KLA CORPORATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
may be forward-looking statements. You can identify these and other
forward-looking statements by the use of words such as "may," "will," "could,"
"would," "should," "expects," "plans," "anticipates," "relies," "believes,"
"estimates," "predicts," "intends," "potential," "continue," "thinks," "seeks,"
or the negative of such terms, or other comparable terminology. Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing statements. Such forward-looking statements include, among others,
statements regarding: the future impacts of the COVID-19 pandemic; forecasts of
the future results of our operations, including profitability; orders for our
products and capital equipment generally; sales of semiconductors; the
investments by our customers in advanced technologies and new materials; growth
of revenue in the semiconductor industry, the semiconductor capital equipment
industry and our business; technological trends in the semiconductor industry;
future developments or trends in the global capital and financial markets; our
future product offerings and product features; the success and market acceptance
of new products; timing of shipment of backlog; our future product shipments and
product and service revenues; our future gross margins; our future research and
development expenses and selling, general and administrative expenses;
international sales and operations; our ability to maintain or improve our
existing competitive position; success of our product offerings; creation and
funding of programs for research and development; results of our investment in
leading edge technologies; the effects of hedging transactions; the effect of
the sale of trade receivables and promissory notes from customers; our future
effective income tax rate; our recognition of tax benefits; the effects of any
audits or litigation; future payments of dividends to our stockholders; the
completion of any acquisitions of third parties, or the technology or assets
thereof; benefits received from any acquisitions and development of acquired
technologies; sufficiency of our existing cash balance, investments, cash
generated from operations and the unfunded portion of our Revolving Credit
Facility (as defined below) to meet our operating and working capital
requirements, including debt service and payment thereof; future dividends, and
stock repurchases; our compliance with the financial covenants under the Credit
Agreement (as defined below) for our Revolving Credit Facility; the adoption of
new accounting pronouncements including ASC 326 and ASC 740; and our repayment
of our outstanding indebtedness.
Our actual results may differ significantly from those projected in the
forward-looking statements in this report. Factors that might cause or
contribute to such differences include, but are not limited to:
• The impact of the COVID-19 pandemic on the global economy and on our business,
financial condition and results of operations;
•Economic, political and social conditions in the countries in which we, our
customers and our suppliers operate, including global trade policies;
•Disruption to our manufacturing facilities or other operations, or the
operations of our customers, due to natural catastrophic events, health
epidemics or terrorism;
•Ongoing changes in the technology industry, and the semiconductor industry in
particular, including future growth rates, pricing trends in end-markets, or
changes in customer capital spending patterns;
•Our ability to timely develop new technologies and products that successfully
anticipate or address changes in the semiconductor industry;
•Our ability to maintain our technology advantage and protect our proprietary
rights;
•Our ability to compete with new products introduced by our competitors;
•Our ability to attract and retain key personnel;
•Cybersecurity threats and our ability to access critical information systems
for daily business operations;
•Liability to our customers under indemnification provisions if our products
fail to operate properly or contain defects or our customers are sued by third
parties due to our products;
•Exposure to a highly concentrated customer base exposes our businesses,
financial condition and operating results to risks;
•Availability and cost of the wide range of materials used in the production of
our products;
•Our ability to operate our business in accordance with our business plan;
•Legal, regulatory and tax environments in which we perform our operations and
conduct our business;
•Our ability to pay interest and repay the principal of our current indebtedness
is dependent upon our ability to manage our business operations, our credit
rating, the ongoing interest rate environment, among other factors;
•Instability in the global credit and financial markets;
•Our exposure to currency exchange rate fluctuations, or declining economic
conditions in those countries;
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•Changes in our effective tax rate resulting from changes in the tax rates
imposed by jurisdictions where are profits are determined to be earned and
taxed, expiration of tax holidays in certain jurisdictions, resolution of issues
arising from tax audits with various authorities or changes in tax laws or the
interpretation of such tax laws; and
•Our ability to identify suitable acquisition targets and successfully integrate
and manage acquired businesses.
For a more detailed discussion of these and other risk factors that might cause
or contribute to differences from the forward looking statements in this report,
see Part II, Item 1A, "Risk Factors" in this report as well as in Item 1,
"Business" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
year ended June 30, 2020 . You should carefully review these risks and also
review the risks described in other documents we file from time to time with the
Securities and Exchange Commission . You are cautioned not to place undue
reliance on these forward-looking statements, and we expressly assume no
obligation and do not intend to update the forward-looking statements in this
report after the date hereof.
