.3 million , consulting costs of$9.8 million , facilities-related expense of$8.7 million and promotional expense of$6.2 million .
Restructuring Charges
Restructuring charges were zero and$2.9 million for the three months endedMarch 31, 2022 and 2021, respectively. Restructuring charges were$0.9 million and$11.1 million for the nine months endedMarch 31, 2022 and 2021, respectively. Restructuring charges for the three and nine months endedMarch 31, 2021 , included$1.0 million and$3.0 million , respectively, of non-cash charges for accelerated depreciation related to certain right-of-use assets and fixed assets to be abandoned. As ofMarch 31, 2022 , the accrual for restructuring charges was$3.1 million .
For additional information refer to Note 19 "Restructuring Charges" to our Condensed Consolidated Financial Statements.
Interest Expense and Other Expense (Income), Net
Other expense (income), net is comprised primarily of realized gains or losses
on sales of marketable securities, gains or losses from revaluations of certain
foreign currency denominated assets and liabilities as well as foreign currency
contracts, interest-related accruals (such as interest and penalty accruals
related to our tax obligations) and interest income earned on our invested cash,
cash equivalents and marketable securities.
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Three Months Ended March 31, Q3 FY22
vs.
(Dollar amounts in thousands) 2022 2021 Q3 FY21
Interest expense $ 39,978 $ 39,092 $ 886 2 %
Other expense (income), net 8,644 (7,348) 15,992 218 %
Interest expense as a percentage of total
revenues 2 % 2 %
Other expense (income), net as a percentage of
total revenues < 1% < 1%
Interest expense during the three months ended
Other expense (income), net during the three months endedMarch 31, 2022 increased compared to the three months endedMarch 31, 2021 primarily due to the following: a fair value loss of$5.2 million from an equity security in the third quarter of fiscal 2022; a$4.4 million gain recorded in the third quarter of the prior fiscal year due to the sale of our interest in PixCell; and the write-off of a$2.5 million cumulative translation loss, previously recorded in AOCI on the consolidated balance sheet, upon substantial completion of the liquidation of a foreign subsidiary in the third quarter of the current fiscal year. Nine Months Ended March 31, Q3 FY22 YTD vs. (Dollar amounts in thousands) 2022 2021 Q3 FY21 YTD Interest expense$ 116,142 $ 117,358 $ (1,216) (1) % Other expense (income), net 23,985 (269) 24,254 9,016 % Interest expense as a percentage of total revenues 2 % 2 % Other expense (income), net as a percentage of total revenues < 1%
< 1%
Interest expense during the nine months ended
Other expense (income), net during the nine months endedMarch 31, 2022 increased compared to the nine months endedMarch 31, 2021 primarily due to the following: a fair value loss of$14.1 million from an equity security in the current fiscal year; a$4.4 million gain recorded in the prior fiscal year due to the sale of our interest in PixCell; and the write-off of a$2.5 million cumulative translation loss, previously recorded in AOCI on the consolidated balance sheet, upon substantial completion of the liquidation of a foreign subsidiary in the current fiscal year.
Provision for Income Taxes
The following table provides details of income taxes:
Three Months Ended March 31, Nine Months Ended March 31,
(Dollar amounts in thousands) 2022 2021 2022 2021
Income before income taxes $ 846,285 $
640,403
115,625 73,233 22,876 207,316
Effective tax rate 13.7 % 11.4 % 0.9 % 12.6 %
The effective tax rate during the three months ended March 31, 2022 was higher
compared to the three months ended March 31, 2021 primarily due to the impact of
the following items:
•Tax expense increased by
•Tax expense increased by
•Tax expense increased by
•Tax expense decreased by
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The effective tax rate during the nine months endedMarch 31, 2022 was lower compared to the nine months endedMarch 31, 2021 primarily due to the impact of the following items: •Tax expense decreased by$394.5 million during the nine months endedMarch 31, 2022 relating to a non-recurring tax benefit resulting from the intra-entity transfers of certain intellectual property rights ("IP rights"). During the three months endedSeptember 30, 2021 , we completed intra-entity transfers of IP rights to one of ourSingapore subsidiaries in order to better align the ownership of these rights with how our business operates. The transfers did not result in taxable gains; however, ourSingapore subsidiary recognized deferred tax assets for the book and tax basis difference of the eligible transferred IP rights; and •Tax expense decreased by$69.1 million during the nine months endedMarch 31, 2022 relating to an internal restructuring reducing the deferred tax liability on unremitted earnings; partially offset by •Tax expense increased by$163.7 million during the nine months endedMarch 31, 2022 relating to a non-recurring tax expense resulting from a newIsrael tax law enacted onNovember 15, 2021 . The newIsrael tax law limits our ability to maintain our previous assertion that certain historical earnings of our subsidiaries were permanently reinvested inIsrael . Given this, we recorded a deferred tax liability and related tax expense of$163.7 million during the three months endedDecember 31, 2021 for the futureIsrael income tax due upon repatriation of these historical earnings in accordance with the newIsrael tax law. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with acquisitions, R&D credits as a percentage of aggregate pre-tax income, non-taxable or non-deductible increases or decreases in the assets held within our Executive Deferred Savings Plan, the tax effects of employee stock activity and the effectiveness of our tax planning strategies.
