Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
Basis of Presentation.
For purposes of this report, “KLA,” “KLA-Tencor,” the “Company,” “we,” “our,” “us,” or similar references mean KLA-Tencor Corporation, and its majority-owned subsidiaries unless the context requires otherwise. The condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair statement of the financial position, results of operations, comprehensive income, stockholders’ equity and cash flows for the periods indicated. These financial statements and notes, however, should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
, filed with the SEC on
August 6, 2018
.
The condensed consolidated financial statements include the accounts of KLA and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The results of operations for the
three
and
nine
months ended
March 31, 2019
are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending
June 30, 2019
.
Certain reclassifications have been made to the prior year’s Condensed Consolidated Financial Statements to conform to the current year presentation. The reclassifications did not have material effects on the prior year’s Condensed Consolidated Balance Sheets, Statements of Operations, Comprehensive Income and Cash Flows.
Acquisition of Orbotech, Ltd.
On February 20, 2019 (the “Closing Date” or “Acquisition Date”), we completed the acquisition of Orbotech, Ltd. (“Orbotech”) for
$38.86
in cash and
0.25
of a share of our common stock in exchange for each ordinary share of Orbotech for a total consideration of
$3.26 billion
. The acquisition of Orbotech is referred to as the “Orbotech Acquisition”. The Orbotech Acquisition was accounted for by applying the acquisition method of accounting for business combinations. The unaudited condensed consolidated financial statements in this report include the financial results of Orbotech prospectively from the Acquisition Date. For additional details, refer to Note 6 “Business Combinations.”
Management Estimates.
The preparation of the condensed 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 and liabilities (and related disclosure of contingent assets and liabilities) at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Comparability.
Effective on the first day of fiscal 2019, we adopted Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (“ASC 606”)
. Prior periods were not retrospectively restated, and accordingly, the consolidated balance sheet as of
June 30, 2018
, and the condensed consolidated statements of operations for the
three
and
nine
months ended
March 31, 2018
were prepared using accounting standards that were different than those in effect for the
three
and
nine
months ended
March 31, 2019
.
Recent Accounting Pronouncements.
Recently Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, which supersedes the guidance in ASC 605,
Revenue Recognition
(“
ASC 605
”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASC 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted the ASC 606 as of
July 1, 2018
in our first quarter of our fiscal year ending June 30, 2019, using the modified retrospective transition approach. For additional detail, refer to Note 2 “Revenue.”
In January 2016, the FASB issued an accounting standard update that changes the accounting for financial instruments primarily related to equity investments (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee), financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a prospective basis and the adoption had no material impact on our condensed consolidated financial statements.
In August 2016, the FASB issued an accounting standard update intended to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a retrospective basis and the adoption had no material impact on our condensed consolidated financial statements.
In October 2016, the FASB issued an accounting standard update to recognize the income tax consequences of intra-entity transfers of assets other than inventory when they occur. This eliminates the exception to postpone recognition until the asset has been sold to an outside party. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a modified retrospective basis and the adoption had no material impact on our condensed consolidated financial statements.
In January 2017, the FASB issued an accounting standard on clarifying the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a prospective basis and the adoption had no material impact on our condensed consolidated financial statements.
In January 2017, the FASB issued an accounting standard update to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test, which requires an entity to determine the fair value of assets and liabilities similar to what is required in a purchase price allocation. Under the update, goodwill impairment will be calculated as the amount by which a reporting unit’s carrying value exceeds our fair value. We early adopted this update in the first quarter of our fiscal year ending June 30, 2019 on a prospective basis and the adoption had no material impact on our condensed consolidated financial statements.
In March 2017, the FASB issued an accounting standard update that changes the statements of operations classification of net periodic benefit cost related to defined benefit pension and/or other post-retirement benefit plans. Under the update, employers will present the service cost component of net periodic benefit cost in the same statements of operations line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit costs separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a retrospective basis and the adoption had no material impact on our condensed consolidated financial statements.
In May 2017, the FASB issued an accounting standard update regarding stock compensation that provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in order to reduce diversity in practice and reduce complexity. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2019 on a prospective basis and the adoption had no material impact on our condensed consolidated financial statements.
