KLA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

The following discussion of our financial condition and results of operations
should be read in conjunction with our Consolidated Financial Statements and the
related notes included in Item 8, "Financial Statements and Supplementary Data,"
in this Annual Report on Form 10-K. This discussion contains forward-looking
statements, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking statements as a
result of certain factors, including but not limited to those discussed in
Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K. (See
"Special Note Regarding Forward-Looking Statements"). Pursuant to the FAST Act
Modernization and Simplification of Regulation S-K, discussions related to the
changes in results of operations from fiscal year 2019 to fiscal year 2018 have
been omitted. Such omitted discussion can be found under Item 7 of our Form 10-K
for the fiscal year ended June 30, 2019, filed with the SEC.

EXECUTIVE SUMMARY
We are a global leader in process control and a supplier of process-enabling
solutions and services for the data era.
We are a leading supplier of process control and yield management solutions and
services for the semiconductor, PCB and Display markets. Our broad portfolio of
inspection and metrology products, and related service, software and other
offerings primarily supports integrated circuit ("IC" or "chip") manufacturers
throughout the entire semiconductor fabrication process, from research and
development to final volume production. We provide leading edge equipment,
software and services that enable IC manufacturers to identify, resolve and
manage significant advanced technology manufacturing process challenges and
obtain higher finished product yields at lower overall cost. In addition to
serving the semiconductor, PCB and Display industry, we also provide a range of
technology solutions to a number of other high technology industries, including
advanced packaging, light emitting diode ("LED"), power devices, compound
semiconductor, and data storage industries, as well as general materials
research.
Our products and services are used by the vast majority of bare wafer, IC,
lithography reticle ("reticle" or "mask") and hard disk drive manufacturers
around the world. Our products, services and expertise are used by our customers
to measure, detect, analyze and resolve critical product defects that arise in
that environment in order to control nanometric level manufacturing processes.
Our revenues are driven largely by our customers' spending on capital equipment
and related maintenance services necessary to support key transitions in their
underlying product technologies, or to increase their production volumes in
response to market demand or expansion plans. Our semiconductor customers
generally operate in one or more of the three major semiconductor markets -
memory, foundry and logic. All three of these markets are characterized by rapid
technological changes and sudden shifts in end-user demand, which influence the
level and pattern of our customers' spending on our products and services.
Although capital spending in all three semiconductor markets has historically
been cyclical, the demand for more advanced and lower cost chips used in a
growing number of consumer electronics, communications, data processing, and
industrial and automotive products has resulted over the long term in a
favorable demand environment for our process control and yield management
solutions, particularly in the foundry and logic markets, which have higher
levels of process control adoption than the memory market. The Data Era is
creating multiple drivers for growth, with increased demand for advanced and
lower cost chips for Artificial Intelligence ("AI"), 5G connectivity, virtual
interaction, electric cars, advanced driver assistance automotive systems
("ADAS"), Internet of Things ("IoT") and mobile devices.
The semiconductor and electronics industries have also been characterized by
constant technological innovation. We believe that, over the long term, our
customers will continue to invest in advanced technologies and new materials to
enable smaller design rules and higher density applications that fuel demand for
process control equipment.
The demand for our products and our revenue levels are driven by our customers'
needs to solve the process challenges that they face as they adopt new
technologies required to fabricate advanced ICs that are incorporated into
sophisticated devices. Our customers continuously seek to increase yields and
enhance the efficiency of their manufacturing processes, including by improving
their manufacturing, inspection, testing and repair capabilities.
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Table of Contents The following table sets forth some of our key consolidated financial information for each of our last three fiscal years(1):

                                                                           Year ended June 30,
(Dollar amounts in thousands, except diluted net income
per share)                                                    2020                 2019                 2018
Total revenues                                           $ 5,806,424          $ 4,568,904          $ 4,036,701
Costs of revenues                                        $ 2,449,561          $ 1,869,377          $ 1,446,041
Gross margin percentage                                           58  %                59  %                64  %
Net income attributable to KLA(2)                        $ 1,216,785          $ 1,175,617          $   802,265
Diluted net income per share attributable to KLA         $      7.70

$ 7.49 $ 5.10

__________________

(1)On February 20, 2019, we completed the acquisition of Orbotech for total
consideration of approximately $3.26 billion. The operating results of Orbotech
have been included in our Condensed Consolidated Financial Statements from the
Acquisition Date. For additional details, refer to Note 6 "Business
Combinations" in the Notes to our Consolidated Financial Statements.
(2)Our net income attributable to KLA for the year ended June 30, 2020 includes
a pre-tax goodwill impairment charge of $256.6 million and a pre-tax charge of
$22.5 million as a result of the extinguishment of debt. For additional details,
refer to Note 7 "Goodwill and Purchased Intangible Assets" and Note 8 "Debt" in
the Notes to our Consolidated Financial Statements.