For discussions on tax examinations, assessments and certain related proceedings, see Note 13 "Income Taxes" to our Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
As of As of
(Dollar amounts in thousands) March 31, 2022 June 30, 2021
Cash and cash equivalents $ 1,415,172 $ 1,434,610
Marketable securities 1,162,724 1,059,912
Total cash, cash equivalents and marketable securities $ 2,577,896 $ 2,494,522
Percentage of total assets 21 % 24 %
Nine Months Ended March 31,
(In thousands) 2022 2021
Cash flows:
Net cash provided by operating activities $ 2,493,473 $ 1,719,402
Net cash used in investing activities (851,064) (406,800)
Net cash used in financing activities (1,653,279) (1,105,036)
Effect of exchange rate changes on cash and cash equivalents (8,568)
10,175
Net (decrease) increase in cash and cash equivalents $
(19,438)
Cash,
As ofMarch 31, 2022 , our cash, cash equivalents and marketable securities totaled$2.58 billion , which represents an increase of$83.4 million fromJune 30, 2021 . The increase is due to net cash provided by operating activities of$2.49 billion , net proceeds from our revolving credit facility of$275.0 million and stock issuance of$36.9 million , partially offset by stock repurchases of$1.39 billion , cash used for payment of dividends and dividend equivalents of$480.9 million ,$470.9 million in net cash paid for acquisitions, capital expenditures of$234.2 million , and net purchases of available for sale and trading securities of$146.8 million . As ofMarch 31, 2022 ,$1.16 billion of our$2.58 billion of cash, cash equivalents and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to indefinitely reinvest$747.4 million of the cash, cash equivalents and marketable securities held by our foreign subsidiaries for which we assert that earnings are permanently 49
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reinvested. If, however, a portion of these funds were to be repatriated tothe United States , we would be required to accrue and pay state and foreign taxes of approximately 1% - 22% of the funds repatriated. The amount of taxes due will depend on the amount and manner of the repatriation, as well as the location from which the funds are repatriated. We have accrued state and foreign tax on the remaining cash of$409.4 million of the$1.16 billion held by our foreign subsidiaries and branch offices. As such, these funds can be returned to theU.S. without accruing any additionalU.S. tax expense.
Cash Dividends
During the three months endedMarch 31, 2022 , our Board of Directors declared a regular quarterly cash dividend of$1.05 per share on our outstanding common stock, which was paid onMarch 1, 2022 to our stockholders of record as of the close of business onFebruary 14, 2022 . During the same period in fiscal year endedJune 30, 2021 , our Board of Directors declared and paid a regular quarterly cash dividend of$0.90 per share on our outstanding common stock. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months endedMarch 31, 2022 and 2021 was$159.0 million and$139.3 million , respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid during the nine months endedMarch 31, 2022 and 2021 was$480.9 million and$420.1 million , respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as ofMarch 31, 2022 andJune 30, 2021 was$10.9 million and$10.3 million , respectively. These amounts will be paid upon vesting of the underlying unvested RSUs as described in Note 10 "Equity, Long-term Incentive Compensation Plans and Non-Controlling Interest" to our Condensed Consolidated Financial Statements.
