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; •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 and the ongoing interest rate environment, among other factors; •Instability in the global credit and financial markets; •Our exposure to currency exchange rate fluctuations, or declining economic conditions in those countries; 40 -------------------------------------------------------------------------------- Table of Contents •Changes in our effective tax rate resulting from changes in the tax rates imposed by jurisdictions where our profits are determined to be earned and taxed, expiration of tax holidays in certain jurisdictions, resolution of issues arising from tax audits with various authorities or changes in tax laws or the interpretation of such tax laws; and •Our ability to identify suitable acquisition targets and successfully integrate and manage acquired businesses. For a more detailed discussion of these and other risk factors that might cause or contribute to differences from the forward looking statements in this report, see Part II, Item 1A, "Risk Factors" in this report as well as 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 endedJune 30, 2020 . You should carefully review these risks and also review the risks described in other documents we file from time to time with theSecurities and Exchange Commission . 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 both of the major semiconductor device manufacturing markets: Memory and Foundry/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 include the deployment of 5G telecommunications technology and associated high-end mobile devices, the electrification and digitalization of the automotive industry, the revival of personal computer demand and associated innovations to support work from home requirements, virtual collaboration, remote learning and entertainment, and the growth of the Internet of Things ("IoT") and associated new applications. These trends drive demand for our other products such as those used in the PCB, FPD and Specialty Semiconductor manufacturing, where the increase in technology complexity is expected to continue and further accelerate as more devices become interconnected and dependent on other electronic devices. As a result of these factors, we saw a general strengthening of demand for our products throughout fiscal 2021, especially in the current quarter. 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 toChina . Government initiatives are propellingChina to expand its domestic manufacturing capacity and attracting investment from semiconductor manufacturers fromTaiwan ,Korea ,Japan andthe United States . AlthoughChina is currently seen as an important long-term growth region for the semiconductor and electronics capital equipment sector, theUnited States Department of Commerce has added certainChina -based entities to theU.S. Entity List, restricting our ability to provide products and services to such entities without a license. In addition, theU.S. Department of Commerce has imposed new export licensing requirements onChina -based customers engaged in military end uses, as well as requiring our customers to obtain an 41 -------------------------------------------------------------------------------- Table of Contents export license when they use certain semiconductor capital equipment based onU.S. technology to manufacture products connected to Huawei or its affiliates. While these new rules have not significantly impacted our operations to-date, such actions by theU.S. government or another country could impact our ability to provide our products and services to existing and potential customers and adversely affect our business.
The following table sets forth some of our key quarterly unaudited financial information:
Three Months Ended (In thousands, except net income per March 31, December 31, September 30, June 30, March 31, share) 2021 2020 2020 2020 2020 Total revenues$ 1,803,773 $ 1,650,870 $ 1,538,620 $ 1,459,593 $ 1,423,964 Gross margin$ 1,094,144 $ 981,137
$ 420,567 $ 411,253 $ 78,452 Diluted net income per share attributable to KLA(2)$ 3.66 $ 2.94 $ 2.69$ 2.63 $ 0.50 __________________ (1)Our net income attributable to KLA increased to$567.5 million in the three months endedMarch 31, 2021 , primarily as a result of higher revenues as well as improvements in cost control. (2)Diluted net income per share is computed independently for each of the quarters presented based on the weighted-average fully diluted shares outstanding for each quarter. Therefore, the sum of quarterly diluted net income per share information may not equal annual (or other multiple-quarter calculations of) diluted net income per share.