Impact of COVID-19
Events surrounding the ongoing COVID-19 pandemic have resulted in a reduction in
economic activity across the globe. The severity and duration of these economic
repercussions remain largely unknown and ultimately will depend on many factors,
including the speed and effectiveness of the containment efforts throughout the
world. The extent to which the COVID-19 pandemic will impact demand for our
products depends on future developments, which are highly uncertain and very
difficult to predict, including new information that may emerge concerning the
severity of the virus and actions to contain and treat its impacts. While all of
our global sites are currently operational, our facilities could be required to
temporarily curtail production levels or temporarily cease operations based on
government mandates.
From the start of the COVID-19 pandemic, we proactively implemented preventative
protocols intended to safeguard our employees, contractors, suppliers,
customers, and communities, and ensure business continuity in the event
government restrictions or severe outbreaks impact our operations at certain
sites. 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.
Our efforts to respond to the COVID-19 pandemic include the following:
•We have put health screenings in place, required social distancing, and have
established employee separation protocols at our facilities. We have also
suspended non-essential business travel and require team members to work from
home to the extent possible. Where work from home is not possible, all on-site
team members must pass through thermal scanning equipment to ensure they do not
have an elevated body temperature and must wear a mask at all times.
•We have developed strategies to address our responsiveness and ability to send
engineers into customer facilities to provide support services.
•We have evaluated our supply chain and communicated with our suppliers to
identify supply gaps and taken steps to ensure continuity. We continue to
monitor the supply chain and work with our suppliers to identify and mitigate
potential gaps to ensure continuity of supply.
•We are evaluating all our construction projects across our global operations
and enacting protocols to enhance the safety of our employees, suppliers, and
contractors.
•We have developed strategies and are implementing measures to respond to a
variety of potential economic scenarios, such as limitations on new hiring and
reductions in discretionary spending.
•We are working with government authorities in the jurisdictions where we
operate, and continuing 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 believe these actions are appropriate and prudent to safeguard our employees,
contractors, suppliers, customers, and communities, while allowing us to safely
continue operations, but we cannot predict how the steps we, our team members,
government entities, suppliers, or customers take in response to the COVID-19
pandemic will impact our business, outlook, or results of operations.
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We will continue to actively monitor the situation and may take further actions
altering 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. The COVID-19 pandemic has resulted in
an increase in freight costs due in large part to reduced air traffic, which
impacts gross margin, as well as decreases in travel costs which reduce our cost
structure. As of the date of this report, we cannot predict with certainty any
other effects the COVID-19 pandemic may have on our business, including the
effects on our customers, employees, or on our financial results for the
remainder of calendar 2020.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions in applying our accounting
policies that affect the reported amounts of assets, 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 Annual Report on Form 10-K. The accounting
policies that reflect our more significant estimates, judgments and assumptions
and which we believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:
Revenue Recognition. We primarily derive revenue from the sale of process
control and yield management solutions for the semiconductor and related
nanoelectronics industries, maintenance and support of all these products,
installation and training services and the sale of spare parts. Our portfolio
also includes yield enhancement and production solutions used by manufacturers
of printed circuit boards, flat panel displays, advanced packaging,
microelectromechanical systems and other electronic components. Our solutions
provide a comprehensive portfolio of inspection, metrology and data analytics
products, which are accompanied by a flexible portfolio of services to enable
our customers to maintain the performance and productivity of the solutions
purchased. Our solutions are generally not sold with a right of return, nor have
we experienced significant returns from or refunds to our customers.
We account for a contract with a customer when there is approval and commitment
from both parties, the rights of the parties are identified, payment terms are
identified, the contract has commercial substance and collectibility of
consideration is probable. Our revenues are measured based on consideration
stipulated in the arrangement with each customer, net of any sales incentives
and amounts collected on behalf of third parties, such as sales taxes. The
revenues are recognized as separate performance obligations that are satisfied
by transferring control of the product or service to the customer. Our
arrangements with our customers include various combinations of products and
services, which are generally capable of being distinct and accounted for as
separate performance obligations. A product or service is considered distinct if
it is separately identifiable from other deliverables in the arrangement and if
a customer can benefit from it on its own or with other resources that are
readily available to the customer. The transaction consideration, including any
sales incentives, is allocated between separate performance obligations of an
arrangement based on the stand-alone selling prices ("SSP") for each distinct
product or service. Management considers a variety of factors to determine the
SSP, such as historical standalone sales of products and services, discounting
strategies and other observable data. From time to time, our contracts are
modified to account for additional, or to change existing, performance
obligations. Our contract modifications are generally accounted for
prospectively.
Product Revenue
We recognize revenue from product sales at a point in time when we have
satisfied our performance obligation by transferring control of the product to
the customer. We use judgment to evaluate whether the control has transferred by
considering several indicators, including:
•whether we have a present right to payment;
•the customer has legal title;
•the customer has physical possession;
•the customer has significant risk and rewards of ownership; and
•the customer has accepted the product, or whether customer acceptance is
considered a formality based on history of acceptance of similar products (for
example, when the customer has previously accepted the same tool, with the same
specifications, and when we can objectively demonstrate that the tool meets all
of the required acceptance criteria, and when the installation of the system is
deemed perfunctory).
Not all of the indicators need to be met for us to conclude that control has
transferred to the customer. In circumstances in which revenue is recognized
prior to the product acceptance, the portion of revenue associated with our
performance obligations to install product is deferred and recognized upon
acceptance.
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We enter into volume purchase agreements with some of our customers. We adjust
the transaction consideration for estimated credits earned by our customers for
such incentives. These credits are estimated based upon the forecasted and
actual product sales for any given period and agreed-upon incentive rate. The
estimate is updated at each reporting period.
We offer perpetual and term licenses for software products. The primary
difference between perpetual and term licenses is the duration over which the
customer can benefit from the use of the software, while the functionality and
the features of the software are the same. Software is generally bundled with
post-contract customer support ("PCS"), which includes unspecified software
updates that are made available throughout the entire term of the arrangement.
Revenue from software licenses is recognized at a point in time, when the
software is made available to the customer. Revenue from PCS is deferred at
contract inception and recognized ratably over the service period, or as
services are performed.
Services and Spare Parts Revenue
The majority of product sales include a standard 6 to 12-month warranty that is
not separately paid for by the customers. The customers may also purchase
extended warranty for periods beyond the initial year as part of the initial
product sale. We have concluded that the standard 12-month warranty as well as
any extended warranty periods included in the initial product sales are separate
performance obligations for most of our products. The estimated fair value of
warranty services is deferred and recognized ratably as revenue over the
warranty period, as the customer simultaneously receives and consumes the
benefits of warranty services provided by us.
Additionally, we offer product maintenance and support services, which the
customer may purchase separately from the standard and extended warranty offered
as part of the initial product sale. Revenue from separately negotiated
maintenance and support service contracts is also recognized over time based on
the terms of the applicable service period. Revenue from services performed in
the absence of a maintenance contract, including training revenue, is recognized
when the related services are performed. We also sell spare parts, revenue from
which is recognized when control over the spare parts is transferred to the
customer.
Installation services include connecting and validating configuration of the
product. In addition, several testing protocols are completed to confirm the
equipment is performing to customer specifications. Revenues from product
installation are deferred and recognized at a point in time, once installation
is complete.
Significant Judgments
Our contracts with our customers often include promises to transfer multiple
products and services. Each product and service is generally capable of being
distinct within the context of the contract and represents a separate
performance obligation. Determining the SSP for each distinct performance
obligation and allocation of consideration from an arrangement to the individual
performance obligations and the appropriate timing of revenue recognition are
significant judgments with respect to these arrangements. We typically estimate
the SSP of products and services based on observable transactions when the
products and services are sold on a standalone basis and those prices fall
within a reasonable range. We typically have more than one SSP for individual
products and services due to the stratification of these products by customers
and circumstances. In these instances, we use information such as the size of
the customer, geographic region, as well as customization of the products in
determining the SSP. In instances where the SSP is not directly observable, we
determine the SSP using information that includes market conditions,
entity-specific factors, including discounting strategies, information about the
customer or class of customer that is reasonably available and other observable
inputs. While changes in the allocation of SSP between performance obligations
will not affect the amount of total revenue recognized for a particular
contract, any material changes could impact the timing of revenue recognition,
which could have a material effect on our financial position and result of
operations.
Although the products are generally not sold with a right of return, we may
provide other credits or sales incentives, which are accounted for either as
variable consideration or material right, depending on the specific terms and
conditions of the arrangement. These credits and incentives are estimated at
contract inception and updated at the end of each reporting period if and when
additional information becomes available.
As outlined above, we use judgments to evaluate whether or not the customer has
obtained control of the product and considers the several indicators in
evaluating whether or not control has transferred to the customer. Not all of
the indicators need to be met for us to conclude that control has transferred to
the customer.
Contract Assets/Liabilities
The timing of revenue recognition, billings and cash collections may result in
accounts receivable, contract assets, and contract liabilities (deferred
revenue) on our Consolidated Balance Sheets. A receivable is recorded in the
period we deliver products or provide services when we have an unconditional
right to payment. Contract assets primarily relate to the value of
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products and services transferred to the customer for which the right to payment
is not just dependent on the passage of time. Contract assets are transferred to
accounts receivable when rights to payment become unconditional.
A contract liability is recognized when we receive payment or have an
unconditional right to payment in advance of the satisfaction of performance.
The contract liabilities represent (1) deferred product revenue related to the
value of products that have been shipped and billed to customers and for which
the control has not been transferred to the customers, and (2) deferred service
revenue, which is recorded when we receive consideration, or such consideration
is unconditionally due, from a customer prior to transferring services to the
customer under the terms of a contract. Deferred service revenue typically
results from warranty services, and maintenance and other service contracts.
Contract assets and liabilities related to rights and obligations in a contract
are recorded net in the Consolidated Balance Sheets.
Business Combinations. Accounting for business combinations requires management
to make significant estimates and assumptions to determine the fair values of
assets acquired and liabilities assumed at the acquisition date. Although we
believe the assumptions and estimates we have made in the past have been
reasonable and appropriate, they are based, in part, on historical experience
and information obtained from management of the acquired companies and are
inherently uncertain. Critical estimates in valuing certain acquired intangible
assets include, but are not limited to future expected cash flows including
revenue growth rate assumptions from product sales, customer contracts and
acquired technologies, expected costs to develop in-process research and
development into commercially viable products, estimated cash flows from the
projects when completed, including assumptions associated with the technology
migration curve, estimated royalty rates used in valuing technology related
intangible assets, and discount rates. The discount rates used to discount
expected future cash flows to present value are typically derived from a
weighted-average cost of capital analysis and adjusted to reflect inherent
risks. Unanticipated events and circumstances may occur that could affect either
the accuracy or validity of such assumptions, estimates or actual results.
We allocate the fair value of the purchase price of our acquisitions to the
tangible assets acquired, liabilities assumed, and intangible assets acquired,
including in-process research and development ("IPR&D"), based on their
estimated fair values. The excess of the fair value of the purchase price over
