KLA CORPORATION 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
may be forward-looking statements. You can identify these and other
forward-looking statements by the use of words such as "may," "will," "could,"
"would," "should," "expects," "plans," "anticipates," "relies," "believes,"
"estimates," "predicts," "intends," "potential," "continues," "thinks," "seeks,"
or the negative of such terms, or other comparable terminology. Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing statements. Such forward-looking statements include those regarding,
among others: the future impacts of the COVID-19 pandemic; forecasts of the
future results of our operations, including profitability; orders for our
products and capital equipment generally; sales of semiconductors; the
investments by our customers in advanced technologies and new materials; growth
of revenue in the semiconductor industry, the semiconductor capital equipment
industry and our business; technological trends in the semiconductor industry;
future developments or trends in the global capital and financial markets; our
future product offerings and product features; the success and market acceptance
of new products; timing of shipment of order backlog; our future product
shipments and product and service revenues; our future gross margins; our future
research and development ("R&D") expenses and selling, general and
administrative ("SG&A") expenses; international sales and operations; our
ability to maintain or improve our existing competitive position; success of our
product offerings; creation and funding of programs for R&D; results of our
investment in leading edge technologies; the effects of hedging transactions;
the effect of the sale of trade receivables and promissory notes from customers;
the effect of future compliance with laws and regulations; our future effective
income tax rate; our recognition of tax benefits; the effects of any audits or
litigation; future payments of dividends to our stockholders; the completion of
any acquisitions of third parties, or the technology or assets thereof; benefits
received from any acquisitions and development of acquired technologies;
sufficiency of our existing cash balance, investments, cash generated from
operations and the unfunded portion of our Revolving Credit Facility (as defined
below) to meet our operating and working capital requirements, including debt
service and payment thereof; future dividends, and stock repurchases; our
compliance with the financial covenants under the Credit Agreement (as defined
below) for our Revolving Credit Facility; the adoption of new accounting
pronouncements; our repayment of our outstanding indebtedness; and our
environmental, social and governance ("ESG") related targets, goals and
commitments.
Our actual results may differ significantly from those projected in the forward-looking statements in this report. Factors that might cause or contribute to such differences include, but are not limited to:
•The impact of the COVID-19 pandemic on the global economy and on our business, financial condition and results of operations, including the supply chain constraints we are experiencing as a result of the pandemic;
•Economic, political and social conditions in the countries in which we, our customers and our suppliers operate, including rising inflation and interest rates,Russia's invasion ofUkraine , and global trade policies;
•Disruption to our manufacturing facilities or other operations, or the operations of our customers, due to natural catastrophic events, health epidemics or terrorism;
•Ongoing changes in the technology industry, and the semiconductor industry in particular, including future growth rates, pricing trends in end-markets, or changes in customer capital spending patterns;
•Our ability to timely develop new technologies and products that successfully anticipate or address changes in the semiconductor industry;
•Our ability to maintain our technology advantage and protect our proprietary rights;
•Our ability to compete with new products introduced by our competitors;
•Our ability to attract, onboard and retain key personnel;
•Cybersecurity threats, cyber incidents affecting our and our customers, suppliers and other service providers' systems and networks and our and their ability to access critical information systems for daily business operations;
•Liability to our customers under indemnification provisions if our products fail to operate properly or contain defects or our customers are sued by third parties due to our products;
•Exposure to a highly concentrated customer base;
•Availability and cost of the wide range of materials used in the production of our products;
•Our ability to operate our business in accordance with our business plan;
•Legal, regulatory and tax environments in which we perform our operations and conduct our business and our ability to comply with relevant laws and regulations;
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•Increasing attention to ESG Matters and the resulting costs, risks and impact on our business;
•Our ability to pay interest and repay the principal of our current indebtedness is dependent upon our ability to manage our business operations, our credit rating and the ongoing interest rate environment, among other factors;
•Our ability or the ability of our customers to obtain licenses for the sale of certain products or provision of certain services to customers inthe People's Republic of China ("China"), pursuant to regulations recently issued (the "New BIS Rules") by theBureau of Industry and Security ("BIS") of theU.S. Department of Commerce ("Commerce"), which could impact our business, financial condition and results of operations;
•Instability in the global credit and financial markets;
•Our exposure to currency exchange rate fluctuations, or declining economic conditions in those countries where we conduct our business;
•Changes in our effective tax rate resulting from changes in the tax rates imposed by jurisdictions where our profits are determined to be earned and taxed, expiration of tax holidays in certain jurisdictions, resolution of issues arising from tax audits with various authorities or changes in tax laws or the interpretation of such tax laws;
•Our ability to identify suitable acquisition targets and successfully integrate and manage acquired businesses; and
•Unexpected delays, difficulties and expenses in executing against our environmental, climate, inclusion and diversity or other ESG targets, goals and commitments.
For a more detailed discussion of these and other risk factors that might cause or contribute to differences from the forward-looking statements in this report, see Part II, Item 1A, "Risk Factors" in this report as well as Part I, Item 1, "Business" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedJune 30, 2022 . You should carefully review these risks and also review the risks described in other documents we file from time to time with theSecurities and Exchange Commission ("SEC"). You are cautioned not to place undue reliance on these forward-looking statements, and we expressly assume no obligation and do not intend to update the forward-looking statements in this report after the date hereof.