Impact of COVID-19
Events surrounding the ongoing COVID-19 pandemic 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 including the speed and efficacy of developing vaccines to prevent its spread. 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 continue to monitor our 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 world, theKLA 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 42 -------------------------------------------------------------------------------- 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. We continue to experience various constraints in our supply chain due to the pandemic. As a result, supply lead times are extended and we continue to have difficulties in obtaining some necessary components in a timely manner. We have communicated with our suppliers to identify supply gaps and taken steps to ensure continuity and, while there is progress in the recovery within our supply chain, 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 fiscal 2021. 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. RESULTS OF OPERATIONS Revenues and Gross Margin Revenues Our business is affected by the concentration of our customer base and our customers' capital equipment procurement schedules as a result of their investment plans. Our product revenues in any particular period are significantly impacted by the amount of new orders that we receive during that period and, depending upon the duration of manufacturing and installation cycles, in the preceding period. 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. 43
--------------------------------------------------------------------------------
Table of Contents Three Months Ended Q3 FY21 March 31, March 31, vs. (Dollar amounts in thousands) 2021 2020 Q3 FY20 Revenues: Product$ 1,375,320 $ 1,051,096 $ 324,224 31 % Service 428,453 372,868 55,585 15 % Total revenues$ 1,803,773 $ 1,423,964 $ 379,809 27 % Costs of revenues$ 709,629 $ 590,158 $ 119,471 20 % Gross margin percentage 60.7 % 58.6 % Product revenues during the three months endedMarch 31, 2021 increased compared to the three months endedMarch 31, 2020 , primarily due to strong demand from our memory and logic customers and an increase from continued growth in the 5G infrastructure market, ongoing work from home requirements, and high-performance computing technologies. These increases were partially offset by softer demand and oversupply in the FPD market. Service revenues during the three months endedMarch 31, 2021 increased compared to the three months endedMarch 31, 2020 , primarily due to an increase in the number of systems installed at our customers' sites. Nine Months Ended Q3 FY21 YTD March 31, March 31, vs. (Dollar amounts in thousands) 2021 2020 Q3 FY20 YTD Revenues: Product$ 3,758,838 $ 3,253,621 $ 505,217 16 % Service 1,234,425 1,093,210 141,215 13 % Total revenues$ 4,993,263 $ 4,346,831 $ 646,432 15 % Costs of revenues$ 1,999,924 $ 1,828,017 $ 171,907 9 % Gross margin percentage 59.9 % 57.9 % Product revenues during the nine months endedMarch 31, 2021 increased compared to the nine months endedMarch 31, 2020 , primarily due to strong demand for many of our products, especially our inspection and metrology portfolios, as well as an increase from continued growth in the 5G infrastructure market. These increases were partially offset by softer demand and oversupply in the FPD market. Service revenues during the nine months endedMarch 31, 2021 increased compared to the nine months endedMarch 31, 2020 , primarily due to an increase in the number of systems installed at our customers' sites. Revenues by segment(1) Three Months Ended Q3 FY21 March 31, March 31, vs. (Dollar amounts in thousands) 2021 2020 Q3 FY20 Revenues: Semiconductor Process Control$ 1,506,140 $ 1,177,777 $ 328,363 28 % Specialty Semiconductor Process 91,724 85,083 6,641 8 % PCB, Display and Component Inspection 205,202 160,411 44,791 28 % Other 149 469
(320) (68) %
Total revenues for reportable segments
44 -------------------------------------------------------------------------------- Table of Contents Revenue from our Semiconductor Process Control segment during the three months endedMarch 31, 2021 increased compared to the three months endedMarch 31, 2020 , primarily due to strong demand for our inspection and metrology products. Revenues in the Specialty Semiconductor Process and PCB, Display and Component Inspection segments during the three months endedMarch 31, 2021 increased compared to the three months endedMarch 31, 2020 , primarily due to continued growth in 5G infrastructure, the ongoing work from home requirements, as well as high-performance computing technologies. These increases were partially offset by softer demand and oversupply in the FPD market. Nine Months Ended Q3 FY21 YTD March 31, March 31, vs. (Dollar amounts in thousands) 2021 2020 Q3 FY20 YTD Revenues: Semiconductor Process Control$ 4,154,278 $ 3,588,839 $ 565,439 16 % Specialty Semiconductor Process 271,264 229,328 41,936 18 % PCB, Display and Component Inspection 565,646 