the fair values of these net tangible and intangible assets acquired is recorded
as goodwill. Management's estimates of fair value are based upon assumptions
believed to be reasonable, but our estimates and assumptions are inherently
uncertain and subject to refinement. As a result, during the measurement period,
which will not exceed one year from the acquisition date, we record adjustments
to the assets acquired and liabilities assumed with the corresponding offset to
goodwill. Upon the conclusion of the measurement period or final determination
of the fair value of the purchase price of our acquisitions, whichever comes
first, any subsequent adjustments are recorded to our Consolidated Statements of
Operations.
The fair value of IPR&D is initially capitalized as an intangible asset with an
indefinite life and assessed for impairment thereafter whenever events or
changes in circumstances indicate that the carrying value of the IPR&D assets
may not be recoverable. Impairment of IPR&D is recorded to research and
development expenses. When an IPR&D project is completed, the IPR&D is
reclassified as an amortizable purchased intangible asset and amortized to costs
of revenues over the asset's estimated useful life.
Acquisition-related expenses are recognized separately from the business
combination and are expensed as incurred.
Inventories. Inventories are stated at the lower of cost (on a first-in,
first-out basis) or net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable
costs of completion, disposal and transportation. Demonstration units are stated
at their manufacturing cost and written down to their net realizable value. We
review and set standard costs semi-annually at current manufacturing costs in
order to approximate actual costs. Our manufacturing overhead standards for
product costs are calculated assuming full absorption of forecasted spending
over projected volumes, adjusted for excess capacity. Abnormal inventory costs
such as costs of idle facilities, excess freight and handling costs, and
spoilage are recognized as current period charges. We write down product
inventory based on forecasted demand and technological obsolescence and service
spare parts inventory based on forecasted usage. These factors are impacted by
market and economic conditions, technology changes, new product introductions
and changes in strategic direction and require estimates that may include
uncertain elements. Actual demand may differ from forecasted demand, and such
differences may have a material effect on recorded inventory values.
Allowance for Doubtful Accounts. A majority of our accounts receivable are
derived from sales to large multinational semiconductor manufacturers throughout
the world. In order to monitor potential credit losses, we perform ongoing
credit evaluations of our customers' financial condition. An allowance for
doubtful accounts is maintained for probable credit losses based upon our
assessment of the expected collectibility of the accounts receivable. The
allowance for doubtful accounts is reviewed on a quarterly basis to assess the
adequacy of the allowance. We take into consideration (1) any circumstances of
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which we are aware of a customer's inability to meet its financial obligations;
and (2) our judgments as to prevailing economic conditions in the industry and
their impact on our customers. If circumstances change, such that the financial
conditions of our customers are adversely affected and they are unable to meet
their financial obligations to us, we may need to record additional allowances,
which would result in a reduction of our net income.
Accounting for Stock-Based Compensation Plans. We account for share-based awards
in accordance with the provisions of the authoritative accounting guidance,
which requires the measurement and recognition of compensation expense for all
share-based payment awards made to our employees and directors. Compensation
expense for restricted stock units with performance metrics is calculated based
upon expected achievement of the metrics specified in the grant, or when a grant
contains a market condition, the grant date fair value using a Monte Carlo
simulation. The Monte Carlo simulation fair value model requires the use of
highly subjective and complex assumptions, including the award's expected life,
the price volatility of the underlying stock, as well as the potential outcomes
of the market condition on the grant date of each award.
Contingencies and Litigation. We are subject to the possibility of losses from
various contingencies. Considerable judgment is necessary to estimate the
probability and amount of any loss from such contingencies. An accrual is made
when it is probable that a liability has been incurred or an asset has been
impaired and the amount of loss can be reasonably estimated. We accrue a
liability and recognize as expense the estimated costs incurred to defend or
settle asserted and unasserted claims existing as of the balance sheet date. See
Note 16 "Commitments and Contingencies" and Note 15 "Litigation and Other Legal
Matters" to our Consolidated Financial Statements for additional details.
Goodwill and Purchased Intangible Assets - Impairment Assessments. We review
goodwill for impairment annually during our third fiscal quarter as well as
whenever events or changes in circumstances indicate the carrying value may not
be fully recoverable. Pursuant to the authoritative guidance, we make certain
judgments and assumptions to determine our reporting units and in allocating
shared assets and liabilities to those reporting units, which determines the
carrying values for each reporting unit. When assessing goodwill for impairment,
an initial assessment of qualitative factors determines whether the existence of
events and circumstances indicate it is more likely than not that the fair value
of a reporting unit is less than its carrying value. Judgments related to
qualitative factors include macroeconomic conditions; industry and market
considerations; cost factors; overall financial performance; relevant
entity-specific events; a sustained decrease in share price; and other events
affecting the reporting units. If we determine it is more likely than not that
the fair value of a reporting unit is less than its carrying value, a
quantitative test is then performed by estimating the fair value of the
reporting unit and comparing it to its carrying value including goodwill. If the
former is lower, goodwill is written down by the excess amount, limited to the
amount of goodwill allocated to that reporting unit. See Note 7 "Goodwill and
Other Intangible Assets" of the Consolidated Financial Statements for additional
information.
We determine the fair value of a reporting unit using the market approach when
deemed appropriate and the necessary information is available, or the income
approach which uses discounted cash flow ("DCF") analysis, or a combination of
both. If multiple valuation methodologies are used, the results are weighted.
Determining fair value requires the exercise of significant judgment, including
judgments about appropriate discount rates, revenue growth rates and the amount
and timing of expected future cash flows. Discount rates are based on a weighted
average cost of capital ("WACC"), which represents the average rate a business
must pay its providers of debt and equity, plus a risk premium. The WACC used to
test goodwill is derived from a group of comparable companies. The cash flows
employed in the DCF analysis are derived from internal forecasts and external
market forecasts. The market approach estimates the fair value of the reporting
unit by utilizing the market comparable method which is based on revenue and
earnings multiples from comparable companies.
We review purchased finite-lived intangible assets for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable or that the useful lives of the assets
are no longer appropriate. We determine whether finite-lived intangible assets
are recoverable based on the forecasted undiscounted future cash flows that are
expected to be generated by the lowest-level associated asset grouping.
Assumptions and estimates about future values and remaining useful lives of our
intangible assets are complex and subjective. If the undiscounted cash flows
used in the recoverability test are less than the long-lived assets' carrying
value, we recognize an impairment loss for the amount that the carrying value
exceeds the fair value.
We review indefinite-lived intangible assets for impairment whenever events or
changes in business circumstances indicate that the carrying value of the assets
may not be fully recoverable. The authoritative accounting guidance allows a
qualitative approach for testing indefinite-lived intangible assets for
impairment, similar to the impairment testing guidance for goodwill. It allows
the option to first assess qualitative factors (events and circumstances) that
could have affected the significant inputs used in determining the fair value of
the indefinite-lived intangible asset. The qualitative factors assist in
determining whether it is more-likely-than-not that the indefinite-lived
intangible asset is impaired. An organization may choose to bypass the
qualitative assessment for any indefinite-lived intangible asset in any period
and proceed directly to
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calculating its fair value. Our indefinite-lived intangible assets are
in-process research and development ("IPR&D") intangible assets.
Any impairment charges could have a material adverse effect on our operating
results and net asset value in the quarter in which we recognize the impairment
charge. See Note 7 "Goodwill and Other Intangible Assets" of the Consolidated
Financial Statements for additional information.
Income Taxes. We account for income taxes in accordance with the authoritative
guidance, which requires income tax effects for changes in tax laws are
recognized in the period in which the law is enacted.
Deferred tax assets and liabilities are recognized using enacted tax rates for
the effect of temporary differences between the book and tax bases of recorded
assets and liabilities. The guidance also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that a portion of
the deferred tax asset will not be realized. We have determined that a valuation
allowance is necessary against a portion of the deferred tax assets, but we
anticipate that our future taxable income will be sufficient to recover the
remainder of our deferred tax assets. However, should there be a change in our
ability to recover our deferred tax assets that are not subject to a valuation
allowance, we could be required to record an additional valuation allowance
against such deferred tax assets. This would result in an increase to our tax
provision in the period in which we determine that the recovery is not probable.
On a quarterly basis, we provide for income taxes based upon an estimated annual
effective income tax rate. The effective tax rate is highly dependent upon the
geographic composition of worldwide earnings, tax regulations governing each
region, availability of tax credits and the effectiveness of our tax planning
strategies. We carefully monitor the changes in many factors and adjust our
effective income tax rate on a timely basis. If actual results differ from these
estimates, this could have a material effect on our financial condition and
results of operations.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax regulations. In accordance with the authoritative
guidance on accounting for uncertainty in income taxes, we recognize liabilities
for uncertain tax positions based on the two-step process. The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained in audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon ultimate
settlement. We reevaluate these uncertain tax positions on a quarterly basis.
This evaluation is based on factors including, but not limited to, changes in
facts or circumstances, changes in tax law, effectively settled issues under
audit and new audit activity. Any change in these factors could result in the
recognition of a tax benefit or an additional charge to the tax provision.
We record income taxes on the undistributed earnings of foreign subsidiaries
unless the subsidiaries' earnings are considered indefinitely reinvested outside
the U.S. Our effective tax rate would be adversely affected if we change our
intent or if such undistributed earnings are needed for U.S. operations because
we would be required to provide or pay income taxes on some or all of these
undistributed earnings.
Global Intangible Low-Taxed Income. The Tax Cuts and Jobs Act (the "Act")
includes provisions for Global Intangible Low-Taxed Income ("GILTI") wherein
taxes on foreign income are imposed in excess of a deemed return on tangible
assets of foreign corporations. This income will effectively be taxed at a 10.5%
tax rate in general. As a result, our deferred tax assets and liabilities were
being evaluated to determine if the deferred tax assets and liabilities should
be recognized for the basis differences expected to reverse as a result of GILTI
provisions that are effective for us after the fiscal year ending June 30, 2018,
or should the tax on GILTI provisions be recognized as period costs in each year
incurred. We elected to account for GILTI as a component of current period tax
expense starting from the first quarter of the fiscal year ending June 30, 2019.
Valuation of Marketable Securities. Our investments in available-for-sale
securities are reported at fair value. Unrealized gains related to increases in
the fair value of investments and unrealized losses related to decreases in the
fair value are included in accumulated other comprehensive income (loss), net of
tax, as reported on our Consolidated Statements of Stockholders' Equity.
However, changes in the fair value of investments impact our net income only
when such investments are sold or an impairment charge is recognized. Realized
gains and losses on the sale of securities are determined by specific
identification of the security's cost basis. We periodically review our
investment portfolio to determine if any investment is other-than-temporarily
impaired due to changes in credit risk or other potential valuation concerns,
which would require us to record an impairment charge in the period during which
any such determination is made. In making this judgment, we evaluate, among
other things, the duration of the investment, the extent to which the fair value
of an investment is less than its cost, the credit rating and any changes in
credit rating for the investment, default and loss rates of the underlying
collateral, structure and credit enhancements to determine if a credit loss may
exist. Our assessment that an investment is not other-than-temporarily impaired
could change in the future due to new developments or changes in our strategies
or assumptions related to any particular investment.
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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 Consolidated Financial Statements of those not yet adopted, see Note 1,
"Description of Business and Summary of Significant Accounting Policies" of the
notes to our Consolidated Financial Statements.
RESULTS OF OPERATIONS
Revenues and Gross Margin
                                             Year ended June 30,
(Dollar amounts in
thousands)                      2020                 2019                 2018                   FY20 vs. FY19                                   FY19 vs. FY18
Revenues:
Product                    $ 4,328,725          $ 3,392,243          $ 3,160,671          $   936,482            28  %       $ 231,572              7  %
Service                      1,477,699            1,176,661              876,030              301,038            26  %         300,631             34  %
Total revenues             $ 5,806,424          $ 4,568,904          $ 4,036,701          $ 1,237,520            27  %       $ 532,203

