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;
the effect of future compliance with laws and regulations; 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; our repayment of our outstanding indebtedness; and our
environmental, social and governance ("ESG") related targets, goals and
commitments.
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 rising inflation and interest rates,Russia's invasion ofUkraine , and 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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•Increasing attention to ESG Matters and the resulting costs, risks and impact on our business;
•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;
•Our ability or the ability of our customers to obtain licenses for the sale of certain products or provision of certain services to customers inthe People's Republic of China ("China"), pursuant to regulations recently issued (the "New BIS Rules") by theBureau of Industry and Security ("BIS") of theU.S. Department of Commerce ("Commerce"), which could impact our business, financial condition and results of operations;
•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;
•Our ability to identify suitable acquisition targets and successfully integrate and manage acquired businesses; and
•Unexpected delays, difficulties and expenses in executing against our environmental, climate, inclusion and diversity or other ESG targets, goals and commitments.
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, 2022 . 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
("LED"), power devices, compound semiconductor, and data storage industries, as
well as general materials research.
Our semiconductor customers generally operate in one or both of the major
semiconductor device manufacturing markets: memory and foundry/logic. 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. Other demand trends include the growth of
end-market drivers such as artificial intelligence ("AI"), the deployment of 5G
telecommunications technology and associated high-end mobile devices, the
electrification and digitalization of the automotive industry, the revival of
personal computer ("PC") demand and associated innovations to support remote
work, virtual collaboration, remote learning and entertainment, and the growth
of the IoT. 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 the 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 over the last
few years. While demand for our products remains strong and we continue to
invest in technological innovation, the recent macro-economic uncertainty,
expectations of a slowing global economy and resulting impact on consumer demand
is a development we are monitoring closely. Some of our customers, particularly
in the PC and mobile device end markets, are experiencing market softening in
the past few months, and we have seen memory pricing in those markets weaken as
well. As a result, some customers have started to postpone capacity expansion
plans. Any push out or cancellation of deliveries by our customers could cause
earnings volatility, due to increases in risk of inventory related charges as
well as the timing of revenue recognition.
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We are organized into three reportable segments. Prior to
•Semiconductor Process Control: 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, from R&D to final volume production.
•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, MEMS, and other electronic components. A majority of our revenues are derived from outside theU.S. , and include geographic regions such asChina ,Taiwan ,Korea ,Japan ,Europe andIsrael , and Rest ofAsia .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 and theU.S. AlthoughChina is currently seen as an important long-term growth region for the semiconductor and electronics capital equipment sector, Commerce has adopted regulations and 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. In addition, inOctober 2022 , the BIS issued the New BIS Rules to control the export ofU.S. semiconductor and high-performance computing technology (including wafer fab equipment) and to control the provision of support byU.S. persons toChina . The New BIS Rules impose export license requirements effectively on all KLA products and services to customers located inChina that fabricate:
a.Non-planar integrated circuits ("ICs") (e.g., FinFet or GaaFeT) or 14/16nm and below logic ICs;
b.NAND ICs at 128 layers and above; and
c.DRAM ICs using a "production" technology node of 18 nanometer half-pitch or less.