EXECUTIVE SUMMARY
We are a leading supplier of process control and yield management solutions and
services for the semiconductor and related electronics industries. Our broad
portfolio of inspection and metrology products, and related service, software
and other offerings, support R&D and manufacturing of integrated circuits
("IC"), wafers and reticles. Our products, services and expertise are used by
our customers to measure, detect, analyze and resolve critical and nanometric
level product defects, helping them to manage manufacturing process challenges
and to obtain higher finish product yields at lower cost. We also offer advanced
technology solutions to address various manufacturing needs of printed circuit
boards ("PCB"), flat panel displays ("FPD"), Specialty Semiconductor Devices and
other electronic components, including advanced packaging, light-emitting diodes
("LED"), power devices, compound semiconductor, and data storage industries, as
well as general materials research.
Our semiconductor customers generally operate in one or both of the major
semiconductor device manufacturing markets: memory and foundry/logic. The
pervasive and increasing needs for semiconductors in many consumer and
industrial products, the rapid proliferation of new applications for more
advanced semiconductor devices, and the increasing complexity associated with
leading edge semiconductor manufacturing drives demand for our process control
and yield management solutions. Continuing advancement of technology spurred by
the economic, power and performance benefits of being at the leading edge,
increasing involvement in legacy nodes as semiconductor content increases, and
innovation and growth of new enabling technologies are fueling long-term growth
for the semiconductor equipment industry. As we begin 2023, the macro-driven
slowdown is having an impact on semiconductor device demand as the semiconductor
industry rebalances its supply chain and inventory levels. As a result, some of
our customers are adjusting their capacity expansion-focused capital expenditure
plans for calendar 2023 to reflect this lower end demand. While we continue to
invest in technological innovation, we are focusing on moderating our spending
levels to reflect the changing environment. Push out or cancellation of
deliveries to our customers could cause earnings volatility, due to the timing
of revenue recognition as well as increased risk of inventory-related charges.
We are organized into three reportable segments. Prior to
•Semiconductor Process Control: a comprehensive portfolio of inspection, metrology and data analytics products as well as related service offerings that help IC manufacturers achieve target yields throughout the semiconductor fabrication process, from R&D to final volume production.
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•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 ("MEMS") and
other electronic components.
A majority of our revenues are derived from outside the U.S. , and include
geographic regions such as China , Taiwan , 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 . Chinese government initiatives are propelling China to expand
its domestic manufacturing capacity and attracting investment from semiconductor
manufacturers from Taiwan , Korea , Japan and the U.S. Although China is currently
seen as an important long-term growth region for the semiconductor and
electronics capital equipment sector, Commerce has adopted regulations and added
certain China -based entities to the U.S. Entity List (a list of parties that are
generally ineligible to receive U.S. -regulated items without prior licensing
from BIS), restricting our ability to provide products and services to such
entities without a license. In addition, Commerce has imposed export licensing
requirements on China -based customers that are military end users or 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 certain entities on the U.S.
Entity List.
In addition, in October 2022 , BIS issued the New BIS Rules that imposed new
export licensing requirements for certain U.S. semiconductor and
high-performance computing technology (including wafer fab equipment), for the
use of such technology for certain end uses in China , and for the provision of
support by U.S. Persons to certain advanced IC fabs located in China . In
particular, the New BIS Rules impose export license requirements effectively on
all KLA products and services to customers located in China that fabricate:
a.Non-planar ICs (e.g., FinFet or GaaFeT) or 14/16nm and below logic ICs;
b.NAND ICs at 128 layers and above; and
c.DRAM ICs using a "production" technology node of 18 nanometer half-pitch or less.
KLA is also restricted from providing certainU.S. origin tools, software and technology to certain wafer fab equipment manufacturers and maskshops located inChina , absent an export license. We are taking appropriate measures to comply with them and are applying for export licenses, when required, to avoid disruption to our customers' operations. While some export licenses have been obtained by us or our customers, there can be no assurance that export licenses applied for by either us or our customers will be granted. The New BIS Rules are complex, and we are working on assessing their full impact on KLA. The new rules have not significantly impacted our operations to date, but the possible negative effects on our future business of export licenses not being granted could be material and could result in a substantial reduction to our remaining performance obligations ("RPO") or require us to return substantial deposits received from customers inChina for future purchase orders. We are still assessing the aggregate potential impact of the existing regulations and New BIS Rules on our financial results and operations. There is a likelihood of system reallocation of products to other customers where supply is meaningfully below demand for those products. See Part II, Item 1A, "Risk Factors" in this report for more information regarding how such actions by theU.S. government or another country could significantly impact our ability to provide our products and services to existing and potential customers, especially inChina , and adversely affect our business, financial condition and results of operations. 38
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The following table sets forth some of our key quarterly unaudited financial
information:
Three Months Ended
(In thousands, except net income December 31, September 30, June 30, March 31, December 31,
per share) 2022 2022 2022 2022 2021
Total revenues $ 2,983,887 $ 2,724,424 $ 2,486,739 $ 2,288,676 $ 2,352,630
Costs of revenues $ 1,208,786 $ 1,041,226 $ 978,564 $ 892,091 $ 908,162
Gross margin 59.5 % 61.8 % 60.6 % 61.0 % 61.4 %
Net income attributable to
KLA(1) $ 978,795 $ 1,025,991 $ 805,374 $ 730,572 $ 717,444
Diluted net income per share
attributable to KLA(2) $ 6.89 $ 7.20 $ 5.40 $ 4.83 $ 4.71
__________________
(1)Our net income attributable to KLA increased to $978.8 million in the three
months ended December 31, 2022 compared to the three months ended December 31,
2021 , which was primarily due to 27% higher revenues partially offset by
increased operating expenses of 20%. Refer to the sections below for further
information.