13 % Costs of revenues $ 2,449,561 $ 1,869,377 $ 1,446,041 $ 580,184

            31  %       $ 423,336             29  %
Gross margin percentage    58%                  59%                  64%                  (1)%                               (5)%


Product 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 that we receive during that
period and, depending upon the duration of manufacturing and installation
cycles, in the preceding period.
The increase in product revenues by 28% in the fiscal year ended June 30, 2020
compared to the prior year is primarily attributable to product revenue from our
newly acquired Orbotech business and increased investments from our foundry and
logic customers, partially offset by a lower products shipments to customers in
the memory business.
Service revenues
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
exchange rates.
The increase in service revenues by 26% in the fiscal year ended June 30, 2020
compared to the prior year is primarily attributable to service revenues from
our newly acquired Orbotech business and an increase in the number of customers
requesting installations.
Revenues by segment(1)
                                                        Year ended June 30,
(Dollar amounts in thousands)              2020                 2019                 2018                   FY20 vs. FY19                                   FY19 vs. FY18
Revenues:
Semiconductor Process Control         $ 4,745,446          $ 4,080,822

    $ 3,944,015          $   664,624            16  %       $ 136,807              3  %
Specialty Semiconductor Process           329,700              151,164                    -              178,536           118  %         151,164               (3)
PCB, Display and Component
Inspection(2)                             727,451              332,810               92,516              394,641           119  %         240,294               (3)
Other                                       3,614                4,676                    -               (1,062)          (23) %           4,676               (3)
Total revenues                        $ 5,806,211          $ 4,569,472

    $ 4,036,531          $ 1,236,739            27  %       $ 532,941             13  %

__________

(1)Segment revenues exclude corporate allocation and the effects of foreign
exchange rates. For additional details, refer to Note 19 "Segment Reporting and
Geographic Information" to our Consolidated Financial Statements.
(2)Segment revenues for the fiscal year ended June 30, 2018 includes the
component inspection business only.
(3)Orbotech was acquired on February 20, 2019.
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Fiscal Year 2020 compared with Fiscal Year 2019
Revenue from our Semiconductor Process Control segment increased by 16%
primarily due to a strong demand from our foundry and logic customers, and
growth in service revenues. The increase in revenues from our Specialty
Semiconductor Process, PCB, Display and Component Inspection and Other segments
is primarily driven by full year results for the year-ended June 30, 2020
compared to partial year results for the year-ended June 30, 2019 and relates to
the Orbotech business which was acquired in February of 2019.

Revenues - Top Customers
The following customers each accounted for more than 10% of our total revenues
primarily in Semiconductor Process Control segment for the indicated periods:
                                                  Year ended June 30,
                2020                                        2019                                     2018
Taiwan Semiconductor Manufacturing            Taiwan Semiconductor                     Samsung Electronics Co., Ltd.
Company Limited                               Manufacturing Company Limited

Samsung Electronics Co., Ltd.