KLA is also restricted from providing certainU.S. origin tools, software and technology to certain wafer fab equipment manufacturers and maskshops located inChina , absent an export license. We are taking appropriate measures to comply with them and are applying for export licenses, when required, to avoid disruption to our customers' operations. While some export licenses have been obtained by us or our customers, there can be no assurance that export licenses applied for by either us or our customers will be granted. The New BIS Rules are complex, and we are working on assessing the their full impact on KLA. The new rules have not significantly impacted our operations to date, but the possible negative effects on our future business of export licenses not being granted could be material and could result in a substantial reduction to our remaining performance obligations ("RPO") or require us to return substantial deposits received from customers inChina for future purchase orders. We are still assessing the aggregate potential impact of the existing regulations and New BIS Rules on our financial results and operations, although our preliminary assessment indicates a potential combined gross direct impact on revenue, based on existing backlog, in the range of approximately$500 million to$900 million in calendar year 2023. However, this estimate does not take into account the likelihood of system reallocation of products to other customers where supply is meaningfully below demand for those products. See Part II, Item 1A, "Risk Factors" in this report for more information regarding how such actions by theU.S. government or another country could significantly impact our ability to provide our products and services to existing and potential customers, especially inChina , and adversely affect our business, financial condition and results of operations. 38
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The following table sets forth some of our key quarterly unaudited financial
information:
Three Months Ended
(In thousands, except net income September 30, June 30, March 31, December 31, September 30,
per share) 2022 2022 2022 2021 2021
Total revenues $ 2,724,424 $ 2,486,739 $ 2,288,676 $ 2,352,630 $ 2,083,838
Costs of revenues $ 1,041,226 $ 978,564 $ 892,091 $ 908,162 $ 813,624
Gross margin 62 % 61 % 61 % 61 % 61 %
Net income attributable to
KLA(1) $ 1,025,991 $ 805,374 $ 730,572 $ 717,444 $ 1,068,417
Diluted net income per share
attributable to KLA(2) $ 7.20 $ 5.40 $ 4.83 $ 4.71 $ 6.96
__________________
(1)Our net income attributable to KLA increased to $1,026.0 million in the three
months ended September 30, 2022 compared to the three months ended September 30,
2021 . The increase from the first quarter of fiscal 2022 was primarily due to
higher revenues partially offset by higher operating expenses as well as a lower
income tax benefit. 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 and higher levels of inflation, even as the pace of economic recovery remains uneven in various geographies. On one hand, the semiconductor and capital equipment industry has experienced multiple growth drivers, including acceleration of the pace of virtual engagement and digitization driven by COVID-19 related travel restrictions and quarantines. On the other hand, the war inUkraine and resumption of growth has caused us to experience new constraints and challenges. 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 introduction of new variants have required and could in the future 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.
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, 2022 . 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 39
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and Results of Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year endedJune 30, 2022 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 September 30, Q1 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q1 FY22
Revenues:
Product $ 2,195,609 $ 1,629,888 $ 565,721 35 %
Service 528,815 453,950 74,865 16 %
Total revenues $ 2,724,424 $ 2,083,838 $ 640,586 31 %
Costs of revenues $ 1,041,226 $ 813,624 $ 227,602 28 %
Gross margin 61.8 % 61.0 %
Product revenues during the three months ended September 30, 2022 increased
compared to the three months ended September 30, 2021 primarily due to strong
demand for many of our products, especially our metrology and inspection
portfolios, as well as increases from continued growth in the advanced packaging
and specialty semiconductor markets.
Service revenues during the three months ended
Revenues by segment(1)
Three Months Ended September 30, Q1 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q1 FY22
Revenues:
Semiconductor Process Control $ 2,397,759 $ 1,779,083 $ 618,676 35 %
Specialty Semiconductor Process 127,867 102,029 25,838 25 %
PCB, Display and Component Inspection 200,745 202,808 (2,063) (1) %
Total revenues for reportable segments $ 2,726,371 $ 2,083,920 $ 642,451 31 %
__________
(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.
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Revenues from our Semiconductor Process Control segment during the three months endedSeptember 30, 2022 increased compared to the three months endedSeptember 30, 2021 primarily due to strong demand for many of our products especially from our metrology and inspection portfolios. Revenues in the Specialty Semiconductor Process segment during the three months endedSeptember 30, 2022 increased compared to the three months endedSeptember 30, 2021 primarily due to continued growth in the specialty semiconductor market. Revenues in the PCB, Display and Component Inspection segment during the three months endedSeptember 30, 2022 remained relatively flat compared to the three months endedSeptember 30, 2021 .