525,242 40,404 8 % Other 739 3,217 (2,478) (77) % Total revenues$ 4,991,927 $ 4,346,626 $ 645,301 15 % __________ (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. Revenues from our Semiconductor Process Control segment during the nine months endedMarch 31, 2021 increased compared to the nine months endedMarch 31, 2020 , primarily due to strong demand for many of our products especially from our inspection and metrology portfolios. Revenues in the Specialty Semiconductor Process and PCB, Display and Component Inspection segments during the nine months endedMarch 31, 2021 increased compared to the nine months endedMarch 31, 2020 , primarily due to continued growth in 5G infrastructure, the ongoing work from home requirements, and high-performance computing technologies. These increases were partially offset by softer demand and oversupply in the FPD market. 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 Nine Months Ended (Dollar amounts in thousands) March 31, 2021 March 31, 2020 March 31, 2021 March 31, 2020 Korea$ 557,514 31 %$ 297,687 21 %$ 1,094,979 22 %$ 677,085 16 % Taiwan 401,797 22 % 349,841 24 % 1,151,683 23 % 1,183,653 27 % China 353,393 20 % 352,343 25 % 1,221,639 24 % 1,079,951 25 % North America 174,728 10 % 159,250 11 % 559,712 11 % 499,750 11 % Japan 161,190 9 % 152,984 11 % 482,330 10 % 553,999 13 % Europe and Israel 95,080 5 % 76,021 5 % 278,398 6 % 232,870 5 % Rest of Asia 60,071 3 % 35,838 3 % 204,522 4 % 119,523 3 % Total$ 1,803,773 100 %$ 1,423,964 100 %$ 4,993,263 100 %$ 4,346,831 100 %
A significant portion of our revenues continues to be generated in
Gross margin Our gross margin fluctuates with revenue levels and product mix and is affected by variations in costs related to manufacturing and servicing our products, including our ability to scale our operations efficiently and effectively in response to prevailing business conditions. 45 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the major factors that contributed to the changes in gross margin percentage: Gross Margin Percentage Three Months Ended Nine Months Ended March 31, 2020 58.6% 57.9% Revenue volume of products and services 1.8% 1.0% Mix of products and services sold 1.3% 1.8% Manufacturing labor, overhead and efficiencies 0.1% 0.1% Other service and manufacturing costs (1.1)% (0.9)% March 31, 2021 60.7% 59.9% 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. 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 percentage during the comparative periods presented is primarily due to a more profitable mix of products and services sold as well as a higher revenue volume of products and services, partially offset by an increase in service and manufacturing costs. Segment gross margin(1) Three months ended Q3 FY21 March 31, March 31, vs. (Dollar amounts in thousands) 2021 2020 Q3 FY20 Segment gross margin: Semiconductor Process Control$ 982,511 $ 752,649 $ 229,862 31 % Specialty Semiconductor Process 51,720 47,187 4,533 10 % PCB, Display and Component Inspection 100,311 71,163 29,148 41 % Other 40 (271) 311 (115) %$ 1,134,582 $ 870,728 $ 263,854 30 % Gross margin in the Semiconductor Process Control segment during the three months endedMarch 31, 2021 increased compared to the three months endedMarch 31, 2020 , primarily due to a higher revenue volume of products and services sold and a more favorable mix of products and services sold, partially offset by an increase in other service and manufacturing costs. Gross margin in the Specialty Semiconductor Process and PCB, Display and Component Inspection segments during the three months endedMarch 31, 2021 increased compared to the three months endedMarch 31, 2020 , primarily due to a more favorable mix of products and services sold as well as a higher revenue volume of products and services sold. 46
--------------------------------------------------------------------------------
Table of Contents Nine Months Ended Q3 FY21 YTD March 31, March 31, vs. (Dollar amounts in thousands) 2021 2020 Q3 FY20 YTD Segment gross margin: Semiconductor Process Control$ 2,681,411 $ 2,290,721 $ 390,690 17 % Specialty Semiconductor Process 152,819 126,684 26,135 21 % PCB, Display and Component Inspection 275,064 229,769 45,295 20 % Other (68) 499 (567) (114) %$ 3,109,226 $ 2,647,673 $ 461,553 17 % ________________ (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. Gross margin in the Semiconductor Process Control segment during the nine months endedMarch 31, 2021 increased compared to the nine months endedMarch 31, 2020 , primarily due to a more profitable mix of products and services sold as well as higher manufacturing efficiencies, partially offset by an increase in other service and manufacturing costs. Gross margin in the Specialty Semiconductor Process and PCB, Display and Component Inspection segments during the nine months endedMarch 31, 2021 increased compared to the nine months endedMarch 31, 2020 , primarily due to a more favorable mix of products and services sold and higher revenue volume of products and services sold.