Revenues by region
Revenues by region for the periods indicated were as follows:
                                                                                 Year ended June 30,
(Dollar amounts in thousands)                       2020                                                     2019                                    2018
Taiwan                                  $ 1,566,823             27  %       $ 1,105,726             24  %       $   636,363             16  %
China                                     1,457,579             25  %         1,215,807             27  %           643,033             16  %
Korea                                       982,171             17  %           584,091             13  %         1,178,601             29  %
Japan                                       670,287             12  %           581,529             13  %           638,358             16  %
United States                               657,550             11  %           596,452             13  %           494,330             12  %
Europe and Israel                           318,483              5  %           305,924              7  %           300,883              7  %
Rest of Asia                                153,531              3  %           179,375              3  %           145,133              4  %
Total                                   $ 5,806,424            100  %       $ 4,568,904            100  %       $ 4,036,701            100  %


A significant portion of our revenues continues to be generated in Asia, where a
substantial portion of the world's semiconductor manufacturing capacity is
located, and we expect that trend to continue.
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.
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The following table summarizes the major factors that contributed to the changes
in gross margin percentage:
                                                    Gross Margin Percentage
Fiscal year ended June 30, 2018                                      64.1  %
Revenue volume of products and services                              (1.0) %
Mix of products and services sold                                     0.7  %
Manufacturing labor, overhead and efficiencies                       (1.6) %
Other service and manufacturing costs                                (0.5) %
Impact from acquisition of Orbotech                                  (2.6) %
Fiscal year ended June 30, 2019                                      59.1  %
Revenue volume of products and services                               1.5  %
Mix of products and services sold                                    (0.8) %
Manufacturing labor, overhead and efficiencies                        0.5  %
Intangible Amortization                                              (1.6) %
Other service and manufacturing costs                                (0.8) %
Fiscal year ended June 30, 2020                                      57.9  %


Changes in gross margin percentage, which are driven by the revenue volume of
products and services, reflect our ability to leverage existing infrastructure
to generate higher revenues. It also includes average customer pricing, customer
revenue deferrals associated with volume purchase agreements and the effect of
fluctuations in foreign exchange rates. Changes in gross margin percentage from
the mix of products and services sold reflect the impact of changes within the
composition of product and service offerings, and amortization of inventory fair
value adjustments from business combinations. Changes in gross margin percentage
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 percentage 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 decrease in our gross margin from 59.1% to 57.9% during the fiscal year
ended June 30, 2020 is primarily attributable to an increase in amortization of
intangibles related to the acquisition of Orbotech, unfavorable mix of products
and services sold, and an increase in service and manufacturing costs. These
decreases were partially offset by a favorable impact from higher revenue volume
of products and services.
Segment gross margin(1)
                                                       Year ended June 30,
(Dollar amounts in thousands)             2020                 2019                 2018                     FY20 vs. FY19                                   FY19 vs. FY18
Segment gross margin:
Semiconductor Process Control        $ 3,028,167          $ 2,590,434          $ 2,554,223          $    437,733              17  %       $  36,211             1  %
Specialty Semiconductor Process          183,641               78,800                    -               104,841             133  %          78,800     

(3)

PCB, Display and Component
Inspection(2)                            315,723              155,765               38,428               159,958             103  %         117,337              (3)
Other                                        (63)               1,102                    -                (1,165)           (106) %           1,102              (3)
                                     $ 3,527,468          $ 2,826,101          $ 2,592,651          $    701,367              25  %       $ 233,450             9  %


_________________
(1) Segment gross margin is calculated as segment revenues less segment cost of
revenues and excludes corporate allocations and the effects of foreign exchange
rates, amortization of intangible assets, inventory fair value adjustments, and
acquisition related costs. For additional details, refer to Note 19 "Segment
Reporting and Geographic Information" to our Consolidated Financial Statements.
(2) Segment gross margin in the fiscal year ended June 30, 2018 includes the
component inspection business only.
(3) Orbotech was acquired on February 20, 2019.
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Fiscal Year 2020 compared with Fiscal Year 2019
The primary factors impacting the performance of our segment gross margins are
summarized as follows:
•Semiconductor Process Control segment gross margin remained relatively
consistent from prior years.
•The segment gross margins of Specialty Semiconductor Process, PCB, Display and
Component Inspection and Other segments primarily relate to the Orbotech
business, which was acquired in February 2019.

Research and Development ("R&D")

                                               Year ended June 30,
(Dollar amounts in thousands)       2020               2019               2018                   FY20 vs. FY19                                   FY19 vs. FY18
R&D expenses                    $ 863,864          $ 711,030          $ 608,531          $    152,834            21  %       $ 102,499             17  %
R&D expenses as a percentage of
total revenues                         15  %              16  %              15  %                 (1) %                             1  %


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.
R&D expenses during the fiscal year ended June 30, 2020 were higher compared to
the fiscal year ended June 30, 2019, primarily due to an increase in
employee-related expenses of $50.2 million as a result of additional engineering
headcount, higher employee benefit costs and higher variable compensation and an
increase of $100.2 million of expenses from the Orbotech business, partially
offset by a decrease in travel and entertainment expense of $4.3 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 that we must continue to make substantial
and focused investments in our research and development. We remain committed to
product development in new and emerging technologies.

Selling, General and Administrative ("SG&A")

                                               Year ended June 30,
(Dollar amounts in thousands)       2020               2019               2018                   FY20 vs. FY19                                   FY19 vs. FY18
SG&A expenses                   $ 734,149          $ 599,124          $ 442,304          $    135,025            23  %       $ 156,820             35  %
SG&A expenses as a percentage
of total revenues                      13  %              13  %              11  %                  -  %                             2  %


SG&A expenses during the fiscal year ended June 30, 2020 were higher compared to
the fiscal year ended June 30, 2019, primarily due to an increase in
employee-related expenses of $33.7 million as a result of additional headcount,
higher employee benefit costs and variable compensation, an increase in
depreciation expense of $12.5 million and expenses related to the Orbotech
business of $115.6 million, which includes an increase in amortization expense
for purchased intangible assets of $30.8 million. These increases were partially
offset by a decrease in acquisition-related expenses of $29.1 million, lower
travel-related expenses of $11.6 million, and $10.9 million of stock-based
compensation expense from acceleration of certain equity awards for Orbotech
employees recorded in the three months ended March 31, 2019.
Goodwill Impairment
We performed our annual impairment assessment of goodwill as of February 28,
2020 and concluded that there was no impairment of goodwill for the Wafer
Inspection and Patterning, Global Service and Support, and Component Inspection
reporting units.
However, due to the downward revision of financial outlook for the Specialty
Semiconductor Process and PCB and Display reporting units as well as the impact
of elevated risk and macroeconomic slowdown driven by the COVID-19 pandemic, we
performed a quantitative goodwill impairment assessment for these reporting
units. As a result, we recorded $144.2 million and $112.5 million in impairment
charges in the Specialty Semiconductor Process and PCB and Display reporting
units, respectively, in the three months ended March 31, 2020.
For our fiscal year ended June 30, 2019, we performed our annual qualitative
assessment of goodwill during the third quarter and concluded that there
was no impairment.
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Restructuring Charges
In September 2019, management approved a plan to streamline our organization and
business processes that included the reduction of workforce, which is expected
to be completed in the second half of our fiscal year 2021, primarily in our
PCB, Display and Component Inspection segment. Restructuring charges were
$7.7 million for the year ended June 30, 2020, and the accrual for restructuring
charges was $5.7 million at June 30, 2020.
We expect to incur additional restructuring charges in future periods in
connection with the completion of our workforce reduction. For additional
information refer to Note 20 "Restructuring Charges" in the Notes to the
Condensed Consolidated Financial Statements.

Interest Expense and Other Expense (Income), Net

                                                                      Year ended June 30,
(Dollar amounts in thousands)                              2020               2019               2018
Interest expense                                       $ 160,274          $ 124,604          $ 114,376
Other expense (income), net                            $   2,678          $ (31,462)         $ (30,482)
Interest expense as a percentage of total revenues             3  %               3  %               3  %

Other expense (income), net as a percentage of total revenues

                                                       -  %               1  %               1  %


The increase in interest expense during the fiscal year ended June 30, 2020
compared to the fiscal year ended June 30, 2019, was primarily due to interest
on the $1.20 billion Senior Notes issued in March 2019.
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, and 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.
The decrease in other expense (income), net during the fiscal year ended
June 30, 2020 compared to the fiscal year ended June 30, 2019 was primarily due
to a decrease in interest income of $17.2 million, other impairments of $8.8
million, and foreign exchange losses of $4.6 million. In addition, during the
fourth quarter of fiscal 2020, we entered into an Asset Purchase Agreement to
sell certain core assets of our non-strategic solar energy business. This
transaction resulted in a loss of $1.9 million, which was included in other
expense (income) in our Consolidated Statement of Operations for fiscal 2020.