The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods:
Three Months Ended (Dollar amounts in thousands) 2022 2021 China$ 839,661 31 %$ 685,156 33 % Taiwan 748,334 27 % 627,084 30 % Korea 407,462 15 % 239,183 12 % North America 233,754 9 % 177,740 9 % Japan 217,709 8 % 175,167 8 % Europe and Israel 164,073 6 % 87,440 4 % Rest of Asia 113,431 4 % 92,068 4 % Total$ 2,724,424 100 %$ 2,083,838 100 %
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
September 30, 2021 61.0%
Revenue volume of products and services 0.7%
Mix of products and services sold 1.9%
Manufacturing labor, overhead and efficiencies (0.2)%
Other service and manufacturing costs (1.6)%
September 30, 2022 61.8%
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 more profitable mix and a higher revenue volume of products
and services sold, 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 September 30, Q1 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q1 FY22
Segment gross profit:
Semiconductor Process Control $ 1,576,982 $ 1,161,929 $ 415,053 36 %
Specialty Semiconductor Process 67,040 54,721 12,319 23 %
PCB, Display and Component Inspection 85,674 94,476 (8,802) (9) %
$ 1,729,696 $ 1,311,126 $ 418,570 32 %
________________
(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 Semiconductor Process Control segment during the three
months ended September 30, 2022 increased compared to the three months ended
September 30, 2021 primarily due to a higher revenue volume of products and
services sold, partially offset by an increase in other service and
manufacturing costs. Gross profit in the Specialty Semiconductor Process segment
during the three months ended September 30, 2022 increased compared to the three
months ended September 30, 2021 primarily due to a 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 months ended
September 30, 2022 decreased compared to the three months ended September 30,
2021 primarily due to a lower revenue volume of products and services sold and
an increase in other service and manufacturing costs, partially offset by a more
favorable mix of products and services sold.
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 September 30, Q1 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q1 FY22
R&D expenses $ 318,515 $ 258,153 $ 60,362 23 %
R&D expenses as a percentage of total
revenues 12 % 12 %
R&D expenses during the three months endedSeptember 30, 2022 increased compared to the three months endedSeptember 30, 2021 primarily due to an increase in employee-related expenses of$32.1 million as a result of additional engineering headcount contributing to higher employee compensation and benefit costs, an increase in engineering project material costs of$20.2 million and increased depreciation expense of$5.5 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 September 30, Q1 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q1 FY22
SG&A expenses $ 253,980 $ 193,261 $ 60,719 31 %
SG&A expenses as a percentage of total
revenues 9 % 9 %
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SG&A expenses during the three months endedSeptember 30, 2022 increased compared to the three months endedSeptember 30, 2021 primarily due to$16.8 million of compensation-related expense from the sale ofOrbograph Ltd. ("Orbograph") along with increases in the following: depreciation expense of$11.3 million , facilities-related expense of$9.0 million , employee travel expenses of$6.6 million , allowance for credit losses of$6.4 million and consulting costs of$4.6 million .
Restructuring Charges
Restructuring charges were$16.2 million and$0.5 million for the three months endedSeptember 30, 2022 and 2021, respectively. As ofSeptember 30, 2022 , the accrual for restructuring charges was$5.4 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.
Three Months Ended September 30, Q1 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q1 FY22
Interest expense $ 74,395 $ 38,312 $ 36,083 94 %
Other expense (income), net (47,006) 14,140 (61,146) (432) %
Interest expense as a percentage of total
revenues 3 % 2 %
Other expense (income), net as a percentage of
total revenues (2) % < 1%
Interest expense during the three months ended
Other expense (income), net during the three months endedSeptember 30, 2022 decreased compared to the three months endedSeptember 30, 2021 primarily due to the following: a gain of$29.7 million from the sale of our interest in Orbograph to a private equity firm, a higher net fair value gain of$13.3 million from an equity security compared to the prior fiscal year, and decreases in accruals related to uncertain tax positions of$10.4 million .
Loss on Extinguishment of Debt
For the three months endedSeptember 30, 2022 , loss on extinguishment of debt reflected a pre-tax net loss of$13.3 million associated with the redemption of$500.0 million of the Senior Notes due 2024, including associated redemption premiums, accrued interest and other fees and expenses. We had no loss on extinguishment of debt in the three months endedSeptember 30, 2021 .