(2)Diluted net income per share is computed independently for each of the quarters presented based on the weighted-average fully diluted shares outstanding for each quarter. Therefore, the sum of quarterly diluted net income per share information may not equal annual (or other multiple-quarter calculations of) diluted net income per share.
Impact of COVID-19
Events surrounding the ongoing COVID-19 pandemic had resulted in a reduction in economic activity across the globe in calendar year 2020 and early 2021. Vaccinations and pandemic containment measures have now created an environment that is driving economic growth and higher levels of inflation, even as the pace of economic recovery remains uneven in various geographies. On one hand, the semiconductor and capital equipment industry has experienced multiple growth drivers, including acceleration of the pace of virtual engagement and digitization driven by COVID-19 related travel restrictions and quarantines. On the other hand, the war inUkraine and resumption of growth has caused us to experience new constraints and challenges. Supply chain lead times are extended and shortages have sometimes required us to plan further ahead and increase our purchase commitments to secure critical components on a timely basis. We continue to monitor our supply chain and work with our suppliers to identify and mitigate potential gaps to ensure continuity of supply. While all of our global manufacturing sites are currently operational, any local pandemic outbreaks or introduction of new variants have required and could in the future require us to temporarily curtail production levels or temporarily cease operations based on government mandates or due to outbreaks affecting our manufacturing employees. We remain committed to the health and safety of our employees, contractors, suppliers, customers and communities, and are following government policies and recommendations designed to slow the spread of COVID-19. We are working with government authorities in the jurisdictions where we operate, and continue to monitor our operations in an effort to ensure we follow government requirements, relevant regulations, industry standards, and best practices to help safeguard our team members, while safely continuing operations to the extent possible at our sites across the globe. We may take further actions or alter our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience and evaluate them on an ongoing basis to ensure that they remain reasonable under current conditions. Actual results could differ from those estimates. We discuss the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors on a quarterly basis, and the Audit Committee has reviewed our related disclosure in this Quarterly Report on Form 10-Q. There have been no material changes in our critical accounting estimates and policies since our Annual Report on Form 10-K for the fiscal year endedJune 30, 2022 . Refer to Note 1 "Basis of Presentation" to our Condensed Consolidated Financial Statements for additional details. In addition, please refer to "Management's Discussion and Analysis of Financial Condition 39
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and Results of Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year endedJune 30, 2022 for a complete description of our critical accounting policies and estimates.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including those recently
adopted and the expected dates of adoption as well as estimated effects, if any,
on our Condensed Consolidated Financial Statements of those not yet adopted, see
Note 1 "Basis of Presentation" to our Condensed Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Revenues and Gross Margin
Revenues
Our business is affected by the concentration of our customer base and our
customers' capital equipment procurement schedules as a result of their
investment plans. Our product revenues in any particular period are
significantly impacted by the amount of new orders we receive during that period
and, depending upon the duration of manufacturing and installation cycles, in
the preceding period. Revenue is also impacted by average customer pricing,
customer revenue deferrals associated with volume purchase agreements and the
effect of fluctuations in foreign currency exchange rates.
Service revenues are generated from product maintenance and support services, as
well as billable time and material service calls made to our customers. The
amount of our service revenues is typically a function of the number of systems
installed at our customers' sites and the utilization of those systems, but it
is also impacted by other factors, such as our rate of service contract
renewals, the types of systems being serviced and fluctuations in foreign
currency exchange rates.
Three Months Ended December 31, Q2 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22
Revenues:
Product $ 2,463,408 $ 1,895,769 $ 567,639 30 %
Service 520,479 456,861 63,618 14 %
Total revenues $ 2,983,887 $ 2,352,630 $ 631,257 27 %
Costs of revenues $ 1,208,786 $ 908,162 $ 300,624 33 %
Gross margin 59.5 % 61.4 %
Six Months Ended December 31, Q2 FY23 YTD
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22 YTD
Revenues:
Product $ 4,659,017 $ 3,525,657 $ 1,133,360 32 %
Service 1,049,294 910,811 138,483 15 %
Total revenues $ 5,708,311 $ 4,436,468 $ 1,271,843 29 %
Costs of revenues $ 2,250,012 $ 1,721,786 $ 528,226 31 %
Gross margin 60.6 % 61.2 %
Product revenues during the three and six months ended December 31, 2022
increased compared to the three and six months ended December 31, 2021 primarily
due to strong demand for many of our products, especially our inspection and
metrology portfolios, as well as increases from continued growth in the
specialty semiconductor markets.