Stock Repurchases
The shares repurchased under our stock repurchase program have reduced our basic and diluted weighted-average shares outstanding for the nine months endedMarch 31, 2022 and 2021. The stock repurchase program is intended, in part, to offset the dilution from our equity incentive plans, shares issued in connection with purchases under our Employee Stock Purchase Program as well as to return excess cash to our shareholders.
Cash Flows from Operating Activities
Historically, we have financed our liquidity requirements through cash generated from our operations. Net cash provided by operating activities during the nine months endedMarch 31, 2022 was$2.49 billion compared to$1.72 billion during the nine months endedMarch 31, 2021 . This increase of$774.1 million resulted primarily from the following: •An increase in collections of approximately$1.9 billion mainly driven by higher shipments and prepayments during the nine months endedMarch 31, 2022 ; partially offset by
•An increase in accounts payable payments of approximately
•An increase in employee-related payments of approximately
•An increase in income tax payments of approximately
•An increase in other tax payments of approximately
Cash Flows from Investing Activities
Net cash used in investing activities during the nine months endedMarch 31, 2022 was$851.1 million compared to$406.8 million during the nine months endedMarch 31, 2021 . This increase in cash used was mainly due to increases in cash paid for business acquisition of$470.9 million and cash paid to purchase fixed assets of$57.9 million , partially offset by a decrease in net purchases of available for sale and trading securities of$103.0 million .
Cash Flows from Financing Activities
Net cash used in financing activities during the nine months endedMarch 31, 2022 was$1.65 billion compared to cash used in financing activities of$1.11 billion during the nine months endedMarch 31, 2021 . This increase was mainly due to increases in cash used for common stock repurchases of$755.4 million and cash paid for dividends and dividend equivalents of$60.8 million , partially offset by an increase in net debt receipts of$284.7 million .
Senior Notes
We have senior unsecured notes in the aggregate principal amount of$3.45 billion outstanding as ofMarch 31, 2022 . InFebruary 2020 , we issued$750.0 million ("2020 Senior Notes") aggregate principal amount of senior, unsecured long-term 50
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notes under which the proceeds were used to redeem$500.0 million of Senior Notes due 2021, including associated redemption premiums, accrued interest and other fees and expenses, to repay borrowings of$200.0 million under the Revolving Credit Facility and for other general corporate purposes. InMarch 2019 andNovember 2014 , we issued$1.20 billion (the "2019 Senior Notes") and$2.50 billion (the "2014 Senior Notes" and together with the 2019 Senior Notes and the 2020 Senior Notes, the "Senior Notes"), respectively, aggregate principal amount of senior, unsecured long-term notes. See Note 8 "Debt" to our Condensed Consolidated Financial Statements for additional discussion of existing debt. We may seek to refinance our existing debt and may incur additional indebtedness depending on our capital requirements and the availability of financing. Interest is payable as follows: semi-annually onMarch 1 andSeptember 1 of each year for the 2020 Senior Notes; semi-annually onMarch 15 andSeptember 15 of each year for the 2019 Senior Notes; and semi-annually onMay 1 andNovember 1 of each year for the 2014 Senior Notes. The Indenture for the Senior Notes includes covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are not restricted. In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two ofMoody's Investors Service ("Moody's"),S&P Global Ratings ("S&P") andFitch Inc. ("Fitch"), unless we have exercised our rights to redeem the Senior Notes of such series, we will be required to make an offer to repurchase all or, at the holder's option, any part, of each holder's Senior Notes of that series pursuant to the offer described below (the "Change of Control Offer"). In the Change of Control Offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of Senior Notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, up to, but not including, the date of repurchase.
As of
Revolving Credit Facility
We have a Credit Agreement (the "Credit Agreement") providing for a$1.00 billion unsecured Revolving Credit Facility (the "Revolving Credit Facility"), with a maturity date ofNovember 30, 2023 . During the first quarter of the fiscal year endingJune 30, 2021 , we made a principal payment of$50.0 million on the Revolving Credit Facility which brought the balance under the Revolving Credit Facility to zero. During the first quarter of the fiscal year endingJune 30, 2022 , we borrowed$300.0 million from the Revolving Credit Facility, which was paid in full in the same quarter. During the quarter endedMarch 31, 2022 , we borrowed$300.0 million from the Revolving Credit Facility, of which$25.0 million was repaid in the same quarter and$275.0 million of aggregate principal amount of borrowings remained outstanding as ofMarch 31, 2022 .
