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

The following discussion of our financial condition and results of operations
should be read in conjunction with our Consolidated Financial Statements and the
related notes included in Item 8 "Financial Statements and Supplementary Data"
in this Annual Report on Form 10-K. This discussion contains forward-looking
statements, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking statements as a
result of certain factors, including but not limited to those discussed in
Item 1A "Risk Factors" and elsewhere in this Annual Report on Form 10-K (see
"Special Note Regarding Forward-Looking Statements"). Discussions and analysis
of fiscal year 2020 as compared against fiscal year 2019 have been omitted and
can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year
ended June 30, 2020, filed with the SEC.
EXECUTIVE SUMMARY
We are a leading supplier of process control and yield management solutions and
services for the semiconductor and related electronics industries. Our broad
portfolio of inspection and metrology products, and related service, software
and other offerings, support R&D and manufacturing of ICs, wafers and reticles.
Our products, services and expertise are used by our customers to measure,
detect, analyze and resolve critical and nanometric level product defects,
helping them to manage manufacturing process challenges and to obtain higher
finish product yields at lower cost. We also offer advanced technology solutions
to address various manufacturing needs of PCBs, FPDs, Specialty Semiconductor
Devices and other electronic components, including advanced packaging, LED,
power devices, compound semiconductor, and data storage industries, as well as
general materials research.
Our semiconductor customers generally operate in one or both of the major
semiconductor device manufacturing markets: Memory and Foundry/Logic. The
pervasive and increasing needs for semiconductors in many consumer and
industrial products, the rapid proliferation of new applications for more
advanced semiconductor devices, and the increasing complexity associated with
leading edge semiconductor manufacturing drives demand for our process control
and yield management solutions. Other demand trends include the growth of
end-market drivers such as AI, the deployment of 5G telecommunications
technology and associated high-end mobile devices, the electrification and
digitalization of the automotive industry, the revival of personal computer
demand and associated innovations to support remote work, virtual collaboration,
remote learning and entertainment, and the growth of the Internet of Things
("IoT"). The favorable end market dynamics are driving our customers to make
increased investments in our process control and yield management solutions as
part of their overall capital investment plans. These trends also drive demand
for our other products such as those used in the PCB, FPD and Specialty
Semiconductor manufacturing, where the increase in technology complexity is
expected to continue and further accelerate as more devices become
interconnected and dependent on other electronic devices. As a result of these
factors, we saw a general strengthening of demand for our products throughout
fiscal 2021. 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, from R&D to final volume production.
•Specialty Semiconductor Process: Advanced vacuum deposition and etching process
tools used by a broad range of specialty semiconductor customers.
•PCB, Display and Component Inspection: a range of inspection, testing and
measurement, and DI for patterning products used by manufacturers of PCBs, FPDs,
advanced packaging, MEMS, and other electronic components.
•Other: products that do not fall into the three segments above.
A majority of our revenues are derived from outside the United States, and
include geographic regions such as Taiwan, China, Korea, Japan, Europe and
Israel, and Rest of Asia. 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, 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, Commerce has
imposed new export licensing requirements
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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 to manufacture products connected to
Huawei or its affiliates. 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.
The following table sets forth some of our key consolidated financial
information for each of our last three fiscal years(1):
                                                                          Year Ended June 30,
(Dollar amounts in thousands, except diluted net income
per share)                                                   2021                 2020                 2019
Total revenues                                          $ 6,918,734          $ 5,806,424          $ 4,568,904
Costs of revenues                                       $ 2,772,165          $ 2,449,561          $ 1,869,377
Gross margin                                                     60  %                58  %                59  %
Net income attributable to KLA(2)                       $ 2,078,292          $ 1,216,785          $ 1,175,617
Diluted net income per share attributable to KLA        $     13.37