Provision for Income Taxes
The following table provides details of income taxes:
Three Months Ended September 30,
(Dollar amounts in thousands) 2022
2021
Income before income taxes$ 1,070,028 $
766,348
Provision (benefit) for income taxes 43,963 (302,137) Effective tax rate 4.1 % (39.4) %
The effective tax rate during the three months ended
•Tax expense decreased by$394.5 million during the three months endedSeptember 30, 2021 relating to a non-recurring tax benefit resulting from the intra-entity transfers of certain intellectual property ("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 43
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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 increased by$11.7 million during the three months endedSeptember 30, 2022 relating to the sale of anOrbotech Ltd. subsidiary; partially offset by
•Tax expense decreased by
•Tax expense decreased by$62 million during the three months endedSeptember 31, 2022 relating to a decrease in our deferred tax liabilities on unremitted earnings and unrealized gains. 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) September 30, 2022 June 30, 2022
Cash and cash equivalents $ 1,819,280 $ 1,584,908
Marketable securities 1,134,240 1,123,100
Total cash, cash equivalents and marketable securities $ 2,953,520 $ 2,708,008
Percentage of total assets 23 % 21 %
Three Months Ended September 30,
(In thousands) 2022 2021
Cash flows:
Net cash provided by operating activities $ 1,011,545 $ 863,797
Net cash used in investing activities (53,475) (175,306)
Net cash used in financing activities (705,727) (609,030)
Effect of exchange rate changes on cash and cash equivalents (17,971) (4,507)
Net increase in cash and cash equivalents $
234,372
Cash,
As ofSeptember 30, 2022 , our cash, cash equivalents and marketable securities totaled$2.95 billion , which represents an increase of$245.5 million fromJune 30, 2022 . The increase is due to net cash provided by operating activities of$1.01 billion and net proceeds from the sale of a business of$75.4 million , partially offset by net repayments of debt of$368.8 million , cash used for payment of dividends and dividend equivalents of$188.0 million , stock repurchases of$89.8 million , capital expenditures of$84.4 million and$55.0 million of tax withholding payments related to vested and released restricted stock units ("RSU"). As ofSeptember 30, 2022 ,$1.24 billion of our$2.95 billion of cash, cash equivalents and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to indefinitely reinvest$88.5 million of the cash, cash equivalents and marketable securities held by our foreign subsidiaries for which we assert that earnings are permanently 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$1.15 billion of the$1.24 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 ended
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$1.30 per share on our outstanding common stock, which was paid onSeptember 1, 2022 to our stockholders of record as of the close of business onAugust 15, 2022 . During the same period in fiscal year endedJune 30, 2022 , our Board of Directors declared and paid a regular quarterly cash dividend of$1.05 per share on our outstanding common stock. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months endedSeptember 30, 2022 and 2021 was$188.0 million and$162.8 million , respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as ofSeptember 30, 2022 andJune 30, 2022 was$9.4 million and$11.2 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 three months endedSeptember 30, 2022 and 2021. The stock repurchase program is intended, in part, to mitigate the potential dilutive impact related to our equity incentive plans and shares issued in connection with our Employee Stock Purchase Program as well as to return excess cash to our stockholders.
Cash Flows Provided by Operating Activities
Historically, we have financed our liquidity requirements through cash generated from our operations. Net cash provided by operating activities during the three months endedSeptember 30, 2022 was$1.01 billion compared to$0.86 billion during the three months endedSeptember 30, 2021 . This increase of$147.7 million resulted primarily from the following: •An increase in collections of approximately$605 million mainly driven by higher shipments and prepayments during the three months endedSeptember 30, 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 Used in Investing Activities
Net cash used in investing activities during the three months endedSeptember 30, 2022 was$53.5 million compared to$175.3 million during the three months endedSeptember 30, 2021 . This decrease in cash used was mainly due to an increase in proceeds from the sale of a business of$75.4 million and a decrease in net purchases of available-for-sale and trading securities of$50.0 million .
Cash Flows Used in Financing Activities
Net cash used in financing activities during the three months endedSeptember 30, 2022 was$0.71 billion compared to net cash used in financing activities of$0.61 billion during the three months endedSeptember 30, 2021 . This increase was mainly due to increases in repayment of debt of$362.3 million and cash paid for dividends and dividend equivalents of$25.2 million , partially offset by a decrease in cash used for common stock repurchases of$309.8 million .