Loss on Extinguishment of Debt
For the fiscal year ended June 30, 2020, loss on extinguishment of debt
reflected a pre-tax net loss of $22.5 million associated with the redemption of
our $500.0 million of the Senior Notes due 2021, including associated redemption
premiums, accrued interest and other fees and expenses. We had no loss on
extinguishment of debt in the year ended June 30, 2019.

Provision for Income Taxes
The following table provides details of income taxes:
                                                Year ended June 30,
(Dollar amounts in thousands)         2020              2019              2018
Income before income taxes       $ 1,316,711       $ 1,296,231       $ 1,455,931
Provision for income taxes       $   101,686       $   121,214       $   653,666
Effective tax rate                       7.7  %            9.4  %           44.9  %

Tax expense was lower as a percentage of income before taxes during the fiscal year ended June 30, 2020 compared to the fiscal year ended June 30, 2019 primarily due to the impact of the following items:

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•Tax expense decreased by $13.7 million relating to an increase in the Foreign
Derived Intangible Income deduction during the fiscal year ended June 30, 2020;
•Tax expense decreased by $6.9 million relating to a decrease in the Global
Intangible Low Taxed Income during the fiscal year ended June 30, 2020;
•Tax expense decreased by $23.6 million relating to the impact of an increase in
the proportion of KLA's earnings +generated in jurisdictions with tax rates
lower than the U.S. statutory rate during the fiscal year ended June 30, 2020;
and
•Tax expense decreased by $34.3 million relating to the impact of an internal
restructuring during the fiscal year ended June 30, 2020; partially offset by
•Tax expense increased by $53.9 million relating to a $256.6 million goodwill
impairment charge, which is non-deductible for income tax.
Our effective tax rate during the fiscal years ended June 30, 2019 and June 30,
2018 was impacted by the Tax Cuts and Jobs Act ("the Act"), which was enacted
into law on December 22, 2017. The following items are the tax impact as a
result of the Act:

•Tax expense decreased by $50.9 million relating to the reduction of the U.S.
federal corporate tax rate from 35.0% to 28.1% for the fiscal year ended June
30, 2018 and tax expense decreased by $49.9 million relating to the reduction of
the U.S. federal corporate tax rate from 28.1% to 21.0% for the fiscal year
ended June 30, 2019. The Act reduced the U.S. federal corporate tax rate from
35.0% to 21.0% as of January 1, 2018. The decrease in the U.S. federal corporate
tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 28.1%
for the fiscal year ended June 30, 2018;
•Tax expense increased by $339.6 million relating to the one-time transition tax
recorded during the fiscal year ended June 30, 2018 on our total post-1986
earnings and profits ("E&P") of which, prior to the enactment of the Act, was
previously deferred from U.S. income taxes;
•Tax expense increased by $102.1 million relating to the one-time re-measurement
of our deferred tax assets and liabilities recorded during the fiscal year ended
June 30, 2018 based on the Act's new corporate tax rate of 21.0%; and
•Tax expense decreased by $19.3 million relating to the transition tax liability
during the fiscal year ended June 30, 2019.
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, research and development 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.
In the normal course of business, we are subject to examination by tax
authorities throughout the world. We are subject to federal income tax
examinations for all years beginning from the fiscal year ended June 30, 2017
and are under United States income tax examination for the fiscal year ended
June 30, 2018. We are subject to state income tax examinations for all years
beginning from the fiscal year ended June 30, 2016. We are also subject to
examinations in other major foreign jurisdictions, including Singapore and
Israel, for all years beginning from the calendar year ended December 31, 2012.
We are under audit in Germany related to Orbotech for the years ended December
31, 2013 to December 31, 2015. We are also under audit in Israel related to KLA
for the fiscal years ended June 30, 2017 to June 30, 2019. Although we believe
our tax estimates are reasonable, the final determination of tax audits and any
related litigation could be materially different from our historical income tax
provisions and accruals. The results of an audit or litigation could have a
material adverse effect on our results of operations or cash flows in the period
or periods for which that determination is made.
In May 2017, Orbotech received an assessment from the Israel Tax Authority
("ITA") with respect to its fiscal years 2012 through 2014 (the "Assessment",
and the "Audit Period", respectively), for an aggregate amount of tax, after
offsetting all net operating losses ("NOLs") available through the end of 2014,
of approximately NIS 229.0 million (equivalent to approximately $66.0 million
which includes related interest and linkage differentials to the Israeli
consumer price index as of date of the issuance of the Tax Decrees).
On August 31, 2018, Orbotech filed an objection in respect of the tax assessment
(the "Objection"). The ITA completed the second stage of the audit, in which the
claims Orbotech raised in the Objection were examined by different personnel at
the ITA. In addition, the ITA examined additional items during this second stage
of the audit. As Orbotech and the ITA did not reach an agreement during the
second stage, the ITA issued Tax Decrees to Orbotech on August 28, 2019 ("Tax
Decrees") for an aggregate amount of tax, after offsetting all NOLs available
through the end of 2014, of approximately NIS 257 million
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(equivalent to approximately $74 million which includes related interest and
linkage differentials to the Israeli consumer price index as of the date of the
issuance of the Tax Decrees). These Tax Decrees replaced the Assessment. We
believe that our recorded unrecognized tax benefits are sufficient to cover the
resolution of these Tax Decrees.
Orbotech filed a notice of appeal with respect to the above Tax Decrees with the
District Court of Tel Aviv on September 26, 2019. On February 27, 2020 the ITA
filed its arguments in support of the Tax Decrees. Orbotech filed the grounds of
appeal with respect to the above Tax Decrees on July 30, 2020. The ITA and
Orbotech are continuing discussions in an effort to resolve this matter in a
mutually agreeable manner.
In connection with the above, there is an ongoing criminal investigation in
Israel against Orbotech, certain of its employees and its tax consultant. On
April 11, 2018, Orbotech received a "suspect notification letter" (dated March
28, 2018) from the Tel Aviv District Attorney's Office (Fiscal and Financial).
In the letter, it was noted that the investigation file was transferred from the
Assessment Investigation Officer to the District Attorney's Office. The letter
further states that the District Attorney's Office has not yet made a decision
regarding submission of an indictment against Orbotech; and that if after
studying the case, a decision is made to consider prosecuting Orbotech, Orbotech
will receive an additional letter, and within 30 days, Orbotech may present its
arguments to the District Attorney's Office as to why it should not be indicted.
On October 27, 2019, we received a request for additional information from the
District Attorney's Office. We will continue to monitor the progress of the
District Attorney's Office investigation; however, we cannot anticipate when the
review of the case will be completed and what will be the results thereof. We
intend to cooperate with the District Attorney's Office to enable them to
conclude their investigation.
On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security (CARES)
Act was signed into law which included several tax relief provisions. As a
result of the CARES Act, we have deferred payment of certain payroll taxes to
the federal government through December 31, 2022 and accelerated the tax
deduction of qualified improvement property. The provisions of the CARES Act do
not have a material impact to our liquidity and we are not expecting a material
tax refund.
Liquidity and Capital Resources
                                                                         As of June 30,
(Dollar amounts in thousands)                            2020                 2019                 2018
Cash and cash equivalents                           $ 1,234,409          $ 1,015,994          $ 1,404,382
Marketable securities                                   746,063              723,391            1,475,936
Total cash, cash equivalents and marketable
securities                                          $ 1,980,472          $ 1,739,385          $ 2,880,318
Percentage of total assets                                   21  %                19  %                51  %

                                                                      Year ended June 30,
(In thousands)                                           2020                 2019                 2018
Cash flows:
Net cash provided by operating activities           $ 1,778,850          $ 

1,152,632 $ 1,229,120 Net cash (used in) provided by investing activities (258,874) (1,180,982)

             291,618
Net cash used in financing activities                (1,299,635)            (360,005)          (1,270,103)
Effect of exchange rate changes on cash and cash
equivalents                                              (1,926)                 (33)                 696
Net (decrease) increase in cash and cash
equivalents                                         $   218,415          $  