In August 2017, the FASB issued an accounting standard update to hedge accounting to better align risk management activities by refining financial and non-financial hedging strategy eligibilities. This update also amends the presentation and disclosure requirements to increase transparency to better understand an entity’s risk exposures and how hedging strategies are used to manage those exposures. We early adopted this update in the second quarter of our fiscal year ending June 30, 2019 under the modified retrospective approach. The cumulative effect adjustment for the elimination of the ineffectiveness was not material to our condensed consolidated financial statements. The presentation and disclosure have been amended on a prospective basis, as required by this update.
In February 2018, the FASB issued an accounting standard update that provides an option to reclassify disproportional tax effects and other income tax effects (“stranded tax effects”) caused by the Tax Cuts and Jobs Act (“the Act”) from accumulated other comprehensive income (“AOCI”) to retained earnings. We early adopted this update in the first quarter of our fiscal year ending June 30, 2019 and applied this update in the period of adoption. As a result of the adoption, we made a reclassification from AOCI to beginning retained earnings of approximately
$10.9 million
related to the stranded tax effects.
Updates Not Yet Effective
In February 2016, the FASB issued an accounting standard update which amends the existing accounting standards for leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on our classification. Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months using a modified retrospective transition method. In July 2018, the FASB issued an amendment to the standard which provides us an option to apply the practical expedient allowed in the standard retrospectively with the cumulative effect recognized as of the date of adoption. The update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2020. Early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our condensed consolidated financial statements.
In June 2016, the FASB issued an accounting standard update that changes the accounting for recognizing impairments of financial assets. Under the update, credit losses for certain types of financial instruments will be estimated based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, with early adoption permitted starting in the first quarter of fiscal year ending June 30, 2020. We are currently evaluating the impact of this accounting standard update on our condensed consolidated financial statements.
In August 2018, the FASB issued an accounting standard update which modifies the existing accounting standards for fair value measurement disclosure. This update eliminates the disclosure of the amount of and reasons for transfers between level 1 and level 2 of the fair value hierarchy, and the policy for timing of transfers between levels. This standard update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our condensed consolidated financial statements.
In August 2018, the FASB issued an accounting standard update to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. Some of the changes include adding a disclosure requirement for significant gains and losses related to changes in the benefit obligation for the period and removing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This standard update is effective for us for the fiscal year ending June 30, 2021, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our condensed consolidated financial statements.
In August 2018, the FASB issued an accounting standard update to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance clarifies which costs should be capitalized including the cost to acquire the license and the related implementation costs. This standard update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, with an option to be adopted either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our condensed consolidated financial statements.
Significant Accounting Policies.
We updated our accounting policies for Revenue Recognition, Business Combinations, Global Intangible Low-Taxed Income (“GILTI”), and Derivative Financial Instruments. There have been no other material changes to our significant accounting policies in Note 1 “Description of Business and Summary of Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
.
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 solutions provide a comprehensive portfolio of inspection, metrology and data analytics products, which are accompanied by a flexible portfolio of services to enable our customers to maintain the performance and productivity of the solutions purchased. The acquisition of Orbotech enabled us to broaden our portfolio to include the
yield enhancement and production solutions used by manufacturers of printed circuit boards, flat panel displays, advanced packaging, micro-electro-mechanical systems 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 collectibility of consideration is probable.
Our revenues are measured based on consideration stipulated in the arrangement with each customer, net of any sales incentives and amounts collected on behalf of third parties, such as sales taxes. The revenues are recognized as separate performance obligations that are satisfied by transferring control of the product or service to the customer.
Our arrangements with our customers include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. A product or service is considered distinct if it is separately identifiable from other deliverables in the arrangement and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
The transaction consideration, including any sales incentives, is allocated between separate performance obligations of an arrangement based on the stand-alone selling prices (“SSP”) for each distinct product or service. Management considers a variety of factors to determine the SSP, such as, historical standalone sales of products and services, discounting strategies and other observable data.
From time to time, our contracts are modified to account for additional, or to change existing, performance obligations. Our contract modifications are generally accounted for prospectively.