$ 7.70 $ 7.49

__________________

(1)On February 20, 2019, we completed the Orbotech Acquisition for total
consideration of approximately $3 billion. The operating results of Orbotech
have been included in our Consolidated Financial Statements from the Acquisition
Date. For additional details, refer to Note 6 "Business Combinations" to our
Consolidated Financial Statements.
(2)Our net income attributable to KLA for the year ended June 30, 2020 includes
a pre-tax goodwill impairment charge of $256.6 million and a pre-tax charge of
$22.5 million as a result of the extinguishment of debt. For additional details,
refer to Note 7 "Goodwill and Purchased Intangible Assets" and Note 8 "Debt" to
our Consolidated Financial Statements.
Impact of COVID-19
Events surrounding the COVID-19 pandemic had resulted in a reduction in economic
activity across the globe in calendar year 2020. Vaccinations and pandemic
containment measures have now created an environment that is driving economic
growth, even as pace of economic recovery remains uneven in various geographies.
The resumption of growth has caused us to experience new constraints in our
supply chain. Supply lead times are extended and shortages have sometimes
required us to increase our purchase commitments to secure critical components
on a timely basis.
While all of our global sites are currently operational, any local pandemic
outbreaks could require us to temporarily curtail production levels or
temporarily cease operations based on government mandates. 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 have included health screenings,
social distancing, employee separation protocols at our facilities, suspension
of non-essential business travel and work from home to the extent possible. We
are working with government authorities in the jurisdictions where we operate,
and continuing to monitor our operations in an effort to ensure we follow
government requirements, relevant regulations, industry standards, and best
practices to help safeguard our team members, while safely continuing operations
to the extent possible at our sites across the globe.
We believe these actions are appropriate and prudent to safeguard our employees,
contractors, suppliers, customers, and communities, while allowing us to safely
continue operations. 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.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions in applying our accounting
policies that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
these estimates and assumptions on historical experience and evaluate them on an
ongoing basis to ensure that they remain reasonable under current conditions.
Actual results could differ from those estimates. We discuss the development and
selection of the critical accounting estimates with the Audit Committee of our
Board of Directors on a quarterly basis, and the Audit Committee has reviewed
our related disclosure in this Annual Report on Form 10-K. The accounting
policies that reflect our more significant estimates, judgments and assumptions
and which we believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:
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Revenue Recognition. We primarily derive revenue from the sale of process
control and yield management solutions for the semiconductor and related
nanoelectronics industries, maintenance and support of all these products,
installation and training services, and the sale of spare parts. Our portfolio
also includes yield enhancement and production solutions used by manufacturers
of PCBs, FPDs, advanced packaging, MEMS and other electronic components. Our
solutions are generally not sold with a right of return, nor have we experienced
significant returns from or refunds to our customers.
We account for a contract with a customer when there is approval and commitment
from both parties, the rights of the parties are identified, payment terms are
identified, the contract has commercial substance and collectability of
consideration is probable. Our revenues are measured based on consideration
stipulated in the arrangement with each customer, net of any sales incentives
and amounts collected on behalf of third parties, such as sales taxes. The
revenues are recognized as separate performance obligations that are satisfied
by transferring control of the product or service to the customer. Our
arrangements with our customers include various combinations of products and
services, which are generally capable of being distinct and accounted for as
separate performance obligations. A product or service is considered distinct if
it is separately identifiable from other deliverables in the arrangement and if
a customer can benefit from it on its own or with other resources that are
readily available to the customer. The transaction consideration, including any
sales incentives, is allocated between separate performance obligations of an
arrangement based on the stand-alone selling prices ("SSP") for each distinct
product or service. Management considers a variety of factors to determine the
SSP, such as historical stand-alone sales of products and services, discounting
strategies and other observable data. From time to time, our contracts are
modified to account for additional, or to change existing, performance
obligations. Our contract modifications are generally accounted for
prospectively.
Product Revenue
We recognize revenue from product sales at a point in time when we have
satisfied our performance obligation by transferring control of the product to
the customer. We use judgment to evaluate whether control has transferred by
considering several indicators, including whether:
•we have a present right to payment;
•the customer has legal title;
•the customer has physical possession;
•the customer has significant risk and rewards of ownership; and
•the customer has accepted the product, or whether customer acceptance is
considered a formality based on history of acceptance of similar products (for
example, when the customer has previously accepted the same tool, with the same
specifications, and when we can objectively demonstrate that the tool meets all
of the required acceptance criteria, and when the installation of the system is
deemed perfunctory).
Not all of the indicators need to be met for us to conclude that control has
transferred to the customer. In circumstances in which revenue is recognized
prior to the product acceptance, the portion of revenue associated with our
performance obligations to install product is deferred and recognized upon
acceptance.
We enter into volume purchase agreements with some of our customers. We adjust
the transaction consideration for estimated credits earned by our customers for
such incentives. These credits are estimated based upon the forecasted and
actual product sales for any given period and agreed-upon incentive rate. The
estimate is updated at each reporting period.
We offer perpetual and term licenses for software products. The primary
difference between perpetual and term licenses is the duration over which the
customer can benefit from the use of the software, while the functionality and
the features of the software are the same. Software is generally bundled with
post-contract customer support ("PCS"), which includes unspecified software
updates that are made available throughout the entire term of the arrangement.
Revenue from software licenses is recognized at a point in time, when the
software is made available to the customer. Revenue from PCS is deferred at
contract inception and recognized ratably over the service period, or as
services are performed.
Services and Spare Parts Revenue
The majority of product sales include a standard six to 12-month warranty that
is not separately paid for by the customers. The customers may also purchase
extended warranties for periods beyond the initial year as part of the initial
product sale. We have concluded that the standard 12-month warranty as well as
any extended warranty periods included in the initial product sales are separate
performance obligations for most of our products. The estimated fair value of
warranty services is deferred and recognized ratably as revenue over the
warranty period, as the customer simultaneously receives and consumes the
benefits of warranty services provided by us.
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Additionally, we offer product maintenance and support services, which the
customer may purchase separately from the standard and extended warranty offered
as part of the initial product sale. Revenue from separately negotiated
maintenance and support service contracts is also recognized over time based on
the terms of the applicable service period. Revenue from services performed in
the absence of a maintenance contract, including training revenue, is recognized
when the related services are performed. We also sell spare parts, revenue from
which is recognized when control over the spare parts is transferred to the
customer.
Installation services include connecting and validating configuration of the
product. In addition, several testing protocols are completed to confirm the
equipment is performing to customer specifications. Revenues from product
installation are deferred and recognized at a point in time, once installation
is complete.
Significant Judgments
Our contracts with our customers often include promises to transfer multiple
products and services. Each product and service is generally capable of being
distinct within the context of the contract and represents a separate
performance obligation. Determining the SSP for each distinct performance
obligation and allocation of consideration from an arrangement to the individual
performance obligations and the appropriate timing of revenue recognition are
significant judgments with respect to these arrangements. We typically estimate
the SSP of products and services based on observable transactions when the
products and services are sold on a stand-alone basis and those prices fall
within a reasonable range. We typically have more than one SSP for individual
products and services due to the stratification of these products by customers
and circumstances. In these instances, we use information such as the size of
the customer, geographic region, as well as customization of the products in
determining the SSP. In instances where the SSP is not directly observable, we
determine the SSP using information that includes market conditions,
entity-specific factors, including discounting strategies, information about the
customer or class of customer that is reasonably available and other observable
inputs. While changes in the allocation of SSP between performance obligations
will not affect the amount of total revenue recognized for a particular
contract, any material changes could impact the timing of revenue recognition,
which could have a material effect on our financial position and results of
operations.
Although the products are generally not sold with a right of return, we may
provide other credits or sales incentives, which are accounted for either as
variable consideration or material right, depending on the specific terms and
conditions of the arrangement. These credits and incentives are estimated at
contract inception and updated at the end of each reporting period if and when
additional information becomes available.
As outlined above, we use judgments to evaluate whether or not the customer has
obtained control of the product and consider several indicators in evaluating
whether or not control has transferred to the customer. Not all of the
indicators need to be met for us to conclude that control has transferred to the
customer.
Contract Assets/Liabilities
The timing of revenue recognition, billings and cash collections may result in
accounts receivable, contract assets, and contract liabilities (deferred
revenue) on our Consolidated Balance Sheets. A receivable is recorded in the
period we deliver products or provide services when we have an unconditional
right to payment. Contract assets primarily relate to the value of products and
services transferred to the customer for which the right to payment is not just
dependent on the passage of time. Contract assets are transferred to accounts
receivable when rights to payment become unconditional.
A contract liability is recognized when we receive payment or have an
unconditional right to payment in advance of the satisfaction of performance.
The contract liabilities represent (1) deferred product revenue related to the
value of products that have been shipped and billed to customers and for which
control has not been transferred to the customers, and (2) deferred service
revenue, which is recorded when we receive consideration, or such consideration
is unconditionally due, from a customer prior to transferring services to the
customer under the terms of a contract. Deferred service revenue typically
results from warranty services, and maintenance and other service contracts.
Contract assets and liabilities related to rights and obligations in a contract
are recorded net in the Consolidated Balance Sheets.
Business Combinations. Accounting for business combinations requires management
to make significant estimates and assumptions to determine the fair values of
assets acquired and liabilities assumed at the acquisition date. Although we
believe the assumptions and estimates we have made in the past have been
reasonable and appropriate, they are based, in part, on historical experience
and information obtained from management of the acquired companies, and are
inherently uncertain. Critical estimates in valuing certain acquired intangible
assets include, but are not limited to, future expected cash flows including
revenue growth rate assumptions from product sales, customer contracts and
acquired technologies, expected costs to develop IPR&D into commercially viable
products, estimated cash flows from the projects when completed, including
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assumptions associated with the technology migration curve, estimated royalty
rates used in valuing technology related intangible assets, and discount rates.
The discount rates used to discount expected future cash flows to present value
are typically derived from a weighted-average cost of capital analysis and
adjusted to reflect inherent risks. Unanticipated events and circumstances may
occur that could affect either the accuracy or validity of such assumptions,
estimates or actual results.
We allocate the fair value of the purchase price of our acquisitions to the
tangible assets acquired, liabilities assumed, and intangible assets acquired,
including IPR&D, based on their estimated fair values at acquisition date. The
excess of the fair value of the purchase price over the fair values of these net
tangible and intangible assets acquired is recorded as goodwill. Management's
estimates of fair value are based upon assumptions believed to be reasonable,
but our estimates and assumptions are inherently uncertain and subject to
refinement. As a result, during the measurement period, which will not exceed
one year from the acquisition date, we record adjustments to the assets acquired
and liabilities assumed with the corresponding offset to goodwill. Upon the
conclusion of the measurement period or final determination of the fair value of
the purchase price of our acquisitions, whichever comes first, any subsequent
adjustments are recorded to our Consolidated Statements of Operations.
The fair value of IPR&D is initially capitalized as an intangible asset with an
indefinite life and assessed for impairment thereafter whenever events or
changes in circumstances indicate that the carrying value of the IPR&D assets
may not be recoverable. Impairment of IPR&D is recorded to R&D expenses. When an
IPR&D project is completed, the IPR&D is reclassified as an amortizable
purchased intangible asset and amortized to costs of revenues over the asset's
estimated useful life.
Acquisition-related expenses are recognized separately from the business
combination and are expensed as incurred.
Inventories. Inventories are stated at the lower of cost (on a first-in,
first-out basis) or net realizable value. Net realizable value is the estimated
selling price in the ordinary course of business, less reasonably predictable
costs of completion, disposal and transportation. Demonstration units are stated
at their manufacturing cost and written down to their net realizable value. We
review and set standard costs semi-annually at current manufacturing costs in
order to approximate actual costs. Our manufacturing overhead standards for
product costs are calculated assuming full absorption of forecasted spending
over projected volumes, adjusted for excess capacity. Abnormal inventory costs
such as costs of idle facilities, excess freight and handling costs, and
spoilage are recognized as current period charges. We write down product
inventory based on forecasted demand and technological obsolescence and service
spare parts inventory based on forecasted usage. These factors are impacted by
market and economic conditions, technology changes, new product introductions
and changes in strategic direction and require estimates that may include
uncertain elements. Actual demand may differ from forecasted demand, and such
differences may have a material effect on recorded inventory values.
Allowance for Credit Losses. A majority of our accounts receivable are derived
from sales to large multinational semiconductor and electronics manufacturers
throughout the world. We maintain an allowance for credit losses for expected
uncollectible accounts receivable and assess collectability by reviewing
accounts receivable on a collective basis where similar risk characteristics
exist and on an individual basis when we identify specific customers with known
disputes or collectability issues. The estimate of expected credit losses
considers historical credit loss information that is adjusted for current
conditions and reasonable and supportable forecasts. The allowance for credit
losses is reviewed on a quarterly basis to assess the adequacy of the allowance.
However, volatility in market conditions and evolving credit trends are
difficult to predict and may cause variability that may have a material impact
on our allowance for credit losses in future periods.
Accounting for Stock-Based Compensation Plans. Compensation expense for
restricted stock units ("RSUs") with performance metrics is calculated based
upon expected achievement of the metrics specified in the grant, or when a grant
contains a market condition, the grant date fair value using a Monte Carlo
simulation. The Monte Carlo simulation fair value model requires the use of
highly subjective and complex assumptions, including the award's expected life,
the price volatility of the underlying stock, as well as the potential outcomes
of the market condition on the grant date of each award.
Contingencies and Litigation. We are subject to the possibility of losses from
various contingencies. Considerable judgment is necessary to estimate the
probability and amount of any loss from such contingencies. An accrual is made
when it is probable that a liability has been incurred or an asset has been
impaired and the amount of loss can be reasonably estimated. We accrue a
liability and recognize as expense the estimated costs incurred to defend or
settle asserted and unasserted claims existing as of the balance sheet date. See
Note 16 "Commitments and Contingencies" and Note 15 "Litigation and Other Legal
Matters" to our Consolidated Financial Statements for additional details.
Goodwill and Purchased Intangible Assets - Impairment Assessments. We review
goodwill for impairment annually during our third fiscal quarter as well as
whenever events or changes in circumstances indicate the carrying value may not
be fully recoverable. Pursuant to the authoritative guidance, we make certain
judgments and assumptions to determine our reporting units and allocate shared
assets and liabilities to those reporting units, which determines the carrying
values for each reporting unit. When assessing goodwill for impairment, an
initial assessment of qualitative factors determines whether the
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existence of events and circumstances indicates it is more likely than not that
the fair value of a reporting unit is less than its carrying value. Judgments
related to qualitative factors include macroeconomic conditions, industry and
market considerations, cost factors, overall financial performance, relevant
entity-specific events, a sustained decrease in share price and other events
affecting the reporting units. If we determine it is more likely than not that
the fair value of a reporting unit is less than its carrying value, a
quantitative test is then performed by estimating the fair value of the
reporting unit and comparing it to its carrying value including goodwill. If the
former is lower, goodwill is written down by the excess amount, limited to the
amount of goodwill allocated to that reporting unit. See Note 7 "Goodwill and
Purchased Intangible Assets" to our Consolidated Financial Statements for
additional information.
We determine the fair value of a reporting unit using the market approach when
deemed appropriate and the necessary information is available, or the income
approach which uses discounted cash flow ("DCF") analysis, or a combination of
both. If multiple valuation methodologies are used, the results are weighted.
Determining fair value requires the exercise of significant judgment, including
judgments about appropriate discount rates, revenue growth rates and the amount
and timing of expected future cash flows. Discount rates are based on a
weighted-average cost of capital ("WACC"), which represents the average rate a
business must pay its providers of debt and equity, plus a risk premium. The
WACC used to test goodwill is derived from a group of comparable companies. The
cash flows employed in the DCF analysis are derived from internal forecasts and
external market forecasts. The market approach estimates the fair value of the
reporting unit by utilizing the market comparable method which is based on
revenue and earnings multiples from comparable companies.
We review purchased finite-lived intangible assets for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable or that the useful lives of the assets
are shorter than initially expected. We determine whether finite-lived
intangible assets are recoverable based on the forecasted undiscounted future
cash flows that are expected to be generated by the lowest-level associated
asset grouping. Assumptions and estimates about future values and remaining
useful lives of our intangible assets are complex and subjective. If the
undiscounted cash flows used in the recoverability test are less than the
long-lived assets' carrying value, we recognize an impairment loss for the
amount that the carrying value exceeds the fair value.
We review indefinite-lived intangible assets for impairment whenever events or
changes in business circumstances indicate that the carrying value of the assets
may not be fully recoverable. The authoritative accounting guidance allows a
qualitative approach for testing indefinite-lived intangible assets for
impairment, similar to the impairment testing guidance for goodwill. It allows
the option to first assess qualitative factors (events and circumstances) that
could have affected the significant inputs used in determining the fair value of
the indefinite-lived intangible asset. The qualitative factors assist in
determining whether it is more-likely-than-not that the indefinite-lived
intangible asset is impaired. An organization may choose to bypass the
qualitative assessment for any indefinite-lived intangible asset in any period
and proceed directly to calculating its fair value. Our indefinite-lived
intangible assets are IPR&D intangible assets.
Any impairment charges could have a material adverse effect on our operating
results and net asset value in the quarter in which we recognize the impairment
charge. See Note 7 "Goodwill and Purchased Intangible Assets" to our
Consolidated Financial Statements for additional information.
Income Taxes. We account for income taxes in accordance with the authoritative
guidance, which requires income tax effects for changes in tax laws to be
recognized in the period in which the law is enacted.
Deferred tax assets and liabilities are recognized using enacted tax rates for
the effect of temporary differences between the book and tax bases of recorded
assets and liabilities. The guidance also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that a portion of
the deferred tax asset will not be realized. We have determined that a valuation
allowance is necessary against a portion of the deferred tax assets, but we
anticipate that our future taxable income will be sufficient to recover the
remainder of our deferred tax assets. However, should there be a change in our
ability to recover our deferred tax assets that are not subject to a valuation
allowance, we could be required to record an additional valuation allowance
against such deferred tax assets. This would result in an increase to our tax
provision in the period in which we determine that the recovery is not probable.
On a quarterly basis, we provide for income taxes based upon an estimated annual
effective income tax rate. The effective tax rate is highly dependent upon the
geographic composition of worldwide earnings, tax regulations governing each
region, availability of tax credits and the effectiveness of our tax planning
strategies. We carefully monitor the changes in many factors and adjust our
effective income tax rate on a timely basis. If actual results differ from these
estimates, this could have a material effect on our financial condition and
results of operations.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax regulations. In accordance with the authoritative
guidance on accounting for uncertainty in income taxes, we recognize liabilities
for uncertain tax positions based on the two-step process. The first step is to
evaluate the tax position for recognition by determining if the
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weight of available evidence indicates that it is more likely than not that the
position will be sustained in audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon ultimate
settlement. We reevaluate these uncertain tax positions on a quarterly basis.
This evaluation is based on factors including, but not limited to, changes in
facts or circumstances, changes in tax law, effectively settled issues under
audit and new audit activities. Any change in these factors could result in the
recognition of a tax benefit or an additional charge to the tax provision.
We record income taxes on the undistributed earnings of foreign subsidiaries
unless the subsidiaries' earnings are considered indefinitely reinvested outside
the U.S. Our effective tax rate would be adversely affected if we change our
intent or if such undistributed earnings are needed for U.S. operations because
we would be required to provide or pay income taxes on some or all of these
undistributed earnings.
Global Intangible Low-Taxed Income. The Tax Act includes provisions for Global
Intangible Low-Taxed Income ("GILTI") wherein taxes on foreign income are
imposed in excess of a deemed return on tangible assets of foreign corporations.
This income will effectively be taxed at a 10.5% tax rate in general. As a
result, our deferred tax assets and liabilities were evaluated to determine if
the deferred tax assets and liabilities should be recognized for the basis
differences expected to reverse as a result of GILTI provisions that are
effective for us after the fiscal year ending June 30, 2018, or if the tax on
GILTI provisions should be recognized as period costs in each year incurred. We
elected to account for GILTI as a component of current period tax expense
starting from the first quarter of the fiscal year ending June 30, 2019.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including those recently
adopted and the expected dates of adoption as well as estimated effects, if any,
on our Consolidated Financial Statements of those not yet adopted, see Note 1
"Description of Business and Summary of Significant Accounting Policies" to our
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Revenues and Gross Margin
                                              Year Ended June 30,
(Dollar amounts in
thousands)                       2021                 2020                 2019                    FY21 vs. FY20                       FY20 vs. FY19
Revenues:
Product                     $ 5,240,316          $ 4,328,725          $ 3,392,243          $    911,591            21  %       $    936,482             28  %
Service                       1,678,418            1,477,699            1,176,661               200,719            14  %            301,038             26  %
Total revenues              $ 6,918,734          $ 5,806,424          $ 4,568,904          $  1,112,310            19  %       $  1,237,520             27  %
Costs of revenues           $ 2,772,165          $ 2,449,561          $ 1,869,377          $    322,604            13  %       $    580,184             31  %
Gross margin                60%                  58%                  59%                  2%                                  (1)%