EXECUTIVE SUMMARY
We are a leading supplier of process control and yield management solutions and
services for the semiconductor and related electronics industries. Our broad
portfolio of device manufacturing, inspection and metrology products and related
service, software and other offerings support R&D and manufacturing of
integrated circuits ("IC" or "chip"), wafers, and reticles. Our products,
services and expertise are used by our customers to measure, detect, analyze and
resolve critical product defects in nanometric level manufacturing processes,
helping reduce risk, lower costs, and achieve their productivity goals. We also
offer technologically advanced, yield-enhancing and process-enabling solutions
to address various manufacturing stages of Printed Circuit Boards ("PCB"), Flat
Panel Displays ("FPD"), Specialty Semiconductor Devices ("SD") and other
electronic components.
Our semiconductor customers generally operate in one or more of the three major
semiconductor device manufacturing markets: Memory, Foundry and Logic. The
diversification of semiconductor end demand, the rapid proliferation of new
applications for more advanced semiconductor devices, and the increasing
complexity associated with leading edge semiconductor manufacturing drives
demand for our process control and yield management solutions. Other advanced
electronics demand trends, such as the deployment of 5G telecommunications
technology and associated high-end mobile devices, the electrification and
digitalization of the automotive industry, and the growth of the Internet of
Things ("IoT") and associated new applications also drives demand for our other
products such as those used in the PCB, FPD and Specialty Semiconductor
manufacturing, where the increase in technology complexity is expected to
continue and further accelerate as more devices become interconnected and
dependent on other electronic devices. Our customer base, particularly in the
semiconductor industry, has become increasingly concentrated, so large orders
from a relatively limited number of customers account for a substantial portion
of our sales, which potentially exposes us to more earnings volatility.
We are organized into four reportable segments:
•Semiconductor Process Control: A comprehensive portfolio of inspection,
metrology and data analytics products as well as related service offerings that
help IC manufacturers achieve target yields throughout the semiconductor
fabrication process.
•Specialty Semiconductor Process: Advanced vacuum deposition and etching process
tools used by a broad range of specialty semiconductor customers.
•PCB, Display and Component Inspection: a range of inspection, testing and
measurement, and direct imaging for patterning products used by manufacturers of
PCBs, FPDs, advanced packaging, microelectromechanical systems, and other
electronic components.
•Other: products that do not fall into the three segments above.
China is emerging as a major region for manufacturing of logic and memory chips,
adding to its role as the world's largest consumer of ICs. Additionally, a
significant portion of global FPD and PCB manufacturing has migrated to China .
Government initiatives are propelling China to expand its domestic manufacturing
capacity and attracting investment from semiconductor manufacturers from Taiwan ,
Korea , Japan and the United States . Although China is currently seen as an
important long-term growth region for the semiconductor and electronics capital
equipment sector, the United States Department of Commerce has added certain
China -based entities to the U.S. Entity List, restricting our ability to provide
products and services to such entities without a license. In addition, the U.S.
Department of Commerce has imposed new export licensing requirements on
China -based customers engaged in military end uses, as well as requiring our
customers to obtain an export license when they use certain semiconductor
capital equipment based on U.S. technology. While these new rules have not
significantly impacted our operations to-date, such actions by the U.S.
government or another country could impact our ability to provide our products
and services to existing and potential customers and adversely affect our
business.
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The following table sets forth some of our key quarterly unaudited financial information(1):
Three Months Ended
(In thousands, except net income per September 30, June 30, March 31, December 31, September 30,
share) 2020 2020 2020 2019 2019
Total revenues $ 1,538,620 $ 1,459,593 $ 1,423,964 $ 1,509,453 $ 1,413,414
Gross margin $ 918,058 $ 838,049 $ 78,452 $ 380,555 $ 346,525 Diluted net income per share attributable to KLA(3) $ 2.69$ 2.63 $ 0.50 $ 2.40 $ 2.16 __________________ (1)OnFebruary 20, 2019 , we completed the Orbotech Acquisition 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 the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 . (2)Our net income attributable to KLA increased to$420.6 million in the three months endedSeptember 30, 2020 , primarily as a result of higher revenues as well as improvements in cost control. (3)Diluted net income per share is computed independently for each of the quarters presented based on the weighted-average fully diluted shares outstanding for each quarter. Therefore, the sum of quarterly diluted net income per share information may not equal annual (or other multiple-quarter calculations of) diluted net income per share.