Service revenues during the three and six months ended
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Revenues by segment(1)
Three Months Ended December 31, Q2 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22
Revenues:
Semiconductor Process Control $ 2,657,395 $ 2,052,202 $ 605,193 29 %
Specialty Semiconductor Process 158,085 112,738 45,347 40 %
PCB, Display and Component Inspection 169,959 187,977 (18,018) (10) %
Total revenues for reportable segments $ 2,985,439 $ 2,352,917 $ 632,522 27 %
Six Months Ended December 31, Q2 FY23 YTD
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22 YTD
Revenues:
Semiconductor Process Control$ 5,055,154 $ 3,831,285 $ 1,223,869 32 % Specialty Semiconductor Process 285,952 214,767 71,185 33 % PCB, Display and Component Inspection 370,704 390,785 (20,081) (5) %
Total revenues for reportable segments
29 %
__________
(1)Segment revenues exclude corporate allocations and the effects of changes in
foreign currency exchange rates. For additional details, refer to Note 18
"Segment Reporting and Geographic Information" to our Condensed Consolidated
Financial Statements.
Revenues from our Semiconductor Process Control segment during the three and six
months ended December 31, 2022 increased compared to the three and six months
ended December 31, 2021 primarily due to strong demand for many of our products,
especially from our inspection and metrology portfolios. Revenues in the
Specialty Semiconductor Process segment during the three and six months ended
December 31, 2022 increased compared to the three and six months ended
December 31, 2021 primarily due to continued growth in the specialty
semiconductor market. Revenues in the PCB, Display and Component Inspection
segment during the three and six months ended December 31, 2022 decreased
compared to the three and six months ended December 31, 2021 primarily due to
market softening.
The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods:
Three Months Ended December 31, Six Months Ended December 31,
(Dollar amounts in
thousands) 2022 2021 2022 2021
Taiwan $ 768,999 26 % 776,442 33 % $ 1,517,333 27 % $ 1,403,526 31 %
China 681,701 23 % $ 544,537 23 % 1,521,362 27 % 1,229,693 28 %
Korea 590,936 20 % 323,095 14 % 998,398 17 % 562,278 13 %
North America 366,641 12 % 271,594 12 % 600,395 10 % 449,334 10 %
Japan 269,746 9 % 196,282 8 % 487,455 9 % 371,449 8 %
Europe and Israel 169,614 5 % 175,195 7 % 333,687 6 % 262,635 6 %
Rest of Asia 136,250 5 % 65,485 3 % 249,681 4 % 157,553 4 %
Total $ 2,983,887 100 % $ 2,352,630 100 % $ 5,708,311 100 % $ 4,436,468 100 %
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.
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The following table summarizes the major factors that contributed to the changes
in gross margin:
Gross Margin
Three Months Ended Six Months Ended
December 31, 2021 61.4% 61.2%
Revenue volume of products and services 1.6% 1.8%
Mix of products and services sold -% 0.3%
Manufacturing labor, overhead and efficiencies 0.4% 0.1%
Other service and manufacturing costs (3.9)% (2.8)%
December 31, 2022 59.5% 60.6%
Changes in gross margin, which are driven by the revenue volume of products and
services, reflect our ability to leverage existing infrastructure to generate
higher revenues. Changes in gross margin from the mix of products and services
sold reflect the impact of changes within the composition of product and service
offerings. Changes in gross margin from manufacturing labor, overhead and
efficiencies reflect our ability to manage costs and drive productivity as we
scale our manufacturing activity to respond to customer requirements, and
amortization of intangible assets. Changes in gross margin from other service
and manufacturing costs include the impact of customer support costs, including
the efficiencies with which we deliver services to our customers, and the
effectiveness with which we manage our production plans and inventory risk.
The decrease in our gross margin during the three and six months ended
Segment gross profit(1)
Three Months Ended December 31, Q2 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22
Segment gross profit:
Semiconductor Process Control $ 1,678,037 $ 1,342,937 $ 335,100 25 %
Specialty Semiconductor Process 84,040 60,274 23,766 39 %
PCB, Display and Component Inspection 53,864 82,322 (28,458) (35) %
$ 1,815,941 $ 1,485,533 $ 330,408 22 %
Six Months Ended December 31, Q2 FY23 YTD
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22 YTD
Segment gross profit:
Semiconductor Process Control $ 3,255,019 $ 2,504,866 $ 750,153 30 %
Specialty Semiconductor Process 151,080 114,995 36,085 31 %
PCB, Display and Component Inspection 139,538 176,798 (37,260) (21) %
Total revenues for reportable segments
27 %
________________
(1) Segment gross profit is calculated as segment revenues less segment costs
of revenues and excludes corporate allocations, amortization of intangible
assets, inventory fair value adjustments, acquisition related costs and the
effects of changes in foreign currency exchange rates. For additional details,
refer to Note 18 "Segment Reporting and Geographic Information" to our Condensed
Consolidated Financial Statements.