(388,388) $ 251,331

Cash and Cash Equivalents and Marketable Securities:
As of June 30, 2020, our cash, cash equivalents and marketable securities
totaled $1.98 billion, which represents an increase of $0.24 billion from
June 30, 2019. The increase is mainly due to net proceeds from our 2020 Senior
Notes of $0.74 billion, net proceeds from our revolving credit facility of $0.45
billion and cash generated from operations of $1.78 billion, partially offset by
repayments of debt of $1.17 billion, payments of dividends and dividend
equivalents of $0.52 billion, stock repurchases of $0.83 billion and capital
expenditures of $0.15 billion. As of June 30, 2020, $0.82 billion of our $1.98
billion of cash, cash equivalents, and marketable securities were held by our
foreign subsidiaries and branch offices. We currently intend to indefinitely
reinvest $0.53 billion 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 to the 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 $0.29 billion of the $0.82
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billion held by our foreign subsidiaries and branch offices. As such, these
funds can be returned to the U.S. without accruing any additional U.S. tax
expense.
Cash Dividends and Special Cash Dividend:
The total amounts of regular quarterly cash dividends and dividends equivalents
paid during the fiscal years ended June 30, 2020, 2019 and 2018 were $522.4
million, $469.4 million and $395.6 million, respectively. The increase in the
amount of regular quarterly cash dividends and dividends equivalents paid during
the fiscal year ended June 30, 2020 reflected the increase in the level of our
regular quarterly cash dividend from $0.75 to $0.85 per share that was
instituted during the three months ended December 31, 2019. The amounts of
accrued dividend equivalents payable for regular quarterly cash dividends on
unvested restricted stock units ("RSUs") with dividend equivalent rights were
$8.3 million and $7.3 million as of June 30, 2020 and 2019, 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 Consolidated Financial Statements.
On August 6, 2020, we announced that our Board of Directors had declared a
quarterly cash dividend of $0.90 per share. Refer to Note 21 "Subsequent Events"
to the Consolidated Financial Statements for additional information regarding
the declaration of our quarterly cash dividend announced subsequent to June 30,
2020.
On November 19, 2014, our Board of Directors declared a special cash dividend of
$16.50 per share on our outstanding common stock. The declaration and payment of
the special cash dividend was part of our leveraged recapitalization transaction
under which the special cash dividend was financed through a combination of
existing cash and proceeds from the debt financing disclosed in Note 8 "Debt"
that was completed during the three months ended December 31, 2014. The total
amount of the special cash dividend accrued by us at the declaration date was
substantially paid out during the three months ended December 31, 2014, except
for the aggregate special cash dividend of $43.0 million that was accrued for
the unvested RSUs to be paid when such underlying unvested RSUs vest. Payments
of the special cash dividend with respect to vested restricted stock units
during the fiscal years ended June 30, 2019 and 2018 were $2.9 million and $6.4
million, respectively, and by the end of the second quarter of fiscal 2019 all
of the special cash dividend accrued with respect to outstanding RSUs had vested
and been paid in full. Other than the special cash dividend declared during the
three months ended December 31, 2014, we historically have not declared any
special cash dividends.
Stock Repurchases:
The shares repurchased under our stock repurchase program have reduced our basic
and diluted weighted-average shares outstanding for the fiscal years ended
June 30, 2020 and 2019. The stock repurchase program is intended, in part, to
offset shares issued in connection with the purchases under our Employee Stock
Purchase Plan ("ESPP") program and the vesting of employee restricted stock
units.
Fiscal Year 2020 Compared to Fiscal Year 2019
Cash Flows from Operating Activities:
We have historically financed our liquidity requirements through cash generated
from operations. Net cash provided by operating activities during the fiscal
year ended June 30, 2020 increased by $0.63 billion compared to the fiscal year
ended June 30, 2019, from $1.15 billion to $1.78 billion, primarily as a result
of the following factors:
•An increase in collections of approximately $1.67 billion mainly driven by
higher shipments and inclusion of Orbotech during the entire 2020 fiscal year;
•Lower merger and acquisition costs of approximately $29.0 million; partially
offset by the following:
•A decrease in interest income of approximately $16.0 million mainly due to
lower average cash balances and interest rates;
•An increase in accounts payable payments of approximately $619.0 million mainly
due to the inclusion of Orbotech during the entire 2020 fiscal year;
•An increase in employee-related payments of approximately $391.0 million mainly
due to the inclusion of Orbotech during the entire 2020 fiscal year;
•An increase of debt interest payments of approximately $47.0 million related to
Senior Notes issued in March 2019 for the Orbotech acquisition and early
redemption of 2021 Senior Notes.
Cash Flows from Investing Activities:
Net cash used in investing activities during the fiscal year ended June 30, 2020
was $0.26 billion compared to net cash used by investing activities of $1.18
billion during the fiscal year ended June 30, 2019. This decrease was mainly due
to a
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decrease in cash paid for business acquisitions of $1.73 billion, partially
offset by higher net purchases of marketable securities of $0.79 billion.
Cash Flows from Financing Activities:
Net cash used in financing activities during the fiscal year ended June 30, 2020
increased compared to the fiscal year ended June 30, 2019, from $0.36 billion to
$1.30 billion. This change was mainly impacted by lower net proceeds from
borrowings of $1.16 billion, partially offset by a decrease in cash used for
common stock repurchases of $0.27 billion.
Senior Notes:
In February 2020, March 2019 and November 2014, we issued $750.0 million, $1.20
billion and $2.50 billion, respectively (each a "2020 Senior Notes", a "2019
Senior Notes", a "2014 Senior Notes", and collectively the "Senior Notes"),
aggregate principal amount of senior, unsecured long-term notes. In February
2020 and October 2019, we repaid $500.0 million and $250.0 million of Senior
Notes, respectively.
In February 2020, S&P upgraded its credit rating of the Company to "BBB+" and
revised its outlook to stable, which permanently removed interest rate
adjustments and the interest rate on the 2014 Senior Notes became fixed. The
interest rate for each series of the 2020 Senior Notes and 2019 Senior Notes are
not subject to adjustments.
In January 2020, we entered into a series of forward contracts ("2020 Rate Lock
Agreements") to lock the 30-year treasury rate ("benchmark rate") on a portion
of the 2020 Senior Notes. The 2020 Rate Lock Agreements had a notional amount of
$350.0 million in aggregate and matured in the same quarter. The 2020 Rate Lock
Agreements were terminated on the date of the pricing of the $750.0 million of
3.300% Senior Notes due in 2050 and we recorded the fair value of $21.5 million
as a loss within Accumulated Other Comprehensive Income (Loss) ("OCI") as of
March 31, 2020, which will be amortized over the life of the debt. During the
fiscal year ended June 30, 2018, we entered into a series of forward contracts
(the "2018 Rate Lock Agreements") to lock the benchmark interest rate with
notional amount of $500.0 million in aggregate. In October 2014, we entered into
a series of forward contracts to lock the 10-year treasury rate ("benchmark
rate") on a portion of the 2014 Senior Notes with a notional amount of $1.00
billion in aggregate. For additional details, refer to Note 17 "Derivative
Instruments and Hedging Activities" and Note 8 "Debt" of the Notes to the
Consolidated Financial Statements.
The original discounts on the 2020 Senior Notes, the 2019 Senior Notes and the
2014 Senior Notes amounted to $0.3 million, $6.7 million and $4.0 million,
respectively, and are being amortized over the life of the debt. Interest is
payable as follows: semi-annually on March 1 and September 1 of each year for
the 2020 Senior Notes; semi-annually on March 15 and September 15 of each year
for the 2019 Senior Notes; and semi-annually on May 1 and November 1 of each
year for the 2014 Senior Notes. The indenture for the Senior Notes (the
"Indenture") 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 of Moody's, S&P and
Fitch Inc., 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 June 30, 2020, we were in compliance with all of our covenants under the
Indenture associated with the Senior Notes.
Revolving Credit Facility:
In November 2017, we entered into a Credit Agreement (the "Credit Agreement")
providing for a $750.0 million five-year unsecured Revolving Credit Facility
(the "Revolving Credit Facility"), which replaced our prior Credit Facility.
Subject to the terms of the Credit Agreement, the Revolving Credit Facility may
be increased in an amount up to $250.0 million in the aggregate. In November
2018, we entered into an Incremental Facility, Extension and Amendment Agreement
(the "Amendment"), which amends the Credit Agreement to (a) extend the Maturity
Date (the "Maturity Date") from November 30, 2022 to November 30, 2023, (b)
increase the total commitment by $250.0 million and (c) effect certain other
amendments to the Credit Agreement as set forth in the Amendment. After giving
effect to the Amendment, the total commitments under the Credit Agreement
are $1.00 billion. During the fiscal year ended June 30, 2020, we borrowed
$450.0 million from the Revolving Credit Facility and made a principal payment
of $400.0 million. As of June 30, 2020, we had outstanding $50.0 million
aggregate principal amount of borrowings under the Revolving Credit Facility.
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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 June 30, 2020, we elected to pay interest on the borrowed amount under the
Revolving Credit Facility at LIBOR plus a spread of 112.5 bps and we pay an
annual commitment fee of 12.5 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 4.00 to 1.00 for a period of time in connection with a
material acquisition or a series of material acquisitions. As of June 30, 2020,
our maximum allowed leverage ratio was 3.50 to 1.00.
We were in compliance with all covenants under the Credit Agreement as of
June 30, 2020 (the interest expense coverage ratio was 13.97 to 1.00 and the
leverage ratio was 1.56 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, 2021.
Contractual Obligations
The following is a schedule summarizing our significant obligations to make
future payments under contractual obligations as of June 30, 2020:
                                                                                                Fiscal year ending June 30,
                                                                                                                                                            2026 and
(In thousands)                       Total                 2021                2022               2023               2024                2025              thereafter             Others
Debt obligations(1)              $ 3,500,000          $         -          $       -          $       -          $  50,000          $ 1,250,000          $  2,200,000          $       -
Interest payments associated
with all debt obligations(2)       2,087,338              151,118            151,067            150,331            149,800              120,738             1,364,284                  -
Purchase commitments(3)              896,928              887,851              8,397                453                227                    -                     -                  -
Income taxes payable(4)              172,674                    -                  -                  -                  -                    -                     -            172,674
Operating leases                     105,743               30,628             22,750             15,410             10,221                8,508                18,226                  -
Cash long-term incentive
program(5)                           197,116               78,404             56,573             41,039             21,100                    -                     -                  -
Pension obligations(6)                42,482                3,014              2,955              3,047              4,317                3,758                25,391                  -
Executive Deferred Savings
Plan(7)                              215,167                    -                  -                  -                  -                    -                     -            215,167
Transition tax payable(8)            274,498               26,143             26,143             26,143             49,018               65,357                81,694                  -
Liability for employee rights
upon retirement(9)                    52,898                    -                  -                  -                  -                    -                     -             52,898
Other(10)                              8,310                3,287              2,600              1,612                811                    -                     -                  -
Total obligations                $ 7,553,154          $ 1,180,445          $ 270,485          $ 238,035          $ 285,494          $ 1,448,361