We may borrow, repay and reborrow funds under the Revolving Credit Facility until the maturity date, at which time such Revolving Credit Facility will terminate, and all outstanding loans under such facility, together with all accrued and unpaid interest, must be repaid. We may prepay outstanding borrowings under the Revolving Credit Facility at any time without a prepayment penalty.
Borrowings under the Revolving Credit Facility will bear interest, at our
option, at either: (i) the Alternative Base Rate ("ABR") plus a spread, which
ranges from 0 bps to 75 bps, or (ii) the London Interbank Offered Rate ("LIBOR")
plus a spread, which ranges from 100 bps to 175 bps. The spreads under ABR and
LIBOR are subject to adjustment in conjunction with credit rating downgrades or
upgrades. We are also obligated to pay an annual commitment fee on the daily
undrawn balance of the Revolving Credit Facility, which ranges from 10 bps to 25
bps, subject to an adjustment in conjunction with changes to our credit rating.
As of March 31, 2022 , we elected to pay interest on the borrowed amount under
the Revolving Credit Facility at LIBOR plus a spread of 100 bps, and we pay an
annual commitment fee of 10 bps on the daily undrawn balance of the Revolving
Credit Facility.
The Revolving Credit Facility requires us to maintain an interest expense
coverage ratio as described in the Credit Agreement, on a quarterly basis,
covering the trailing four consecutive fiscal quarters of no less than 3.50 to
1.00. In addition, we are required to maintain the maximum leverage ratio as
described in the Credit Agreement, on a quarterly basis of 3.00 to 1.00,
covering the trailing four consecutive fiscal quarters for each fiscal quarter,
which can be increased to a maximum of 4.00 to 1.00 for a period of time in
connection with a material acquisition or a series of material acquisitions. As
of March 31, 2022 , our maximum allowed leverage ratio was 3.00 to 1.00.
We were in compliance with all covenants under the Credit Agreement as of
March 31, 2022 (the interest expense coverage ratio was 24.79 to 1.00 and the
leverage ratio was 0.96 to 1.00). Considering our current liquidity position,
short-term financial forecasts and ability to prepay the Revolving Credit
Facility, if necessary, we expect to continue to be in compliance with our
financial covenants at the end of our fiscal year ending June 30, 2022 .
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Contractual Obligations
There have been no material changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 , except for an increase in purchase obligations for inventory. For additional details regarding our debt and commitments, refer to Note 8 "Debt" and Note 15 "Commitments and Contingencies," respectively, to our Condensed Consolidated Financial Statements. For additional details regarding our contractual obligations, refer to our Annual Report Form on 10-K for the fiscal year endedJune 30, 2021 .
Working Capital
Working capital was$3.75 billion as ofMarch 31, 2022 , which represents an increase of$160.7 million compared to our working capital of$3.59 billion as ofJune 30, 2021 . As ofMarch 31, 2022 , our principal sources of liquidity consisted of$2.58 billion of cash, cash equivalents and marketable securities. Our liquidity may be affected by many factors, some of which are based on the normal ongoing operations of the business, spending for business acquisitions and other factors such as uncertainty in the global and regional economies and the semiconductor, semiconductor-related and electronic device industries. Although cash requirements will fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with the liquidity provided by existing cash and cash equivalents balances and availability under our Revolving Credit Facility, will be sufficient to satisfy our liquidity requirements associated with working capital needs, capital expenditures, cash dividends, stock repurchases and other contractual obligations, including repayment of outstanding debt, for at least the next 12 months.
In
Rating Agency Rating Fitch A- Moody's A2Standard & Poor's BBB+
Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the semiconductor and semiconductor equipment industries, our financial position, material acquisitions and changes in our business strategy.
Off-Balance Sheet Arrangements
As ofMarch 31, 2022 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial position, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 15 "Commitments and Contingencies" to our Condensed Consolidated Financial Statements for information related to indemnification obligations. 52
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