Senior Notes
InJune 2022 , we issued$3.00 billion aggregate principal amount of senior, unsecured notes (the "2022 Senior Notes") as follows:$1.00 billion of 4.650% senior, unsecured notes dueJuly 15, 2032 ;$1.20 billion of 4.950% senior, unsecured notes dueJuly 15, 2052 ; and$800.0 million of 5.250% senior, unsecured notes dueJuly 15, 2062 . A portion of the net proceeds of the 2022 Senior Notes was used to complete a tender offer inJuly 2022 for$500.0 million of our 2014 Senior Notes, as defined below, including associated redemption premiums, accrued interest and other fees and expenses. The transaction resulted in pre-tax net loss on extinguishment of debt of$13.3 million for the three months endedSeptember 30, 2022 . The remainder of the net proceeds were used for share repurchases and for general corporate purposes. Prior toJune 2022 , the following aggregate principal amounts of senior, unsecured long-term notes were issued in the following periods:$750.0 million inFebruary 2020 (the "2020 Senior Notes"),$1.20 billion inMarch 2019 (the "2019 Senior Notes") and$2.50 billion inNovember 2014 (the "2014 Senior Notes"). These, along with the 2022 Senior Notes, are collectively referred to as the "Senior Notes." 45
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The original discounts on the Senior Notes are being amortized over the life of the debt. Interest is payable as follows: semi-annually onJanuary 15 andJuly 15 of each year for the 2022 Senior Notes; 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 relevant indentures for the Senior Notes (collectively, the "Indenture") include covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions. 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 (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 in place a Credit Agreement ("Credit Agreement") for an unsecured
Revolving Credit Facility ("Revolving Credit Facility") with a maturity date of
June 8, 2027 that allows us to borrow up to $1.50 billion . Subject to the terms
of the Credit Agreement, the Revolving Credit Facility may be increased by an
amount up to $250.0 million in the aggregate. In the first quarter of fiscal
2023, we borrowed $300.0 million and repaid $150.0 million , leaving
$425.0 million aggregate principal amount outstanding at September 30, 2022 .
We may borrow, repay and reborrow funds under the Revolving Credit Facility
until the maturity date, at which time we may exercise two one-year extension
options with the consent of the lenders. We may prepay outstanding borrowings
under the Revolving Credit Facility at any time without a prepayment penalty.
Borrowings under the Revolving Credit Facility can be made as Term Secured
Overnight Financing Rate ("SOFR") Loans or Alternate Base Rate ("ABR") Loans, at
the Company's option. In the event that Term SOFR is unavailable, any Term SOFR
elections will be converted to Daily Simple SOFR, as long as it is available.
Each Term SOFR Loan will bear interest at a rate per annum equal to the
applicable Adjusted Term SOFR rate, which is equal to the applicable Term SOFR
rate plus 10 bps that shall not be less than zero, plus a spread ranging from 75
bps to 125 bps, as determined by the Company's credit ratings at the time. Each
ABR Loan will bear interest at a rate per annum equal to the ABR plus a spread
ranging from 0 bps to 25 bps, as determined by the Company's credit ratings at
the time. We are also obligated to pay an annual commitment fee on the daily
undrawn balance of the Revolving Credit Facility, which ranges from 4.5 bps to
12.5 bps, subject to an adjustment in conjunction with changes to our credit
rating. The applicable interest rates and commitment fees are also subject to
adjustment based on the Company's performance against certain environmental
sustainability key performance indicators related to greenhouse gas ("GHG")
emissions and renewable electricity usage. As of September 30, 2022 , the all-in
interest rate of the $425.0 million outstanding Term SOFR loans reflected the
applicable Adjusted Term SOFR plus a spread of 100 bps and the applicable
commitment fee on the daily undrawn balance of the Revolving Credit Facility was
9 bps.
Under the Credit Agreement, the maximum leverage ratio, on a quarterly basis, is
3.50 to 1.00, covering the trailing four consecutive fiscal quarters for each
fiscal quarter, which can be increased to 4.00 to 1.00 for a period of time in
connection with a material acquisition or a series of material acquisitions. As
of September 30, 2022 , our maximum allowed leverage ratio was 3.50 to 1.00.
We were in compliance with all covenants under the Credit Agreement as of
September 30, 2022 (the leverage ratio was 1.41 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, 2023 .
Material Cash Requirements
There have been no material changes outside the ordinary course of business to our material cash requirements as disclosed in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2022 . 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 material cash requirements, refer to our Annual Report Form on 10-K for the fiscal year endedJune 30, 2022 . 46
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Working Capital
Working capital was$4.50 billion as ofSeptember 30, 2022 , which represents an increase of$206.7 million compared to our working capital of$4.30 billion as ofJune 30, 2022 . As ofSeptember 30, 2022 , our principal sources of liquidity consisted of$2.95 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 our$1.50 billion 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.
Our credit ratings as of
Rating Agency Rating Fitch A- Moody's A2Standard & Poor's A-
In
Off-Balance Sheet Arrangements
As ofSeptember 30, 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. 47
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