Research and Development ("R&D")
R&D expenses may fluctuate with product development phases and project timing as well as our R&D efforts. As technological innovation is essential to our success, we may incur significant costs associated with R&D projects, including compensation for engineering talent, engineering material costs, and other expenses. Three Months Ended Q3 FY21 vs. (Dollar amounts in thousands) March 31, 2021 March 31, 2020 Q3 FY20 R&D expenses$ 238,957 $ 215,433 $ 23,524 11 % R&D expenses as a percentage of total revenues 13 % 15 % R&D expenses during the three months endedMarch 31, 2021 increased compared to the three months endedMarch 31, 2020 , primarily due to increased employee-related expenses of$18.3 million as a result of additional engineering headcount, higher employee benefit costs and higher variable compensation, as well as an increase in engineering project material costs of$5.4 million . Nine Months Ended Q3 FY21 YTD vs. (Dollar amounts in thousands) March 31, 2021 March 31, 2020 Q3 FY20 YTD R&D expenses$ 687,059 $ 646,764 $ 40,295 6 % R&D expenses as a percentage of total revenues 14 % 15 % R&D expenses during the nine months endedMarch 31, 2021 increased compared to the nine months endedMarch 31, 2020 , primarily due to an increase in employee-related expenses of$34.3 million as a result of additional engineering headcount, higher employee benefit costs and higher variable compensation, as well as higher engineering project material costs of$19.5 million , partially offset by a decrease in travel-related expenses of$11.7 million . 47 -------------------------------------------------------------------------------- Table of Contents Our future operating results will depend significantly on our ability to produce products and provide services that have a competitive advantage in our marketplace. To do this, we believe that we must continue to make substantial and focused investments in our research and development. We remain committed to product development in new and emerging technologies.