Gross profit in the Semiconductor Process Control segment during the three and
six months ended December 31, 2022 increased compared to the three and six
months ended December 31, 2021 primarily due to a higher revenue volume of
products and services sold, partially offset by an increase in other service and
manufacturing costs. Gross profit in the Specialty Semiconductor Process segment
during the three and six months ended December 31, 2022 increased compared to
the three and six months ended December 31, 2021 primarily due to a higher
revenue volume, partially offset by a less favorable mix of products and
services sold as well as an increase in other service and manufacturing costs.
Gross profit in the PCB, Display and Component Inspection segment during the
three and six months ended December 31, 2022 decreased compared to the three and
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six months endedDecember 31, 2021 primarily due to a lower revenue volume of products and services sold and an increase in other service and manufacturing costs, partially offset by a more favorable mix of products and services sold.
Research and Development
R&D expenses may fluctuate with product development phases and project timing as
well as our R&D efforts. As technological innovation is essential to our
success, we may incur significant costs associated with R&D projects, including
compensation for engineering talent, engineering material costs and other
expenses.
Three Months Ended December 31, Q2 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22
R&D expenses $ 332,826 $ 265,031 $ 67,795 26 %
R&D expenses as a percentage of total
revenues 11 % 11 %
R&D expenses during the three months endedDecember 31, 2022 increased compared to the three months endedDecember 31, 2021 primarily due to an increase in engineering project material costs of$39.1 million , an increase in employee-related expenses of$17.6 million as a result of additional engineering headcount contributing to higher employee compensation and benefit costs, and an increase in depreciation expense of$5.4 million . Six Months Ended December 31, Q2 FY23 YTD vs. (Dollar amounts in thousands) 2022 2021 Q2 FY22 YTD R&D expenses$ 651,341 $ 523,184 $ 128,157 24 % R&D expenses as a percentage of total revenues 11 %
12 %
R&D expenses during the six months endedDecember 31, 2022 increased compared to the six months endedDecember 31, 2021 primarily due to an increase in engineering project material costs of$59.4 million , an increase in employee-related expenses of$49.7 million as a result of additional engineering headcount contributing to higher employee compensation and benefit costs, and an increase in depreciation expense of$10.8 million . Our future operating results will depend significantly on our ability to produce products and provide services that have a competitive advantage in our marketplace. To do this, we believe we must continue to make substantial and focused investments in our R&D. We remain committed to product development in new and emerging technologies.
Selling, General and Administrative
Three Months Ended December 31, Q2 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22
SG&A expenses $ 243,096 $ 213,479 $ 29,617 14 %
SG&A expenses as a percentage of total
revenues 8 % 9 %
SG&A expenses during the three months endedDecember 31, 2022 increased compared to the three months endedDecember 31, 2021 primarily due to increases in the following areas: depreciation expense of$11.4 million , facilities-related expense of$8.3 million , allowance for credit losses of$7.8 million , employee travel expenses of$6.2 million , consulting costs of$3.5 million , and partially offset by a decrease in employee related expenses of$12.5 million . Six Months Ended December 31, Q2 FY23 YTD vs. (Dollar amounts in thousands) 2022 2021 Q2 FY22 YTD SG&A expenses$ 497,076 $ 406,740 $ 90,336 22 % SG&A expenses as a percentage of total revenues 9 %
9 %
SG&A expenses during the six months endedDecember 31, 2022 increased compared to the six months endedDecember 31, 2021 primarily due to$16.8 million of compensation-related expense from the sale ofOrbograph Ltd. ("Orbograph") along with increases in the following: depreciation expense of$22.7 million , facilities-related expense of$17.5 million , allowances for credit losses of$14.3 million , employee travel expenses of$12.9 million , consulting costs of$8.1 million , and partially offset by a decrease in employee related expenses of$15.5 million . 43
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Restructuring Charges
Restructuring charges were$0.6 million and$0.5 million for the three months endedDecember 31, 2022 and 2021, respectively. Restructuring charges were$16.8 million and$0.9 million for the six months endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , the accrual for restructuring charges was$5.3 million .
For additional information refer to Note 19 "Restructuring Charges" to our Condensed Consolidated Financial Statements.
Interest Expense and Other Expense (Income), Net
Other expense (income), net is comprised primarily of realized gains or losses
on sales of marketable securities, gains or losses from revaluations of certain
foreign currency denominated assets and liabilities as well as foreign currency
contracts, interest-related accruals (such as interest and penalty accruals
related to our tax obligations) and interest income earned on our invested cash,
cash equivalents and marketable securities.
Three Months Ended December 31, Q2 FY23
vs.