Product revenues
Our business is affected by the concentration of our customer base and our
customers' capital equipment procurement schedules as a result of their
investment plans. Our product revenues in any particular period are
significantly impacted by the amount of new orders that we receive during that
period and, depending upon the duration of manufacturing and installation
cycles, in the preceding period.
The increase in product revenues by 21% in the fiscal year ended June 30, 2021
compared to the prior year is primarily attributable to strong demand for many
of our products, especially our inspection and metrology portfolios, due to the
continued growth in the 5G market and increased demand for high-performance
computing and advanced packaging. These increases were partially offset by
softer demand and oversupply in the display markets.
Service revenues
Service revenues are generated from product maintenance and support services, as
well as billable time and material service calls made to our customers. The
amount of our service revenues is typically a function of the number of systems
installed at our customers' sites and the utilization of those systems, but it
is also impacted by other factors, such as our rate of service contract
renewals, the types of systems being serviced and fluctuations in foreign
currency exchange rates.
The increase in service revenues by 14% in the fiscal year ended June 30, 2021
compared to the prior year is primarily attributable to an increase in the
number of systems installed at our customers' sites.
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Revenues by segment(1)
                                                      Year Ended June 30,
(Dollar amounts in thousands)            2021                 2020                 2019                    FY21 vs. FY20                        FY20 vs. FY19
Revenues:
Semiconductor Process Control       $ 5,734,825          $ 4,745,446          $ 4,080,822          $    989,379             21  %       $    664,624            16  %
Specialty Semiconductor Process(2)      369,216              329,700              151,164                39,516             12  %            178,536           118  %
PCB, Display and Component
Inspection(2)                           812,620              727,451              332,810                85,169             12  %            394,641           119  %
Other(2)                                    739                3,614                4,676                (2,875)           (80) %             (1,062)          (23) %
Total revenues                      $ 6,917,400          $ 5,806,211          $ 4,569,472          $  1,111,189             19  %       $  1,236,739            27  %