Impact of COVID-19
Events surrounding the ongoing COVID-19 pandemic 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 committed to helping those most impacted by COVID-19. In regions around the worldKLA Foundation is addressing immediate humanitarian needs while investing resources to combat the long-term effect of the virus on our communities. •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 38 -------------------------------------------------------------------------------- Table of Contents 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. 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. And, while we continue to see progress in the recovery within our supply chain and continued strong demand from semiconductor customers, the situation remains fluid and uncertain. 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 Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience and evaluate them on an ongoing basis to ensure that they remain reasonable under current conditions. Actual results could differ from those estimates. We discuss the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors on a quarterly basis, and the Audit Committee has reviewed our related disclosure in this Quarterly Report on Form 10-Q. Other than the change for the accounting of credit losses as a result of the adoption of Accounting Standard Codification ("ASC") 326, there have been no material changes in our critical accounting estimates and policies since our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 . Refer to Note 1 "Basis of Presentation" in the Notes to the Condensed Consolidated Financial Statements for additional details. In addition, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year endedJune 30, 2020 for a complete description of our critical accounting policies and estimates. Recent Accounting Pronouncements For a description of recent accounting pronouncements, including those recently adopted and the expected dates of adoption as well as estimated effects, if any, on our Condensed Consolidated Financial Statements of those not yet adopted, see Note 1 "Basis of Presentation" in the Notes to the Condensed Consolidated Financial Statements for additional details. RESULTS OF OPERATIONS Revenues and Gross Margin Three Months Ended Q1 FY21 September 30, September 30, vs. (Dollar amounts in thousands) 2020 2019 Q1 FY20 Revenues: Product$ 1,145,495 $ 1,057,975 $ 87,520 8 % Service 393,125 355,439 37,686 11 % Total revenues$ 1,538,620 $ 1,413,414 $ 125,206 9 % Costs of revenues$ 620,562 $ 604,241 $ 16,321 3 % Gross margin percentage 59.7 % 57.2 % 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.
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Product revenues increased during the three months ended September 30, 2020
compared to the three months ended September 30, 2019 , primarily due to a strong
demand from our customers in the wafer inspection business and an increase from
continued growth in the 5G infrastructure market and advanced radio frequency
and mobile technologies. These increases were partially offset by softer demand
and oversupply in the FPD market.
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.
Service revenues during the three months ended September 30, 2020 increased
compared to the three months ended September 30, 2019 , primarily due to an
increase in the number of systems installed at our customers' sites.
Revenues by segment(1)
Three Months Ended
Q1 FY21
September 30, September 30, vs.
(Dollar amounts in thousands) 2020 2019 Q1 FY20
Revenues:
Semiconductor Process Control $ 1,267,954 $ 1,163,632 $ 104,322 9 %
Specialty Semiconductor Process 88,954 69,139 19,815 29 %
PCB, Display and Component Inspection 181,177 178,552 2,625 1 %
Other 140 2,231 (2,091) (94) %
Total revenues $ 1,538,225 $ 1,413,554 $ 124,671 9 %
__________
(1)Segment revenues exclude corporate allocations and the effects of foreign
exchange rates. For additional details, refer to Note 18 "Segment Reporting and
Geographic Information" in the Notes to the Condensed Consolidated Financial
Statements.
Revenue from our Semiconductor Process Control segment increased by 9% primarily
due to strength in Inspection products and service offerings. Revenues in the
Specialty Semiconductor Process and PCB, Display and Component Inspection
segments increased due to increased demand in the 5G infrastructure market and
advanced radio frequency and mobile technologies.
Revenues by region
The following is a summary of revenues by geographic region, based on ship-to
location, for the indicated periods:
Three Months Ended
(Dollar amounts in thousands) September 30, 2020 September 30, 2019 China $ 486,089 32 % $ 345,856 24 % Taiwan 369,100 24 % 386,729 27 % Korea 189,518 12 % 197,450 14 % North America 170,176 11 % 181,983 13 % Japan 164,419 11 % 206,211 15 % Europe and Israel 83,117 5 % 59,383 4 % Rest of Asia 76,201 5 % 35,802 3 % Total$ 1,538,620 100 %$ 1,413,414 100 %
A significant portion of our revenues continues to be generated in
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Gross margin
Our gross margin fluctuates with revenue levels and product mix and is affected
by variations in costs related to manufacturing and servicing our products,
including our ability to scale our operations efficiently and effectively in
response to prevailing business conditions.