(Dollar amounts in thousands) 2022 2021 Q2 FY22
Interest expense $ 74,280 $ 37,852 $ 36,428 96 %
Other expense (income), net (18,074) 1,201 (19,275) (1,605) %
Interest expense as a percentage of total
revenues 2 % 2 %
Other expense (income), net as a percentage
of total revenues < 1% < 1%
Interest expense during the three months ended
The change in other expense (income), net during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 was primarily due to an increase of$14.6 million of interest income due to higher interest rates. Six Months Ended December 31, Q2 FY23 YTD vs. (Dollar amounts in thousands) 2022 2021 Q2 FY22 YTD Interest expense$ 148,675 $ 76,164 $ 72,511 95 % Other expense (income), net (65,080) 15,341 (80,421) (524) % Interest expense as a percentage of total revenues 3 % 2 % Other expense (income), net as a percentage of total revenues (1) %
< 1%
Interest expense during the six months ended
The change in other expense (income), net during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 was primarily due to the following: a gain of$29.7 million from the sale of our interest in Orbograph to a private equity firm, higher interest income of$22.2 million due to higher interest rates, a higher fair value net gain of$17.2 million from an equity security compared to the prior fiscal year, and decreases in accruals related to uncertain tax positions of$13.1 million .
Loss on Extinguishment of Debt
For the three months endedDecember 31, 2022 , we had no loss on extinguishment of debt. For the six months endedDecember 31, 2022 , loss on extinguishment of debt reflected a pre-tax net loss of$13.3 million associated with the redemption of$500.0 million of the Senior Notes due 2024, including associated redemption premiums, accrued interest and other fees and expenses. We had no loss on extinguishment of debt in the three and six months endedDecember 31, 2021 . 44
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Provision for Income Taxes
The following table provides details of income taxes:
Three Months Ended December 31, Six Months Ended December 31,
(Dollar amounts in thousands) 2022 2021 2022 2021
Income before income taxes $ 1,142,973 $ 926,905 $ 2,213,001 $ 1,693,253
Provision (benefit) for income taxes 164,178 209,388 208,141 (92,749)
Effective tax rate 14.4 % 22.6 % 9.4 % (5.5) %
The effective tax rate during the three months ended December 31, 2022 was lower
compared to the three months ended December 31, 2021 primarily due to the impact
of the following items that occurred in the three months ended December 31,
2021 :
•Tax expense increased by $163.7 million relating to a non-recurring tax expense
resulting from a new Israel tax law enacted on November 15, 2021 . The new Israel
tax law limits our ability to maintain our previous representation that the
historical earnings were permanently reinvested in Israel . We recorded deferred
tax liability and related tax expense of $163.7 million in accordance with the
new Israel tax law; partially offset by
•Tax expense decreased by
The effective tax rate during the six months endedDecember 31, 2022 was higher compared to the six months endedDecember 31, 2021 primarily due to the impact of the following items that occurred during the six months endedDecember 31, 2021 : •Tax expense decreased by$394.5 million relating to a non-recurring tax benefit resulting from the intra-entity transfers of certain intellectual property ("IP") rights. During the six months endedDecember 31, 2021 , we completed intra-entity transfers of IP rights to one of ourSingapore subsidiaries in order to better align the ownership of these rights with how our business operates. The transfers did not result in taxable gains; however, ourSingapore subsidiary recognized deferred tax assets for the book and tax basis difference of the eligible transferred IP rights; and
•Tax expense decreased by
•Tax expense increased by$163.7 million relating to a non-recurring tax expense resulting from a newIsrael tax law enacted onNovember 15, 2021 . The newIsrael tax law limits our ability to maintain our previous representation that the historical earnings were permanently reinvested inIsrael . We recorded deferred tax liability and related tax expense of$163.7 million in accordance with the newIsrael tax law. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with acquisitions, R&D credits as a percentage of aggregate pre-tax income, non-taxable or non-deductible increases or decreases in the assets held within our Executive Deferred Savings Plan, the tax effects of employee stock activity and the effectiveness of our tax planning strategies.
For discussions on tax examinations, assessments and certain related proceedings, see Note 13 "Income Taxes" to our Condensed Consolidated Financial Statements.
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Liquidity and Capital Resources
As of As of
(Dollar amounts in thousands) December 31, 2022 June 30, 2022
Cash and cash equivalents $ 1,571,477 $ 1,584,908
Marketable securities 1,294,873 1,123,100
Total cash, cash equivalents and marketable securities $ 2,866,350 $ 2,708,008
Percentage of total assets 21 % 21 %
Six Months Ended December 31,
(In thousands) 2022 2021
Cash flows:
Net cash provided by operating activities $ 1,699,835 $ 1,674,595
Net cash used in investing activities (294,880) (281,570)
Net cash used in financing activities (1,416,247) (1,166,876)
Effect of exchange rate changes on cash and cash equivalents (2,139) (3,702)
Net increase in cash and cash equivalents $
(13,431)
Cash,
As ofDecember 31, 2022 , our cash, cash equivalents and marketable securities totaled$2.87 billion , which represents an increase of$158.3 million fromJune 30, 2022 . The increase is due to net cash provided by operating activities of$1.70 billion and net proceeds from the sale of a business of$75.4 million , partially offset by net repayments of debt of$568.8 million , stock repurchases of$444.9 million , cash used for payment of dividends and dividend equivalents of$372.2 million , capital expenditures of$178.0 million and$57.6 million of tax withholding payments related to vested and released restricted stock units ("RSU"). As ofDecember 31, 2022 ,$1.18 billion of our$2.87 billion of cash, cash equivalents and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to indefinitely reinvest$79.0 million of the cash, cash equivalents and marketable securities held by our foreign subsidiaries for which we assert that earnings are permanently reinvested. If, however, a portion of these funds were to be repatriated tothe United States , we would be required to accrue and pay state and foreign taxes of approximately 1% - 22% of the funds repatriated. The amount of taxes due will depend on the amount and manner of the repatriation, as well as the location from which the funds are repatriated. We have accrued state and foreign tax on the remaining cash of$1.10 billion of the$1.18 billion held by our foreign subsidiaries and branch offices. As such, these funds can be returned to theU.S. without accruing any additionalU.S. tax expense.