__________

(1)Segment revenues exclude corporate allocations and the effects of foreign
currency exchange rates. For additional details, refer to Note 19 "Segment
Reporting and Geographic Information" to our Consolidated Financial Statements.
(2)Orbotech was acquired on February 20, 2019.
Revenue from our Semiconductor Process Control segment increased by 21% in the
fiscal year ended June 30, 2021 compared to the prior year primarily due to a
strong demand for many of our products, especially from our inspection and
metrology portfolios. The increase in revenues from our Specialty Semiconductor
Process and PCB, Display and Component Inspection segments is primarily driven
by continued growth in advanced packaging, high-performance computing
technologies and 5G infrastructure, partially offset by softer demand and
oversupply in the FPD market.
Revenues - Top Customers
The following customers each accounted for more than 10% of our total revenues
primarily in our Semiconductor Process Control segment for the indicated
periods:
                                                   Year Ended June 30,
                2021                                        2020                                      2019
Taiwan Semiconductor Manufacturing            Taiwan Semiconductor                     Taiwan Semiconductor Manufacturing
Company Limited                               Manufacturing Company Limited            Company Limited
Samsung Electronics Co., Ltd.                 Samsung Electronics Co., Ltd.


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Revenues by region
We have revised the fiscal 2020 revenue by geographic regions as presented below
as well as in Note 19 "Segment Reporting and Geographic Information." The
revisions were to correct the amount of revenue allocated to each geographic
region. These revisions had no impact on the previously issued Consolidated
Balance Sheet, Statements of Operations, Statements of Cash Flows, Statements of
Comprehensive Income (Loss) or Statements of Stockholders' Equity as of and for
the year-ended June 30, 2020 and we determined that the impact of the revisions
was not material to our previously issued Consolidated Financial Statements.
Revenues by region for the periods indicated were as follows:
                                                              Year Ended June 30,
(Dollar amounts in thousands)             2021                        2020                        2019
Taiwan                          $ 1,690,558        25  %    $ 1,598,201        27  %    $ 1,105,726        24  %
China                             1,831,446        26  %      1,495,977        26  %      1,215,807        27  %
Korea                             1,343,473        19  %        911,848        16  %        584,091        13  %
Japan                               639,381         9  %        660,772        11  %        581,529        13  %
United States                       765,974        11  %        651,328        11  %        596,452        13  %
Europe and Israel                   396,422         6  %        322,085         6  %        305,924         7  %
Rest of Asia                        251,480         4  %        166,213         3  %        179,375         3  %
Total                           $ 6,918,734       100  %    $ 5,806,424       100  %    $ 4,568,904       100  %


A significant portion of our revenues continues to be generated in Asia, where a
substantial portion of the world's semiconductor manufacturing capacity is
located, and we expect that trend to continue.
Gross margin
Our gross margin fluctuates with revenue levels and product mix and is affected
by variations in costs related to manufacturing and servicing our products,
including our ability to scale our operations efficiently and effectively in
response to prevailing business conditions.
The following table summarizes the major factors that contributed to the changes
in gross margin percentage:
                                                    Gross Margin Percentage
Fiscal Year Ended June 30, 2019                                      59.1  %
Revenue volume of products and services                               1.5  %
Mix of products and services sold                                    (0.8) %
Manufacturing labor, overhead and efficiencies                        0.5  %
Intangible amortization                                              (1.6) %
Other service and manufacturing costs                                (0.8) %
Fiscal Year Ended June 30, 2020                                      57.9  %
Revenue volume of products and services                               1.3  %
Mix of products and services sold                                     1.2  %