Selling, General and Administrative ("SG&A")
Three Months Ended Q3 FY21 March 31, vs. (Dollar amounts in thousands) March 31, 2021 2020 Q3 FY20 SG&A expenses$ 183,040 $ 185,760 $ (2,720) (1) % SG&A expenses as a percentage of total revenues 10 % 13 % SG&A expenses during the three months endedMarch 31, 2021 decreased compared to the three months endedMarch 31, 2020 , primarily due to a decrease in travel-related expenses of$6.1 million and a decrease in depreciation and intangible amortization expense of$4.3 million , partially offset by an increase in employee-related expenses of$4.9 million as the result of additional headcount, higher employee benefit costs and higher variable compensation, and an increase in consulting costs of$2.3 million . Nine Months Ended Q3 FY21 YTD vs. (Dollar amounts in thousands) March 31, 2021 March 31, 2020 Q3 FY20 YTD SG&A expenses$ 537,580 $ 566,358 $ (28,778) (5) % SG&A expenses as a percentage of total revenues 11 % 13 % SG&A expenses during the nine months endedMarch 31, 2021 decreased compared to the nine months endedMarch 31, 2020 , primarily due to a decrease in travel-related expenses of$27.4 million and a decrease in depreciation and intangible amortization expense of$18.7 million , partially offset by an increase in employee-related expenses of$5.1 million as the result of additional headcount, higher employee benefit costs and higher variable compensation, an increase in facilities-related expense of$4.8 million , an increase in legal fees of$4.1 million and an increase in consulting costs of$3.1 million . Goodwill Impairment We performed the required annual goodwill impairment testing via the qualitative assessment for all reporting units as ofFebruary 28, 2021 and concluded that goodwill was not impaired. For the fiscal year endedJune 30, 2020 , as a result of our annual goodwill impairment testing for all reporting units, 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 endedMarch 31, 2020 . 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 fourth quarter of our fiscal year endingJune 30, 2021 , primarily in our PCB, Display and Component Inspection segment. Restructuring charges were$2.9 million for the three months endedMarch 31, 2021 , 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. Restructuring charges were$11.1 million for the nine months endedMarch 31, 2021 , and included$3.0 million of non-cash charges for accelerated depreciation related to certain right-of use assets and fixed assets to be abandoned. As ofMarch 31, 2021 , the accrual for restructuring charges was$4.5 million . We expect to incur additional restructuring charges in future periods in connection with the completion of our workforce reduction. For additional information refer to Note 19 "Restructuring Charges" in the Notes to the Condensed Consolidated Financial Statements. 48
--------------------------------------------------------------------------------
Table of Contents
Interest Expense and Other Expense (Income), Net Other expense (income), net is comprised primarily of realized gains or losses on sales of marketable securities, gains or losses from revaluations of certain foreign currency denominated assets and liabilities as well as foreign currency contracts, and interest-related accruals (such as interest and penalty accruals related to our tax obligations) and interest income earned on our invested cash, cash equivalents and marketable securities. Three Months Ended Q3 FY21 vs. (Dollar amounts in thousands) March 31, 2021 March 31, 2020 Q3 FY20 Interest expense$ 39,092 $ 39,231 $ (139) - % Other expense (income), net$ (7,348) $ (1,004) $ 6,344 632 % Interest expense as a percentage of total revenues 2 % 3 % Other expense (income), net as a percentage of total revenues < 1%
< 1%
Other expense (income), net during the three months endedMarch 31, 2021 increased compared to the three months endedMarch 31, 2020 , primarily due to the sale of our interest in PixCell to a South Korean company in the third quarter of fiscal 2021 for total consideration of$20.2 million , for which the$4.4 million gain was recorded as part of other expense (income), net. Nine Months Ended Q3 FY21 YTD vs. (Dollar amounts in thousands) March 31, 2021 March 31, 2020 Q3 FY20 YTD Interest expense$ 117,358 $ 120,053 $ (2,695) (2) % Other expense (income), net $ (269)$ (5,190) $ (4,921) (95) % Interest expense as a percentage of total revenues 2 % 3 % Other expense (income), net as a percentage of total revenues < 1% < 1% Interest expense during the nine months endedMarch 31, 2021 decreased compared to the nine months endedMarch 31, 2020 , primarily due to a lower interest rate on our$750.0 million Senior Notes issued inFebruary 2020 . Other expense (income), net during the nine months endedMarch 31, 2021 decreased compared to the nine months endedMarch 31, 2020 , primarily due to a decrease in interest income of$11.2 million due to lower interest rates, and is partially offset by the$4.4 million gain from the sale of our interest in PixCell. Loss on Extinguishment of Debt For the three and nine months endedMarch 31, 2021 , we had no loss on extinguishment of debt. For the three and nine months endedMarch 31, 2020 , loss on extinguishment of debt reflected a pre-tax net loss of$22.5 million associated with the redemption of our$500.0 million of Senior Notes due 2021, including associated redemption premiums, accrued interest and other fees and expenses. Provision for Income Taxes The following table provides details of income taxes: Three Months Ended Nine Months Ended March 31, March 31, (Dollar amounts in thousands) 2021 2020 2021 2020 Income before income taxes$ 640,403 $ 115,199 $ 1,651,611 $ 911,642 Provision for income taxes$ 73,233 $ 37,190 $ 207,316 $ 106,932 Effective tax rate 11.4 % 32.3 % 12.6 % 11.7 % 49