Cash Dividends
During the three months endedDecember 31, 2022 , our Board of Directors declared a regular quarterly cash dividend of$1.30 per share on our outstanding common stock, which was paid onDecember 1, 2022 to our stockholders of record as of the close of business onNovember 15, 2022 . During the same period in fiscal year endedJune 30, 2022 , our Board of Directors declared and paid a regular quarterly cash dividend of$1.05 per share on our outstanding common stock. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months endedDecember 31, 2022 and 2021 was$184.2 million and$159.1 million , respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid during the six months endedDecember 31, 2022 and 2021 was$372.2 million and$322.0 million , respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as ofDecember 31, 2022 andJune 30, 2022 was$11.2 million on each date. These amounts will be paid upon vesting of the underlying unvested RSUs as described in Note 10 "Equity, Long-term Incentive Compensation Plans and Non-Controlling Interest" to our Condensed Consolidated Financial Statements.
Stock Repurchases
The shares of common stock repurchased under our stock repurchase program have reduced our basic and diluted weighted-average shares outstanding for the six months endedDecember 31, 2022 and 2021. The stock repurchase program is intended, in part, to mitigate the potential dilutive impact related to our equity incentive plans and shares issued in connection with our Employee Stock Purchase Program as well as to return excess cash to our stockholders. 46
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Cash Flows Provided by Operating Activities
Historically, we have financed our liquidity requirements through cash generated from our operations. Net cash provided by operating activities during the six months endedDecember 31, 2022 was$1.70 billion compared to$1.67 billion during the six months endedDecember 31, 2021 . This increase of$25.2 million resulted primarily from the following:
•An increase in collections of approximately
•An increase in interest income of approximately
•An increase in accounts payable payments of approximately
•An increase in employee-related payments of approximately
•An increase in income tax payments of approximately
•An increase in other tax payments of approximately
Cash Flows Used in Investing Activities
Net cash used in investing activities during the six months endedDecember 31, 2022 was$294.9 million compared to$281.6 million during the six months endedDecember 31, 2021 . This increase in cash used was mainly due to an increase in net purchases of available-for-sale and trading securities of$55.6 million and an increase in capital expenditures of$44.1 million , partially offset by an increase in proceeds from the sale of a business of$75.4 million and a decrease in cash used in business acquisitions of$10.9 million .
Cash Flows Used in Financing Activities
Net cash used in financing activities during the six months endedDecember 31, 2022 was$1.42 billion compared to net cash used in financing activities of$1.17 billion during the six months endedDecember 31, 2021 . This increase was mainly due to increases in repayment of debt of$562.3 million and cash paid for dividends and dividend equivalents of$50.2 million , partially offset by a decrease in cash used for common stock repurchases of$384.7 million .
Senior Notes
InJune 2022 , we issued$3.00 billion aggregate principal amount of senior, unsecured notes (the "2022 Senior Notes") as follows:$1.00 billion of 4.650% senior, unsecured notes dueJuly 15, 2032 ;$1.20 billion of 4.950% senior, unsecured notes dueJuly 15, 2052 ; and$800.0 million of 5.250% senior, unsecured notes dueJuly 15, 2062 . A portion of the net proceeds of the 2022 Senior Notes was used to complete a tender offer inJuly 2022 for$500.0 million of our 2014 Senior Notes, as defined below, including associated redemption premiums, accrued interest and other fees and expenses. The transaction resulted in pre-tax net loss on extinguishment of debt of$13.3 million for the three months endedSeptember 30, 2022 . The remainder of the net proceeds were used for share repurchases and for general corporate purposes. Prior toJune 2022 , the following aggregate principal amounts of senior, unsecured long-term notes were issued in the following periods:$750.0 million inFebruary 2020 (the "2020 Senior Notes"),$1.20 billion inMarch 2019 (the "2019 Senior Notes") and$2.50 billion inNovember 2014 (the "2014 Senior Notes"). These, along with the 2022 Senior Notes, are collectively referred to as the "Senior Notes." The original discounts on the Senior Notes are being amortized over the life of the debt. Interest is payable as follows: semi-annually onJanuary 15 andJuly 15 of each year for the 2022 Senior Notes; semi-annually onMarch 1 andSeptember 1 of each year for the 2020 Senior Notes; semi-annually onMarch 15 andSeptember 15 of each year for the 2019 Senior Notes; and semi-annually onMay 1 andNovember 1 of each year for the 2014 Senior Notes. The relevant indentures for the Senior Notes (collectively, the "Indenture") include covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions. In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two ofMoody's Investors Service ("Moody's"),S&P Global Ratings ("S&P") andFitch Inc. ("Fitch"), unless we have exercised our rights to redeem the Senior Notes of such series, we will be required to make an offer to repurchase all or, at the holder's option, any part of each holder's Senior Notes of that series pursuant to the offer (the "Change of Control Offer"). In the Change of Control Offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of Senior Notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, up to, but not including, the date of repurchase.