The following table summarizes the major factors that contributed to the changes
in gross margin percentage:
Gross Margin Percentage
Three Months Ended
September 30, 2019 57.2%
Mix of products and services sold 2.9%
Revenue volume of products and services 0.5%
Manufacturing labor, overhead and efficiencies 0.3%
Other service and manufacturing costs (1.2)%
September 30, 2020 59.7%
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. 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 increase in our gross margin during the three months ended September 30,
2020 compared to the three months ended September 30, 2019 , is primarily
attributable to a more profitable mix of products and services sold, partially
offset by an increase in service and manufacturing costs.
Segment gross margin(1)
Three months ended
Q1 FY21
September 30, September 30, vs.
(Dollar amounts in thousands) 2020 2019 Q1 FY20
Segment gross margin:
Semiconductor Process Control $ 814,810 $ 742,342 $ 72,468 10 %
Specialty Semiconductor Process 49,928 38,164 11,764 31 %
PCB, Display and Component Inspection 90,169 76,068 14,101 19 %
Other 13 653 (640) (98) %
$ 954,920 $ 857,227 $ 97,693 11 %
_________________
(1) Segment gross margin is calculated as segment revenues less segment cost of
revenues and excludes corporate allocations, amortization of intangible assets,
inventory fair value adjustments, acquisition related costs, and the effects of
foreign exchange rates. For additional details, refer to Note 18 "Segment
Reporting and Geographic Information" in the Notes to the Condensed Consolidated
Financial Statements.
Semiconductor Process Control segment gross margin increased primarily due to a
higher revenue volume of products and services sold, partially offset by an
increase in service and manufacturing costs. Gross margin increased in the
Specialty Semiconductor Process and PCB, Display and Component Inspection
segments due to higher incremental margin on the revenue increase as well as a
more favorable mix of products and services sold.
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Research and Development ("R&D")
Three Months Ended
Q1 FY21
vs.
(Dollar amounts in thousands) September 30, 2020 September 30, 2019 Q1 FY20
R&D expenses $ 219,038 $ 210,580 $ 8,458 4 %
R&D expenses as a percentage of total
revenues 14 % 15 %
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 three months ended September 30, 2020 increased compared
to the three months ended September 30, 2019 , primarily due to an increase in
employee-related expenses of $8.3 million as a result of additional engineering
headcount, higher employee benefit costs and higher variable compensation.
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")
Three Months Ended
Q1 FY21
vs.
(Dollar amounts in thousands) September 30, 2020 September 30, 2019 Q1 FY20
SG&A expenses $ 172,631 $ 188,345 $ (15,714) (8) %
SG&A expenses as a percentage of total
revenues 11 % 13 %
SG&A expenses during the three months ended
Restructuring Charges
InSeptember 2019 , management approved a plan to streamline our organization and business processes that included a 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$3.5 million for the three months endedSeptember 30, 2020 , and included$1.0 million of non-cash charges for accelerated depreciation related to certain right-of use assets and fixed assets to be abandoned. As ofSeptember 30, 2020 , the accrual for restructuring charges was$7.0 million . We expect to incur additional restructuring charges in future periods in connection with the completion of our workforce reduction. Proceeds from disposition of our solar energy business is not expected to be material. For additional information refer to Note 19 "Restructuring Charges" in the Notes to the Condensed Consolidated Financial Statements. 42 -------------------------------------------------------------------------------- Table of Contents Interest Expense and Other Expense (Income), Net
Three Months Ended
September 30, September 30,
(Dollar amounts in thousands) 2020 2019
Interest expense $ 39,386 $ 40,350
Other expense (income), net $ 3,197 $ (1,618)
Interest expense as a percentage of total revenues 3 % 3 %
Other expense (income), net as a percentage of total revenues < 1% < 1%
The decrease in interest expense during the three months ended September 30,
2020 compared to the three months ended September 30, 2019 , was primarily due to
lower interest rate on our $750.0 million Senior Notes issued in February 2020 .
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 increase in other expense (income), net during the three months ended
September 30, 2020 compared to the three months ended September 30, 2019 was
primarily due to a decrease in interest income as a result of lower investment
balances as well as lower interest rate, and an increase in accruals related to
uncertain tax positions of $2.9 million .