-------------------------------------------------------------------------------- Table of Contents The effective tax rate during the three months endedMarch 31, 2021 was lower compared to the three months endedMarch 31, 2020 primarily due to a$256.6 million goodwill impairment charge during the three months endedMarch 31, 2020 , which is non-deductible for income tax. Excluding the goodwill impairment charge, tax expense was higher as a percentage of income before taxes during the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 primarily due to the impact of the following item: • Tax expense increased by$10.9 million during the three months endedMarch 31, 2021 relating to a decrease in the proportion of our earnings generated in jurisdictions with tax rates lower than theU.S. statutory rate. The effective tax rate during the nine months endedMarch 31, 2021 was higher compared to the nine months endedMarch 31, 2020 primarily due to the impact of the following items: •Tax expense increased by$28.2 million during the nine months endedMarch 31, 2021 relating to a decrease in the proportion of our earnings generated in jurisdictions with tax rates lower than theU.S. statutory rate; partially offset by •Tax expense decreased by$12.2 million during the nine months endedMarch 31, 2021 relating to a non-deductible increase in the value of the assets held within our Executive Deferred Savings Plan. 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 toUnited States income tax examinations for all years beginning from the fiscal year endedJune 30, 2017 and are underUnited States income tax examination for the fiscal year endedJune 30, 2018 . We are subject to state income tax examinations for all years beginning from the fiscal year endedJune 30, 2016 . We are also subject to examinations in other major foreign jurisdictions, includingSingapore andIsrael , for all years beginning from the calendar year endedDecember 31, 2012 . We are under audit inGermany related toOrbotech for the calendar years endedDecember 31, 2013 toDecember 31, 2015 . We are also under audit inIsrael related to KLA for the fiscal years endedJune 30, 2017 toJune 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. InMay 2017 ,Orbotech received an assessment from theIsrael Tax Authority ("ITA") with respect to its fiscal years 2012 through 2014 (the "Assessment") for an aggregate amount of tax, after offsetting all net operating losses ("NOLs") available through the end of 2014, of approximatelyNIS 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, as defined below). OnAugust 31, 2018 ,Orbotech filed an objection in respect of the Assessment (the "Objection"). The ITA completed the second stage of the audit, in which the claimsOrbotech 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. AsOrbotech and the ITA did not reach an agreement during the second stage, the ITA issued Tax Decrees toOrbotech onAugust 28, 2019 ("Tax Decrees") for an aggregate amount of tax, after offsetting all NOLs available through the end of 2014, of approximatelyNIS 257.0 million (equivalent to approximately$73.0 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 theDistrict Court of Tel Aviv onSeptember 26, 2019 . OnFebruary 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 onJuly 30, 2020 . We are currently in the pre-trial hearing stage of the process and the next pre-trial meeting is scheduled forJune 2021 . The ITA andOrbotech 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 inIsrael againstOrbotech , certain of its employees and its tax consultant. OnApril 11, 2018 ,Orbotech received a "suspect notification letter" (datedMarch 28, 2018 ) from theTel 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 theDistrict Attorney's Office . The letter further states that theDistrict Attorney's Office has not yet made a decision regarding submission of an indictment againstOrbotech ; and that if after studying the case, a decision is made to consider prosecutingOrbotech ,Orbotech will receive an additional letter and, within 30 50 -------------------------------------------------------------------------------- Table of Contents days,Orbotech may present its arguments to theDistrict Attorney's Office as to why it should not be indicted. OnOctober 27, 2019 , we received a request for additional information from theDistrict Attorney's Office . We will continue to monitor the progress of theDistrict 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 theDistrict Attorney's Office to enable them to conclude their investigation. InDecember 2020 ,Orbotech received an assessment from the ITA with respect to its fiscal years 2015 through 2018 (the "Second Assessment"), for an aggregate amount of tax, after offsetting all NOLs available through the end of 2018, of approximatelyNIS 227.0 million (equivalent to approximately$68.0 million which includes related interest and linkage differentials to the Israeli consumer price index as of date of the issuance of the Second Assessment). We filed an objection to the Second Assessment with the ITA inMarch 2021 . The objection moved the 2015-2018 audit to the second stage, in which the ITA will review the objections. We believe that our recorded unrecognized tax benefits are sufficient to cover the resolution of the Second Assessment.