Other service and manufacturing costs                                (0.5) %
Fiscal Year Ended June 30, 2021                                      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. Revenue is impacted by average customer pricing,
customer revenue deferrals associated with volume purchase agreements and the
effect of fluctuations in foreign currency exchange rates. Changes in gross
margin percentage from the mix of products and services sold reflect the impact
of changes within the composition of product and service offerings, and
amortization of inventory fair value adjustments from business combinations.
Changes in gross margin percentage from manufacturing labor, overhead and
efficiencies reflect our ability to manage costs and drive productivity as we
scale our manufacturing activity to respond to customer requirements, and
amortization of intangible assets. Changes in gross margin percentage from other
service and manufacturing costs include the impact of customer support
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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 from 57.9% to 59.9% during the fiscal year
ended June 30, 2021 is primarily attributable to a higher revenue volume of
products and services sold and a more profitable mix of products and services
sold, partially offset by an increase in service and manufacturing costs.
Segment gross margin(1)
                                                      Year Ended June 30,
(Dollar amounts in thousands)            2021                 2020                 2019                     FY21 vs. FY20                         FY20 vs. FY19
Segment gross margin:
Semiconductor Process Control       $ 3,705,222          $ 3,028,167          $ 2,590,434          $     677,055             22  %       $     437,733              17  %
Specialty Semiconductor Process(2)      206,706              183,641               78,800                 23,065             13  %             104,841             133  %
PCB, Display and Component
Inspection(2)                           390,571              315,723              155,765                 74,848             24  %             159,958             103  %
Other(2)                                    (68)                 (63)               1,102                     (5)            (8) %              (1,165)           (106) %
                                    $ 4,302,431          $ 3,527,468          $ 2,826,101          $     774,963             22  %       $     701,367              25  %


_________________
(1)  Segment gross margin is calculated as segment revenues less segment cost of
revenues and excludes corporate allocations and the effects of foreign currency
exchange rates, amortization of intangible assets, inventory fair value
adjustments, and acquisition-related costs. For additional details, refer to
Note 19 "Segment Reporting and Geographic Information" to our Consolidated
Financial Statements.
(2)  Orbotech was acquired on February 20, 2019.
The primary factors impacting the performance of our segment gross margins for
fiscal year 2021 compared to fiscal year 2020 are summarized as follows:
•Semiconductor Process Control segment gross margin increased due to a more
profitable mix of products and services sold, partially offset by an increase in
service and manufacturing costs.
•The changes in the segment gross margins of the Specialty Semiconductor
Process, PCB, Display and Component Inspection and Other segments increased
primarily due to a more favorable mix of products and services sold as well as a
higher revenue volume of products and services sold.

Research and Development ("R&D")

                                               Year Ended June 30,
(Dollar amounts in thousands)       2021               2020               2019                  FY21 vs. FY20                       FY20 vs. FY19
R&D expenses                    $ 928,487          $ 863,864          $ 711,030          $     64,623            7  %       $    152,834            21  %
R&D expenses as a percentage of
total revenues                         13  %              15  %              16  %                 (2) %                              (1) %


R&D expenses may fluctuate with product development phases and project timing as
well as our R&D efforts. As technological innovation is essential to our
success, we may incur significant costs associated with R&D projects, including
compensation for engineering talent, engineering material costs and other
expenses.
R&D expenses during the fiscal year ended June 30, 2021 increased compared to
the fiscal year ended June 30, 2020, primarily due to an increase in
employee-related expenses of $54.5 million as a result of additional engineering
headcount, higher employee benefit costs, and higher variable compensation and
an increase in engineering project materials expenses of $22.6 million. This is
partially offset by a decrease in travel-related expense of $11.3 million.
Our future operating results will depend significantly on our ability to produce
products and provide services that have a competitive advantage in our
marketplace. To do this, we believe that we must continue to make substantial
and focused investments in our R&D. We remain committed to product development
in new and emerging technologies.

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Selling, General and Administrative ("SG&A")
                                               Year Ended June 30,
(Dollar amounts in thousands)       2021               2020               2019                   FY21 vs. FY20                       FY20 vs. FY19
SG&A expenses                   $ 729,602          $ 734,149          $ 599,124          $     (4,547)           (1) %       $    135,025            23  %
SG&A expenses as a percentage
of total revenues                      11  %              13  %              13  %                 (2) %                                -  %


SG&A expenses during the fiscal year ended June 30, 2021 decreased compared to
the fiscal year ended June 30, 2020, primarily due to a decrease in
travel-related expenses of $25.4 million and a decrease in depreciation and
intangible amortization expense of $19.3 million. These decreases were partially
offset by an increase in employee-related expenses of $19.5 million as the
result of additional headcount, higher employee benefit costs and variable
compensation, an increase in facility and office expense of $9.7 million, and
higher consulting costs of $6.6 million.
Goodwill Impairment
We performed our annual impairment assessment of goodwill as of February 28,
2021 and concluded that goodwill was not impaired.
For the fiscal year ended June 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 ended March
31, 2020.
Restructuring Charges
In September 2019, management approved a plan to streamline our organization and
business processes that included the reduction of workforce, primarily in our
PCB, Display and Component Inspection segment.
Restructuring charges were $12.4 million for the year ended June 30, 2021 and
included $3.9 million of non-cash charges for accelerated depreciation related
to certain right-of-use ("ROU") assets and fixed assets to be abandoned.
Restructuring charges were $7.7 million for the year ended June 30, 2020.
For additional information refer to Note 20 "Restructuring Charges" to our
Consolidated Financial Statements.
Interest Expense and Other Expense (Income), Net
                                               Year Ended June 30,
(Dollar amounts in thousands)       2021               2020               2019                     FY21 vs. FY20                           FY20 vs. FY19
Interest expense                $ 157,328          $ 160,274          $ 124,604          $      (2,946)               (2) %       $      35,670

29 % Other expense (income), net $ (29,302) $ 2,678 $ (31,462)

               (31,980)           (1,194) %       $      34,140            109  %
Interest expense as a
percentage of total revenues            2  %               3  %               3  %
Other expense (income), net as
a percentage of total revenues          -  %               -  %             

1 %

The decrease in interest expense during the fiscal year ended June 30, 2021
compared to the fiscal year ended June 30, 2020 was primarily due to lower
interest expense on our Revolving Credit Facility, which is described further in
the "Liquidity and Capital Resources" section below.
Other expense (income), net is comprised primarily of fair value adjustments and
realized gains or losses on sales of marketable and non-marketable securities,
gains or losses from revaluations of certain foreign currency denominated assets
and liabilities as well as foreign currency contracts, interest-related accruals
(such as interest and penalty accruals related to our tax obligations) and
interest income earned on our invested cash, cash equivalents and marketable
securities.
The decrease in other expense (income), net during the fiscal year ended
June 30, 2021 compared to the fiscal year ended June 30, 2020 was primarily due
to an initial fair value adjustment of $26.7 million from an equity security
becoming marketable.
Loss on Extinguishment of Debt
We had no loss on extinguishment of debt in the year ended June 30, 2021.
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For the fiscal year ended June 30, 2020, loss on extinguishment of debt
reflected a pre-tax net loss of $22.5 million associated with the redemption of
our $500.0 million of 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:
                                                Year Ended June 30,
(Dollar amounts in thousands)         2021              2020              2019
Income before income taxes       $ 2,360,454       $ 1,316,711       $ 1,296,231
Provision for income taxes       $   283,101       $   101,686       $   121,214
Effective tax rate                      12.0  %            7.7  %            9.4  %