Provision for Income Taxes
The following table provides details of income taxes:
Three Months Ended
September 30,
(Dollar amounts in thousands) 2020 2019
Income before income taxes $ 483,806 $ 371,516
Provision for income taxes $ 63,664 $ 25,120
Effective tax rate 13.2 % 6.8 %
The effective tax rate during the three months ended September 30, 2020 was
higher compared to the three months ended September 30, 2019 primarily due to
the impact of the following items:
•Tax expense increased by $16.9 million during the three months ended
September 30, 2020 relating to a decrease in the proportion of our earnings
generated in jurisdictions with tax rates lower than the U.S. statutory rate;
and
•Tax expense increased by $14.0 million during the three months ended
September 30, 2020 relating to an increase in the United Kingdom statutory rate.
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 calendar 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.
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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 (equivalent to
approximately $73 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 . We are currently
in the pre-trial hearing stage of the process and the next pre-trial meeting is
scheduled for January 2021 . 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.
Liquidity and Capital Resources
As of As of
(Dollar amounts in thousands) September 30, 2020 June 30, 2020
Cash and cash equivalents $ 1,215,820 $ 1,234,409
Marketable securities 827,633 746,063
Total cash, cash equivalents and marketable securities $ 2,043,453 $ 1,980,472
Percentage of total assets 22 % 21 %
Three Months Ended September 30,
(In thousands) 2020 2019
Cash flows:
Net cash provided by operating activities $ 512,171 $ 496,245
Net cash used in investing activities (134,320) (146,693)
Net cash (used in) provided by financing activities (404,206) (373,613)
Effect of exchange rate changes on cash and cash equivalents 7,766 (3,585)
Net (decrease) increase in cash and cash equivalents $
(18,589)
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Cash and Cash Equivalents and Marketable Securities :
As of September 30, 2020 , our cash, cash equivalents and marketable securities
totaled $2.04 billion , which represents an increase of $63.0 million from
June 30, 2020 . The increase is due to net cash provided by operating activities
of $512.2 million , partially offset by stock repurchases of $187.9 million , cash
used for payment of dividends and dividend equivalents of $141.2 million ,
capital expenditures of $55.9 million and a net cash usage of $80.1 million
related to purchases, sales and maturities of available-for-sale and trading
securities.
As of September 30, 2020 , $904.6 million of our $2.04 billion of cash, cash
equivalents and marketable securities were held by our foreign subsidiaries and
branch offices. We currently intend to indefinitely reinvest $584.9 million of
the cash, cash equivalents and marketable securities held by our foreign
subsidiaries for which we assert that earnings are permanently reinvested. If,
however, a portion of these funds were to be repatriated 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 $319.7 million of the $904.6 million 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:
During the three months ended September 30, 2020 , our Board of Directors
declared a regular quarterly cash dividend of $0.90 per share on our outstanding
common stock, which was paid on September 1, 2020 to our stockholders of record
as of the close of business on August 17, 2020 . During the same period in fiscal
year 2019, our Board of Directors declared and paid a regular quarterly cash
dividend of $0.75 per share on our outstanding common stock. The total amount of
regular quarterly cash dividends and dividend equivalents paid during the three
months ended September 30, 2020 and 2019 was $141.2 million and $121.6 million ,
respectively. The amount of accrued dividend equivalents payable for regular
quarterly cash dividends on unvested restricted stock units (RSUs) with dividend
equivalent rights as of September 30, 2020 and June 30, 2020 was $8.7 million
and $8.3 million , respectively. These amounts will be paid upon vesting of the
underlying unvested RSU as described in Note 10 "Equity, Long-term Incentive
Compensation Plans and Non-Controlling Interest" in the Notes to the Condensed
Consolidated Financial Statements.
Stock Repurchases:
The shares repurchased under our stock repurchase program have reduced our basic
and diluted weighted-average shares outstanding for the three months ended
September 30, 2020 and 2019. The stock repurchase program is intended, in part,
to offset the dilution from our equity incentive plans, shares issued in
connection with purchases under our ESPP, and the issuance of shares in the
Orbotech Acquisition, as well as to return excess cash to our shareholders.
Cash Flows from Operating Activities:
We have historically financed our liquidity requirements through cash generated
from our operations. Net cash provided by operating activities during the three
months ended September 30, 2020 increased by $15.9 million compared to the three
months ended September 30, 2019 primarily as a result of the following factors:
•An increase in collections of approximately $202.1 million mainly driven by
higher shipments during the three months ended September 30, 2020 ;
•An increase in accounts payable payments of approximately $106.2 million during
the three months ended September 30, 2020 ;
•An increase in income tax payments of approximately $34.3 million during the
three months ended September 30, 2020 ;
•An increase in other tax payments of approximately $24.4 million during the
three months ended September 30, 2020 ;
•An increase in employee related payments of approximately $7.1 million during
the three months ended September 30, 2020 ;
•An increase of debt interest payments of approximately $13.3 million mainly
related to new 30-year Senior Notes issued in February 2020 .