As of
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Revolving Credit Facility
We have in place a Credit Agreement ("Credit Agreement") for an unsecured
Revolving Credit Facility ("Revolving Credit Facility") with a maturity date of
June 8, 2027 that allows us to borrow up to $1.50 billion . Subject to the terms
of the Credit Agreement, the Revolving Credit Facility may be increased by an
amount up to $250.0 million in the aggregate. During the six months ended
December 31, 2022 , we borrowed $300.0 million and repaid $350.0 million . As of
December 31, 2022 , we had $225.0 million aggregate principal amount of
borrowings.
We may borrow, repay and reborrow funds under the Revolving Credit Facility
until the maturity date, at which time we may exercise two one-year extension
options with the consent of the lenders. We may prepay outstanding borrowings
under the Revolving Credit Facility at any time without a prepayment penalty.
Borrowings under the Revolving Credit Facility can be made as Term Secured
Overnight Financing Rate ("SOFR") Loans or Alternate Base Rate ("ABR") Loans, at
the Company's option. In the event that Term SOFR is unavailable, any Term SOFR
elections will be converted to Daily Simple SOFR, if available. Each Term SOFR
Loan will bear interest at a rate per annum equal to the applicable Adjusted
Term SOFR rate, which is equal to the applicable Term SOFR rate plus 10 bps that
shall not be less than zero, plus a spread ranging from 75 bps to 125 bps, as
determined by the Company's credit ratings at the time. Each ABR Loan will bear
interest at a rate per annum equal to the ABR plus a spread ranging from 0 bps
to 25 bps, as determined by the Company's credit ratings at the time. We are
also obligated to pay an annual commitment fee on the daily undrawn balance of
the Revolving Credit Facility, which ranges from 4.5 bps to 12.5 bps, subject to
an adjustment in conjunction with changes to our credit rating. The applicable
interest rates and commitment fees are also subject to adjustment based on the
Company's performance against certain environmental sustainability key
performance indicators related to greenhouse gas ("GHG") emissions and renewable
electricity usage. As of December 31, 2022 , the all-in interest rate of the
$225.0 million outstanding Term SOFR loans reflected the applicable Adjusted
Term SOFR plus a spread of 100 bps and the applicable commitment fee on the
daily undrawn balance of the Revolving Credit Facility was 9 bps.
Under the Credit Agreement, the maximum leverage ratio, on a quarterly basis, is
3.50 to 1.00, covering the trailing four consecutive fiscal quarters for each
fiscal quarter, which can be increased to 4.00 to 1.00 for a period of time in
connection with a material acquisition or a series of material acquisitions. As
of December 31, 2022 , our maximum allowed leverage ratio was 3.50 to 1.00.
We were in compliance with all covenants under the Credit Agreement as of
December 31, 2022 (the leverage ratio was 1.28 to 1.00). Considering our current
liquidity position, short-term financial forecasts and ability to prepay the
Revolving Credit Facility, if necessary, we expect to continue to be in
compliance with our financial covenants at the end of our fiscal year ending
June 30, 2023 .
Material Cash Requirements
While demand for our products remains strong and we continue to invest in
technological innovation, the recent slowdown in consumer demand and
expectations of a slowing global economy are having an impact on semiconductor
demand. As a result, customers are postponing capacity expansion plans and
setting lower capital expenditure budgets for 2023. Accordingly, we have seen a
decrease in our estimate of our significant purchase commitments. For additional
details regarding our debt and commitments, refer to Note 8 "Debt" and Note 15
"Commitments and Contingencies," respectively, to our Condensed Consolidated
Financial Statements. For additional details regarding our material cash
requirements, refer to our Annual Report Form on 10-K for the fiscal year
ended June 30, 2022 .
Working Capital
Working capital was$4.65 billion as ofDecember 31, 2022 , which represents an increase of$352.3 million compared to our working capital of$4.30 billion as ofJune 30, 2022 . As ofDecember 31, 2022 , our principal sources of liquidity consisted of$2.87 billion of cash, cash equivalents and marketable securities. Our liquidity may be affected by many factors, some of which are based on the normal ongoing operations of the business, spending for business acquisitions, and other factors such as uncertainty in the global and regional economies and the semiconductor, semiconductor-related and electronic device industries. Although cash requirements will fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with the liquidity provided by existing cash and cash equivalents balances and our$1.50 billion Revolving Credit Facility, will be sufficient to satisfy our liquidity requirements associated with working capital needs, capital expenditures, cash dividends, stock repurchases and other contractual obligations, including repayment of outstanding debt, for at least the next 12 months. 48
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Our credit ratings as of
Rating Agency Rating Fitch A- Moody's A2 S&P A-
In
Off-Balance Sheet Arrangements
As ofDecember 31, 2022 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial position, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 15 "Commitments and Contingencies" to our Condensed Consolidated Financial Statements for information related to indemnification obligations. 49
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