Tax expense was higher as a percentage of income before taxes during the fiscal
year ended June 30, 2021 compared to the fiscal year ended June 30, 2020
primarily due to the impact of the following items:
•Tax expense increased by $107.2 million relating to the impact of a decrease in
the proportion of KLA's earnings generated in jurisdictions with tax rates lower
than the U.S. statutory rate during the fiscal year ended June 30, 2021;
•Tax expense increased by $41.1 million during the fiscal year ending June 30,
2021 relating to an increase in our deferred tax liability on purchased
intangibles due to an increase in the United Kingdom statutory income tax rate
effective April 2023; and
•Tax expense decreased by $34.3 million relating to the impact of an internal
restructuring during the fiscal year ended June 30, 2020; partially offset by
•Tax expense decreased by $44.3 million relating to a decrease in our
unrecognized tax benefit during the fiscal year ended June 30, 2021; and
•Tax expense increased by $53.9 million relating to a $256.6 million goodwill
impairment charge, which is non-deductible for income tax, during the fiscal
year ended June 30, 2020.
Our effective tax rate during the fiscal year ended June 30, 2019 was impacted
by the Tax Act, which was enacted into law on December 22, 2017. The following
items are the tax impacts as a result of the Tax Act:
•Tax expense decreased by $49.9 million relating to the reduction of the U.S.
federal corporate tax rate from 28.1% to 21.0% for the fiscal year ended June
30, 2019; and
•Tax expense decreased by $19.3 million relating to the transition tax liability
during the fiscal year ended June 30, 2019.
Our future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income, the amount of our
pre-tax income as business activities fluctuate, non-deductible expenses
incurred in connection with acquisitions, R&D credits as a percentage of
aggregate pre-tax income, non-taxable or non-deductible increases or decreases
in the assets held within our Executive Deferred Savings Plan, the tax effects
of employee stock activity and the effectiveness of our tax planning strategies.
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, 2018
and are under U.S. income tax examination for the fiscal year ended June 30,
2018. We are subject to U.S. state income tax examinations for all years
beginning from the fiscal year ended June 30, 2017. 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 have concluded our audit in Israel
related to KLA for the fiscal years ended June 30, 2017 to June 30, 2020.
Although we believe our tax estimates are reasonable, the final determination of
tax audits and any related litigation could be materially different from our
historical income tax provisions and accruals. The results of an audit or
litigation could have a material adverse effect on our results of operations or
cash flows in the period or periods for which that determination is made.
In May 2017, Orbotech received an assessment from the 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 ("NOL") available through the end of 2014, of approximately NIS
229 million (equivalent to approximately $66 million which includes related
interest and linkage differentials to the Israeli consumer price index as of
date of the issuance of the Tax Decrees).
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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. 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.
In December 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
approximately NIS 227 million (equivalent to approximately $68 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 in March 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.
On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security ("CARES
Act"), which includes several tax relief provisions, was signed into law. As a
result of the CARES Act, we have deferred payment of certain payroll taxes to
the U.S. federal government through December 31, 2022 and accelerated the tax
deduction of qualified improvement property. The provisions of the CARES Act do
not have a material impact to our liquidity and we are not expecting a material
tax refund.
Liquidity and Capital Resources
                                                                        As of June 30,
(Dollar amounts in thousands)                           2021                 2020                 2019
Cash and cash equivalents                          $ 1,434,610          $ 1,234,409          $ 1,015,994
Marketable securities                                1,059,912              746,063              723,391
Total cash, cash equivalents and marketable
securities                                         $ 2,494,522          $ 1,980,472          $ 1,739,385
Percentage of total assets                                  24  %                21  %                19  %

                                                                     Year Ended June 30,
(In thousands)                                          2021                 2020                 2019
Cash flows:
Net cash provided by operating activities          $ 2,185,026          $ 1,778,850          $ 1,152,632
Net cash used in investing activities                 (500,404)            (258,874)          (1,180,982)
Net cash used in financing activities               (1,497,881)          (1,299,635)            (360,005)
Effect of exchange rate changes on cash and cash
equivalents                                             13,460               (1,926)                 (33)
Net (decrease) increase in cash and cash
equivalents                                        $   200,201          $   

218,415 $ (388,388)

Cash and Cash Equivalents and Marketable Securities:

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As of June 30, 2021, our cash, cash equivalents and marketable securities
totaled $2.49 billion, which represents an increase of $514.1 million from
June 30, 2020. The increase is mainly due to net cash provided by operating
activities of $2.19 billion, partially offset by stock repurchases of $938.6
million, cash used for payments of dividends and dividend equivalents of $559.4
million, net cash usage of $288.1 million related to the purchases, sales and
maturities of available-for-sale and trading securities and capital expenditures
of $231.6 million.
As of June 30, 2021, $0.96 billion of our $2.49 billion of cash, cash
equivalents, and marketable securities were held by our foreign subsidiaries and
branch offices. We currently intend to indefinitely reinvest $0.60 billion of
the cash, cash equivalents and marketable securities held by our foreign
subsidiaries for which we assert that earnings are permanently reinvested. If,
however, a portion of these funds were to be repatriated to the United States,
we would be required to accrue and pay state and foreign taxes of approximately
1%-22% of the funds repatriated. The amount of taxes due will depend on the
amount and manner of the repatriation, as well as the location from which the
funds are repatriated. We have accrued state and foreign tax on the remaining
cash of $0.36 billion of the $0.96 billion held by our foreign subsidiaries and
branch offices. As such, these funds can be returned to the U.S. without
accruing any additional U.S. tax expense.
Cash Dividends and Special Cash Dividend:
The total amounts of regular quarterly cash dividends and dividends equivalents
paid during the fiscal years ended June 30, 2021, 2020 and 2019 were $559.4
million, $522.4 million and $469.4 million, respectively. The increase in the
amount of regular quarterly cash dividends and dividends equivalents paid during
the fiscal year ended June 30, 2021 reflected the increase in the level of our
regular quarterly cash dividend from $0.85 to $0.90 per share that was
instituted during the three months ended September 30, 2020. The amounts of
accrued dividend equivalents payable for regular quarterly cash dividends on
unvested RSUs with dividend equivalent rights were $10.3 million and $8.3
million as of June 30, 2021 and 2020, respectively. These amounts will be paid
upon vesting of the underlying unvested RSUs as described in Note 10 "Equity,
Long-term Incentive Compensation Plans and Non-Controlling Interest" to our
Consolidated Financial Statements.
On August 5, 2021, we announced that our Board of Directors had declared a
quarterly cash dividend of $1.05 per share. Refer to Note 21 "Subsequent Events"
to our Consolidated Financial Statements for additional information regarding
the declaration of our quarterly cash dividend announced subsequent to June 30,
2021.
On November 19, 2014, our Board of Directors declared a special cash dividend of
$16.50 per share on our outstanding common stock. The total amount of the
special cash dividend accrued by us at the declaration date was substantially
paid out during the three months ended December 31, 2014, and the final payment
was made during the fiscal year ended June 30, 2019. Other than the special cash
dividend declared during the three months ended December 31, 2014, we
historically have not declared any special cash dividends.
Stock Repurchases:
The shares repurchased under our stock repurchase program have reduced our basic
and diluted weighted-average shares outstanding for the fiscal years ended
June 30, 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 the purchases under our ESPP and the issuance of shares in the Orbotech
Acquisition, as well as to return excess cash to our stockholders.
Cash Flows from Operating Activities:
We have historically financed our liquidity requirements through cash generated
from operations. Net cash provided by operating activities during the fiscal
year ended June 30, 2021 increased by $0.41 billion compared to the fiscal year
ended June 30, 2020, from $1.78 billion to $2.19 billion, primarily as a result
of the following factors:
•An increase in collections of approximately $1 billion mainly driven by higher
shipments during the fiscal year ended June 30, 2021 compared to the fiscal year
ended June 30, 2020; partially offset by the following:
•A decrease in interest income of approximately $14 million mainly due to lower
interest rates during the fiscal year ended June 30, 2021 compared to the fiscal
year ended June 30, 2020;
•An increase in accounts payable payments of approximately $445 million during
the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30,
2020;
•An increase in employee-related payments of approximately $119 million during
the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30,
2020;
•An increase of long-term incentive payments of approximately $12 million during
the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30,
2020;
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•An increase in income tax payments of $131.4 million during the fiscal year
ended June 30, 2021 compared to the fiscal year ended June 30, 2020
Net cash used in investing activities during the fiscal year ended June 30, 2021
was $500.4 million compared to net cash used in investing activities of $258.9
million during the fiscal year ended June 30, 2020. This increase in cash used
was mainly due to an increase in net purchases of available for sale and trading
securities of $270.9 million and an increase in cash paid to purchase fixed
assets of $79.0 million, partially offset by a decrease in cash paid for a
business acquisition of $90.1 million and an increase in cash received from sale
of a business of $16.8 million.
Cash Flows from Financing Activities:
Net cash used in financing activities during the fiscal year ended June 30, 2021
increased compared to the fiscal year ended June 30, 2020, from $1.30 billion to
$1.50 billion. This increase was mainly due to an increase in cash used for
stock repurchases of $109.5 million, an increase in net debt repayments of $50.5
million and cash paid for dividends and dividend equivalents of $36.9 million.
Senior Notes:
In February 2020, March 2019 and November 2014, we issued $750.0 million, $1.20
billion and $2.50 billion, respectively (the "2020 Senior Notes," "2019 Senior
Notes" and "2014 Senior Notes," respectively, and collectively the "Senior
Notes"), aggregate principal amount of senior, unsecured long-term notes. In
February 2020 and October 2019, we repaid $500.0 million and $250.0 million of
Senior Notes, respectively.
In February 2020, S&P upgraded its credit rating of the Company to "BBB+" and
revised its outlook to stable, which permanently removed interest rate
adjustments and the interest rate on the 2014 Senior Notes became fixed. The
interest rates for each series of the 2020 Senior Notes and 2019 Senior Notes
are not subject to adjustments.
In January 2020, we entered into a series of forward contracts ("2020 Rate Lock
Agreements") to lock the 30-year treasury rate (the "benchmark interest rate"
with respect to the 2020 Rate Lock Agreements) on a portion of the 2020 Senior
Notes. The 2020 Rate Lock Agreements had a notional amount of $350.0 million in
aggregate and matured in the same quarter. The 2020 Rate Lock Agreements were
terminated on the date of the pricing of the $750.0 million of 3.300% Senior
Notes due in 2050 and we recorded the fair value of $21.5 million as a loss
within Accumulated Other Comprehensive Income (Loss) ("AOCI") as of March 31,
2020, which is being amortized over the life of the debt. During the fiscal year
ended June 30, 2018, we entered into a series of forward contracts (the "2018
Rate Lock Agreements") to lock the benchmark interest rate with notional amount
of $500.0 million in aggregate. In October 2014, we entered into a series of
forward contracts to lock the 10-year treasury rate (the "benchmark interest
rate" with respect to the 2014 Rate Lock Agreements) on a portion of the 2014
Senior Notes with a notional amount of $1.00 billion in aggregate. For
additional details, refer to Note 17 "Derivative Instruments and Hedging
Activities" and Note 8 "Debt" to our Consolidated Financial Statements.
The original discounts on the 2020 Senior Notes, the 2019 Senior Notes and the
2014 Senior Notes amounted to $0.3 million, $6.7 million and $4.0 million,
respectively, and are being amortized over the life of the debt. Interest is
payable as follows: semi-annually on March 1 and September 1 of each year for
the 2020 Senior Notes; semi-annually on March 15 and September 15 of each year
for the 2019 Senior Notes; and semi-annually on May 1 and November 1 of each
year for the 2014 Senior Notes. The indenture for the Senior Notes (the
"Indenture") includes covenants that limit our ability to grant liens on our
facilities and enter into sale and leaseback transactions, subject to certain
allowances under which certain sale and leaseback transactions are not
restricted.
In certain circumstances involving a change of control followed by a downgrade
of the rating of a series of Senior Notes by at least two of Moody's, S&P and
Fitch, unless we have exercised our rights to redeem the Senior Notes of such
series, we will be required to make an offer to repurchase all or, at the
holder's option, any part, of each holder's Senior Notes of that series pursuant
to the offer described below (the "Change of Control Offer"). In the Change of
Control Offer, we will be required to offer payment in cash equal to 101% of the
aggregate principal amount of Senior Notes repurchased plus accrued and unpaid
interest, if any, on the Senior Notes repurchased, up to, but not including, the
date of repurchase.
As of June 30, 2021, we were in compliance with all of our covenants under the
Indenture associated with the Senior Notes.
Revolving Credit Facility:
In November 2017, we entered into a Credit Agreement (the "Credit Agreement")
providing for a $750.0 million five-year unsecured Revolving Credit Facility
(the "Revolving Credit Facility"), which replaced our prior Credit Facility.
Subject to the terms of the Credit Agreement, the Revolving Credit Facility may
be increased by an amount up to $250.0 million in the
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aggregate. In November 2018, we entered into an Incremental Facility, Extension
and Amendment Agreement (the "Amendment"), which amended the Credit Agreement to
(a) extend the Maturity Date (the "Maturity Date") from November 30,
2022 to November 30, 2023, (b) increase the total commitment by $250.0
million and (c) effect certain other amendments to the Credit Agreement as set
forth in the Amendment. After giving effect to the Amendment, the total
commitments under the Credit Agreement amount to $1.00 billion. During the
fiscal year ended June 30, 2021, we made a principal payment of $50.0 million.
As of June 30, 2021, we had no outstanding aggregate principal amount of
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 June 30, 2021, we elected to pay interest on the borrowed amount under the
Revolving Credit Facility at LIBOR plus a spread of 100.0 bps and we pay an
annual commitment fee of 10 bps on the daily undrawn balance of the Revolving
Credit Facility.
The Revolving Credit Facility requires us to maintain an interest expense
coverage ratio as described in the Credit Agreement, on a quarterly basis,
covering the trailing four consecutive fiscal quarters of no less than 3.50 to
1.00. In addition, we are required to maintain the maximum leverage ratio as
described in the Credit Agreement, on a quarterly basis of 3.00 to 1.00,
covering the trailing four consecutive fiscal quarters for each fiscal quarter,
which can be increased to 4.00 to 1.00 for a period of time in connection with a
material acquisition or a series of material acquisitions. As of June 30, 2021,
our maximum allowed leverage ratio was 3.00 to 1.00.
We were in compliance with all covenants under the Credit Agreement as of
June 30, 2021 (the interest expense coverage ratio was 18.70 to 1.00 and the
leverage ratio was 1.18 to 1.00). Considering our current liquidity position,
short-term financial forecasts and ability to prepay the Revolving Credit
Facility, if necessary, we expect to continue to be in compliance with our
financial covenants at the end of our fiscal year ending June 30, 2022.
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Contractual Obligations
The following is a schedule summarizing our significant obligations to make
future payments under contractual obligations as of June 30, 2021:
                                                                                              Fiscal Year Ending June 30,
                                                                                                                                                          2027 and
(In thousands)                     Total                 2022                2023               2024                2025                2026             thereafter             Other
Debt obligations(1)            $ 3,470,000          $    20,000          $       -          $       -          $ 1,250,000          $       -          $  2,200,000          $       -
Interest payments associated
with all
debt obligations(2)              1,933,811              150,814            150,231            149,806              120,738             91,675             1,270,547                  -
Purchase commitments(3)          1,545,701            1,503,960             34,117                988                5,436                752                   448                  -
Income taxes
payable(4)                         154,034                    -                  -                  -                    -                  -                     -            154,034
Operating leases(5)                107,557               33,759             24,326             15,501               12,104              9,168                12,699                  -
Cash long-term incentive
program(6)                         247,979               88,946             74,115             54,887               30,031                  -                     -                  -
Pension obligations(7)              49,386                2,983              3,049              4,141                3,753              3,612                31,848                  -
Executive Deferred
Savings Plan(8)                    268,028                    -                  -                  -                    -                  -                     -            268,028
Transition tax payable(9)          248,356               26,143             26,143             49,018               65,357             81,695                     -                  -
Liability for employee rights
upon retirement(10)                 47,079                    -                  -                  -                    -                  -                     -             47,079
Other(11)                           10,334                4,649              3,288              2,101                  296                  -                     -                  -
Total obligations              $ 8,082,265          $ 1,831,254          $ 