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Cash Flows used in Investing Activities:
Net cash used in investing activities during the three months ended
September 30, 2020 was $134.3 million compared to $146.7 million during the
three months ended September 30, 2019 . This decrease in cash used was mainly due
to a decrease in cash paid for business acquisitions of $78.5 million , partially
offset by an increase in net purchases of marketable securities of $43.4 million
and an increase in cash paid to purchase fixed assets of $23.4 million .
Cash Flows used in Financing Activities:
Net cash used in financing activities during the three months ended
September 30, 2020 was $404.2 million compared to cash used by financing
activities of $373.6 million during the three months ended September 30, 2019 .
This change was mainly due to increased debt repayments of $50.0 million , an
increase in cash paid for dividends and dividend equivalents of $19.5 million ,
partially offset by less cash used for common stock repurchases of $40.6
million .
Senior Notes:
We have senior unsecured notes in the aggregate principal amount of $3.45
billion outstanding as of September 30, 2020 . In February 2020 , we issued $750
million ("2020 Senior Notes") aggregate principal amount of senior, unsecured
long-term notes under which the proceeds were used to redeem $500.0 million of
Senior Notes due 2021, including associated redemption premiums, accrued
interest and other fees and expenses, to repay borrowings of $200.0 million
under the Revolving Credit Facility, and for other general corporate purposes.
See Note 8 "Debt" of the Notes to the Consolidated Condensed Financial
Statements for additional discussion of existing debt. We may seek to refinance
our existing debt and may incur additional indebtedness depending on our capital
requirements and the availability of financing.
Interest is payable as follows: semi-annually 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
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 September 30, 2020 , we were in compliance with all of our covenants under
the Indenture associated with the Senior Notes.
Revolving Credit Facility:
We have a Credit Agreement (the "Credit Agreement") providing for a $1.00
billion unsecured Revolving Credit Facility (the "Revolving Credit Facility"),
with a maturity date of November 30, 2023 . In the second and fourth quarters of
fiscal 2020, we borrowed $250.0 million and $200.0 million , respectively, from
the Revolving Credit Facility. In the second, third, and fourth quarters of
fiscal 2020, we made principal payments of $25.0 million , $200.0 million and
$175.0 million , respectively. During the first quarter of the fiscal year ending
June 30, 2021 , we made a principal payment of $50.0 million on the Revolving
Credit Facility so that as of September 30, 2020 , we had no outstanding
borrowings under the Revolving Credit Facility.
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 September 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.
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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 September 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
September 30, 2020 (the interest expense coverage ratio was 14.65 to 1.00 and
the leverage ratio was 1.48 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:
There have been no material changes outside the ordinary course of business to
our contractual obligations as disclosed in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2020 . For additional details regarding our debt
and commitments, refer to Note 8 "Debt" and Note 15 "Commitments and
Contingencies", respectively, in the Notes to the Condensed Consolidated
Financial Statements. For additional details regarding our contractual
obligations, refer to our Annual Report Form on 10-K for the fiscal year
ended June 30, 2020 .
Working Capital:
Working capital was $3.01 billion as of September 30, 2020 , which represents a
decrease of $17.9 million compared to our working capital of $3.02 billion as of
June 30, 2020 . As of September 30, 2020 , our principal sources of liquidity
consisted of $2.04 billion of cash, cash equivalents and marketable securities.
Our liquidity may be affected by many factors, some of which are based on the
normal ongoing operations of the business, spending for business acquisitions,
and other factors such as uncertainty in the global and regional economies and
the semiconductor, semiconductor related and electronic device industries.
Although cash requirements will fluctuate based on the timing and extent of
these factors, we believe that cash generated from operations, together with the
liquidity provided by existing cash and cash equivalents balances and
availability under our Revolving Credit Facility, will be sufficient to satisfy
our liquidity requirements associated with working capital needs, capital
expenditures, cash dividends, stock repurchases and other contractual
obligations, including repayment of outstanding debt, for at least the next 12
months.
Our credit ratings as of September 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 ofSeptember 30, 2020 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial position, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 15 "Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements for information related to indemnification obligations. 47
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