$ 3,689,595 $ 440,739

__________________

(1)Represents $3.45 billion aggregate principal amount of Senior Notes due from fiscal year 2025 to fiscal year 2050 and $50.0 million principal amount of Revolving Credit Facility due in fiscal year 2024.

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(2)The interest payments associated with the Senior Notes payable included in
the table above are based on the principal amount multiplied by the applicable
interest rate for each series of Senior Notes. Our future interest payments are
subject to change if our then effective credit rating is below investment grade
as discussed above. The interest payment under the Revolving Credit Facility for
the undrawn balance is payable at 12.5 bps as a commitment fee based on the
daily undrawn balance and we utilized the existing rate for the projected
interest payments included in the table above. Our future interest payments for
the Revolving Credit Facility is subject to change due to any upgrades or
downgrades to our then effective credit rating.
(3)Represents an estimate of significant commitments to purchase inventory from
our suppliers as well as an estimate of significant purchase commitments
associated with goods, services and other assets in the ordinary course of
business. Our obligation under these purchase commitments is generally
restricted to a forecasted time-horizon as mutually agreed upon between the
parties. This forecasted time-horizon can vary among different suppliers. Actual
expenditures will vary based upon the volume of the transactions and length of
contractual service provided. In addition, the amounts paid under these
arrangements may be less in the event the arrangements are renegotiated or
canceled. Certain agreements provide for potential cancellation penalties.
(4)Represents the estimated income tax payable obligation related to uncertain
tax positions as well as related accrued interest. We are unable to make a
reasonably reliable estimate of the timing of payments in individual years due
to uncertainties in the timing of tax audit outcomes.
(5)Represents the amount committed under our cash long-term incentive program.
The expected payment after estimated forfeitures is approximately $160.2
million.
(6)Represents an estimate of expected benefit payments up to fiscal year 2030
that was actuarially determined and excludes the minimum cash required to
contribute to the plan. As of June 30, 2020, our defined benefit pension plans
do not have material required minimum cash contribution obligations.
(7)Represents the amount committed under our non-qualified executive deferred
compensation plan. We are unable to make a reasonably reliable estimate of the
timing of payments in individual years due to the uncertainties in the timing
around participant's separation and any potential changes that participants may
decide to make to the previous distribution elections.
(8)Represents the transition tax liability associated with our deemed
repatriation of accumulated foreign earnings as a result from the enactment of
the Tax Cuts and Jobs-Act into law on December 22, 2017.
(9)Represents severance payments due upon dismissal of an employee or upon
termination of employment in certain other circumstances as required under
Israeli law.
(10)Represents amounts committed for accrued dividends payable for quarterly
cash dividends for unvested restricted stock units granted with dividend
equivalent rights. For additional details, refer to Note 10 "Equity, Long-term
Incentive Compensation Plans and Non-Controlling Interest" to our Consolidated
Financial Statements.
We have adopted a cash-based long-term incentive ("Cash LTI") program for many
of our employees as part of our employee compensation program. Cash LTI awards
issued to employees under the Cash Long-Term Incentive Plan ("Cash LTI Plan")
generally vest in three or four equal installments. For additional details,
refer to Note 10 "Equity, Long-term Incentive Compensation Plans and
Non-Controlling Interest" to our Consolidated Financial Statements.
We have agreements with financial institutions to sell certain of our trade
receivables and promissory notes from customers without recourse. In addition,
we periodically sell certain letters of credit ("LCs"), without recourse,
received from customers in payment for goods and services.
The following table shows total receivables sold under factoring agreements and
proceeds from sales of LCs for the indicated periods:
                                                            Year ended June 

30,

(In thousands)                                      2020            2019    

2018

Receivables sold under factoring agreements $ 293,006 $ 193,089

    $ 217,462
Proceeds from sales of LCs                      $  59,036       $  95,436       $   5,511


 Factoring and LC fees for the sale of certain trade receivables were recorded
in other expense (income), net and were not material for the periods presented.
We maintain guarantee arrangements available through various financial
institutions for up to $81.7 million, of which $68.7 million had been issued as
of June 30, 2020, primarily to fund guarantees to customs authorities for
value-added tax ("VAT") and other operating requirements of our subsidiaries in
Europe, Israel, and Asia.
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Working Capital:
Working capital was $3.02 billion as of June 30, 2020, which represents an
increase of $477.2 million compared to our working capital as of June 30, 2019.
As of June 30, 2020, our principal sources of liquidity consisted of $1.98
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 $1.00
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 June 30, 2020 are summarized below:
Rating Agency        Rating
Fitch                 BBB+
Moody's               Baa1
Standard & 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 of June 30, 2020, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC 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 16 "Commitments and Contingencies" to our Consolidated Financial
Statements for information related to indemnification obligations.
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