315,269 $ 276,442 $ 1,487,715 $ 186,902 $ 3,515,542 $ 469,141

__________________

(1)Represents $3.45 billion aggregate principal amount of Senior Notes due from
fiscal year 2025 to fiscal year 2050 and $20.0 million principal amount of Notes
Payable due in fiscal year 2022.
(2)The interest payments associated with the Senior Notes payable included in
the table above are based on the principal amount multiplied by the applicable
interest rate for each series of Senior Notes. Our future interest payments are
subject to change if our then effective credit rating is below investment grade
as discussed above. The interest payment under the Revolving Credit Facility for
the undrawn balance is payable at 10 bps as a commitment fee based on the daily
undrawn balance, and we utilized the existing rate for the projected interest
payments included in the table above. Our future interest payments for the
Revolving Credit Facility are subject to change due to any upgrades or
downgrades to our then effective credit rating.
(3)Represents an estimate of significant commitments to purchase inventory from
our suppliers as well as an estimate of significant purchase commitments
associated with goods, services and other assets in the ordinary course of
business. Our obligation under these purchase commitments is generally
restricted to a forecasted time-horizon as mutually agreed upon between the
parties. This forecasted time-horizon can vary among different suppliers. Actual
expenditures will vary based upon the volume of the transactions and length of
contractual service provided. In addition, the amounts paid under these
arrangements may be less in the event the arrangements are renegotiated or
canceled. Certain agreements provide for potential cancellation penalties.
(4)Represents the estimated income tax payable obligation related to uncertain
tax positions as well as related accrued interest. We are unable to make a
reasonably reliable estimate of the timing of payments in individual years due
to uncertainties in the timing of tax audit outcomes.
(5)Operating lease obligations represent the undiscounted lease payments under
non-cancelable leases, but exclude non-lease components.
(6)As part of our employee compensation program, we issue cash-based long-term
incentive ("Cash LTI") awards to many of our employees. Cash LTI awards issued
to employees under the Cash Long-Term Incentive Plan ("Cash LTI Plan") generally
vest in three or four equal installments. The amounts in the table above are
those committed under the Cash LTI Plan; the expected total payment after
estimated forfeitures is approximately $209 million. For additional details,
refer to Note 10 "Equity, Long-term Incentive Compensation Plans and
Non-Controlling Interest" to our Consolidated Financial Statements.
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(7)Represents an estimate of expected benefit payments up to fiscal year 2031
that was actuarially determined and excludes the minimum cash required to
contribute to the plan. As of June 30, 2021, our defined benefit pension plans
do not have material required minimum cash contribution obligations.
(8)Represents the amount committed under our non-qualified executive deferred
compensation plan. We are unable to make a reasonably reliable estimate of the
timing of payments in individual years due to the uncertainties in the timing
around participant's separation and any potential changes that participants may
decide to make to the previous distribution elections.
(9)Represents the transition tax liability associated with our deemed
repatriation of accumulated foreign earnings resulting from the enactment of the
Tax Act into law on December 22, 2017.
(10)Represents severance payments due upon dismissal of an employee or upon
termination of employment in certain other circumstances as required under
Israeli law.
(11)Represents amounts committed for accrued dividends payable for quarterly
cash dividends for unvested RSUs granted with dividend equivalent rights. For
additional details, refer to Note 10 "Equity, Long-term Incentive Compensation
Plans and Non-Controlling Interest" to our Consolidated Financial Statements.
We have agreements with financial institutions to sell certain of our trade
receivables and promissory notes from customers without recourse. In addition,
we periodically sell certain letters of credit ("LC"), without recourse,
received from customers as payment for goods and services.
The following table shows total receivables sold under factoring agreements and
proceeds from sales of LC for the indicated periods:
                                                           Year Ended June 

30,

(In thousands)                                     2021           2020      

2019

Receivables sold under factoring agreements $ 305,565 $ 293,006

  $ 193,089
Proceeds from sales of LC                       $ 133,679      $  59,036      $  95,436


 Factoring and LC fees for the sale of certain trade receivables were recorded
in other expense (income), net and were not material for the periods presented.
We maintain guarantee arrangements available through various financial
institutions for up to $75.2 million, of which $59.7 million had been issued as
of June 30, 2021, primarily to fund guarantees to customs authorities for
value-added tax ("VAT") and other operating requirements of our subsidiaries in
Europe, Israel, and Asia.
Working Capital:
Working capital was $3.59 billion as of June 30, 2021, which represents an
increase of $569.3 million compared to our working capital as of June 30, 2020.
As of June 30, 2021, our principal sources of liquidity consisted of $2.49
billion of cash, cash equivalents and marketable securities. Our liquidity may
be affected by many factors, some of which are based on the normal ongoing
operations of the business, spending for business acquisitions, and other
factors such as uncertainty in the global and regional economies and the
semiconductor, semiconductor-related and electronic device industries. Although
cash requirements will fluctuate based on the timing and extent of these
factors, we believe that cash generated from operations, together with the
liquidity provided by existing cash and cash equivalents balances and our $1.00
billion Revolving Credit Facility, will be sufficient to satisfy our liquidity
requirements associated with working capital needs, capital expenditures, cash
dividends, stock repurchases and other contractual obligations, including
repayment of outstanding debt, for at least the next 12 months.
Our credit ratings as of June 30, 2021 are summarized below:
Rating Agency      Rating
Fitch               BBB+
Moody's              A2
S&P                 BBB+


In June 2021, Moody's upgraded our senior unsecured credit rating from Baa1 to
A2. Factors that can affect our credit ratings include changes in our operating
performance, the economic environment, conditions in the semiconductor and
semiconductor capital equipment industries, our financial position, material
acquisitions and changes in our business strategy.
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Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K, that have or are reasonably
likely to have a current or future effect on our financial position, changes in
financial condition, revenues and expenses, results of operations, liquidity,
capital expenditures, or capital resources that are material to investors. Refer
to Note 16 "Commitments and Contingencies" to our Consolidated Financial
Statements for information related to indemnification obligations.
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