Liquidity and Capital Resources
As of As of (Dollar amounts in thousands) March 31, 2021 June 30, 2020 Cash and cash equivalents$ 1,452,150 $ 1,234,409 Marketable securities 990,575 746,063 Total cash, cash equivalents and marketable securities$ 2,442,725 $ 1,980,472 Percentage of total assets 25 % 21 % Nine Months Ended March 31, (In thousands) 2021 2020 Cash flows: Net cash provided by operating activities$ 1,719,402 $ 1,326,004 Net cash used in investing activities (406,800) (153,053) Net cash used in financing activities (1,105,036) (1,238,280)
Effect of exchange rate changes on cash and cash equivalents 10,175
(4,490) Net (decrease) increase in cash and cash equivalents $
217,741
Cash andCash Equivalents and Marketable Securities : As ofMarch 31, 2021 , our cash, cash equivalents and marketable securities totaled$2.44 billion , which represents an increase of$462.3 million fromJune 30, 2020 . The increase is due to net cash provided by operating activities of$1.72 billion , partially offset by stock repurchases of$638.8 million , cash used for payment of dividends and dividend equivalents of$420.1 million , capital expenditures of$176.3 million and a net cash usage of$249.9 million related to purchases, sales and maturities of available-for-sale and trading securities. As ofMarch 31, 2021 ,$897.5 million of our$2.44 billion of cash, cash equivalents and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to indefinitely reinvest$581.8 million of the cash, cash equivalents and marketable securities held by our foreign subsidiaries for which we assert that earnings are permanently reinvested. If, however, a portion of these funds were to be repatriated tothe United States , we would be required to accrue and pay state and foreign taxes of approximately 1% - 22% of the funds repatriated. The amount of taxes due will depend on the amount and manner of the repatriation, as well as the location from which the funds are repatriated. We have accrued state and foreign tax on the remaining cash of$315.7 million of the$897.5 million held by our foreign subsidiaries and branch offices. As such, these funds can be returned to theU.S. without accruing any additionalU.S. tax expense. 51 -------------------------------------------------------------------------------- Table of Contents Cash Dividends: During the three months endedMarch 31, 2021 , our Board of Directors declared a regular quarterly cash dividend of$0.90 per share on our outstanding common stock, which was paid onMarch 2, 2021 to our stockholders of record as of the close of business onFebruary 19, 2021 . During the same period in fiscal year endedJune 30, 2020 , our Board of Directors declared and paid a regular quarterly cash dividend of$0.85 per share on our outstanding common stock. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months endedMarch 31, 2021 and 2020 was$139.3 million and$133.3 million , respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid during the nine months endedMarch 31, 2021 and 2020 was$420.1 million and$389.7 million , respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as ofMarch 31, 2021 andJune 30, 2020 was$10.3 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 nine months endedMarch 31, 2021 and 2020. 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 theOrbotech 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 nine months endedMarch 31, 2021 was$1.72 billion compared to$1.33 billion during the nine months endedMarch 31, 2020 . This increase of$393.4 million resulted primarily from the following: •An increase in collections of approximately$751.0 million mainly driven by higher shipments and prepayments during the nine months endedMarch 31, 2021 ; partially offset by •An increase in accounts payable payments of approximately$239.0 million during the nine months endedMarch 31, 2021 ; •An increase in employee related payments of approximately$58.0 million during the nine months endedMarch 31, 2021 ; •An increase in income tax payments of approximately$51.9 million during the nine months endedMarch 31, 2021 ; and •An increase in other tax payments of approximately$13.0 million during the nine months endedMarch 31, 2021 . Cash Flows used in Investing Activities: Net cash used in investing activities during the nine months endedMarch 31, 2021 was$406.8 million compared to$153.1 million during the nine months endedMarch 31, 2020 . This increase in cash used was mainly due to an increase in net purchases of available for sale and trading securities of$285.2 million and an increase in cash paid to purchase fixed assets of$65.4 million , partially offset by a decrease in cash paid for business acquisitions of$78.6 million and an increase in cash received from sale of business of$16.8 million . Cash Flows used in Financing Activities: Net cash used in financing activities during the nine months endedMarch 31, 2021 was$1.11 billion compared to cash used by financing activities of$1.24 billion during the nine months endedMarch 31, 2020 . This decrease was mainly due to a decrease in cash used for common stock repurchases of$190.3 million , partially offset by an increase in cash paid for dividends and dividend equivalents of$30.4 million , and an increase in net debt repayments of$25.6 million . Senior Notes: We have senior unsecured notes in the aggregate principal amount of$3.45 billion outstanding as ofMarch 31, 2021 . InFebruary 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. InMarch 2019 andNovember 2014 , we issued$1.20 billion (the "2019 52 -------------------------------------------------------------------------------- Table of Contents Senior Notes") and$2.50 billion (the "2014 Senior Notes" and together with the 2019 Senior Notes and the 2020 Senior Notes, the "Senior Notes"), respectively, aggregate principal amount of senior, unsecured long-term notes. See Note 8 "Debt" 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 onMarch 1 andSeptember 1 of each year for the 2020 Senior Notes; semi-annually onMarch 15 andSeptember 15 of each year for the 2019 Senior Notes; and semi-annually onMay 1 andNovember 1 of each year for the 2014 Senior Notes. The Indenture for the Senior Notes includes covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are not restricted. In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two of Moody's, S&P andFitch 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 ofMarch 31, 2021 , 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 ofNovember 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 endingJune 30, 2021 , we made a principal payment of$50.0 million on the Revolving Credit Facility so that as ofMarch 31, 2021 , 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 ofMarch 31, 2021 , 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 a maximum of 4.00 to 1.00 for a period of time in connection with a material acquisition or a series of material acquisitions, as we elected to increase our maximum leverage ratio from January throughDecember 2019 in connection with theOrbotech acquisition. As ofMarch 31, 2021 , our maximum allowed leverage ratio was 3.00 to 1.00. We were in compliance with all covenants under the Credit Agreement as ofMarch 31, 2021 (the interest expense coverage ratio was 16.97 to 1.00 and the leverage ratio was 1.30 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 endingJune 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 endedJune 30, 2020 . For additional details regarding our debt and 53 -------------------------------------------------------------------------------- Table of Contents 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 endedJune 30, 2020 . Working Capital: Working capital was$3.38 billion as ofMarch 31, 2021 , which represents an increase of$351.9 million compared to our working capital of$3.02 billion as ofJune 30, 2020 . As ofMarch 31, 2021 , our principal sources of liquidity consisted of$2.44 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 ofMarch 31, 2021 are summarized below: Rating Agency Rating Fitch BBB+ Moody's Baa1Standard & Poor's BBB+
Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the semiconductor and semiconductor equipment industries, our financial position, material acquisitions and changes in our business strategy.
Off-Balance Sheet Arrangements As ofMarch 31, 2021 , 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. 54
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source