Product revenue
We recognize revenue from product sales at a point in time when we have satisfied our performance obligation by transferring control of the product to the customer. We use judgment to evaluate whether the control has transferred by considering several indicators, including:
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•
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whether we have a present right to payment;
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•
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the customer has legal title;
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•
|
the customer has physical possession;
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|
|
|
•
|
the customer has significant risk and rewards of ownership; and
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•
|
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 defects and data analysis software. 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. With the acquisition of Orbotech we offer computer-aided manufacturing and engineering software solutions for the
printed circuit boards
production. Software is generally bundled with post-contract customer support (“PCS”), which includes unspecified software updates that are made available throughout the entire term of the arrangement. Revenue from software licenses is recognized at a point in time, when the software is made available to the customer. Revenue from PCS is deferred at contract inception and recognized ratably over the service period, or as services are performed.
Services and spare parts revenue
The majority of product sales include a standard
6
to
12
-month warranty that is not separately paid for by the customers. The customers may also purchase extended warranty for periods beyond the initial year as part of the initial product sale. We have concluded that the standard
12
-month warranty as well as any extended warranty periods included in the initial product sales are separate performance obligations. The estimated fair value of warranty services is deferred and recognized ratably as revenue over the warranty period, as the customer simultaneously receives and consumes the benefits of warranty services provided by us.
Additionally, we offer product maintenance and support services, which the customer may purchase separately from the standard and extended warranty offered as part of the initial product sale. Revenue from separately negotiated maintenance and support service contracts is also recognized over time based on the terms of the applicable service period. Revenue from services performed in the absence of a maintenance contract, including training revenue, is recognized when the related services are performed. We also sell spare parts, revenue from which is recognized when control over the spare parts is transferred to the customer.
Installation services include connecting and validating configuration of the product. In addition, several testing protocols are completed to confirm the equipment is performing to customer specifications. Revenue 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 and represents a separate performance obligation. Determining the SSP for each distinct performance obligation and allocation of consideration from an arrangement to the individual performance obligations and the appropriate timing of revenue recognition are significant judgments with respect to these arrangements. We typically estimate the SSP of products and services based on observable transactions when the products and services are sold on a standalone basis and those prices fall within a reasonable range. We typically have more than one SSP for individual products and services due to the stratification of these products by customers and circumstances. In these instances, we use information such as the size of the customer, geographic region, as well as customization of the products in determining the SSP. In instances where the SSP is not directly observable, we determine the SSP using information that includes market conditions, entity-specific factors, including discounting strategies, information about the customer or class of customer that is reasonably available and other observable inputs. While changes in the allocation of SSP between performance obligations will not affect the amount of total revenue recognized for a particular contract, any material changes could impact the timing of revenue recognition, which could have a material effect on our financial position and result of operations.
Although the products are generally not sold with a right of return, we may provide other credits or sales incentives, which are accounted for either as variable consideration or material right, depending on the specific terms and conditions of the arrangement. These credits and incentives are estimated at contract inception and updated at the end of each reporting period if and when additional information becomes available.
As outlined above, we use judgments to evaluate whether or not the customer has obtained control of the product and considers the several indicators in evaluating whether or not control has transferred to the customer. Not all of the indicators need to be met for us to conclude that control has transferred to the customer.
Contract Assets/Liabilities
The timing of revenue recognition, billings and cash collections may result in accounts receivable, contract assets, and contract liabilities (deferred revenue) on our condensed consolidated balance sheet. 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 receivable when rights to payment become unconditional.
A contract liability is recognized when we receive payment or have an unconditional right to payment in advance of the satisfaction of performance. The contract liabilities represent (1) deferred product revenue related to the value of products that have been shipped and billed to customers and for which the control has not been transferred to the customers, and (2) deferred service revenue, which is recorded when we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring services to the customer under the terms of a contract. Deferred service revenue typically results from warranty services, and maintenance and other service contracts.
Contract assets and liabilities related to rights and obligations in a contract are recorded net in the condensed consolidated balance sheets. Upon the adoption of ASC 606, deferred costs of revenue are included in other current assets while under the legacy guidance deferred costs of revenue was included in deferred system profit.
Business Combinations.
We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these net tangible and intangible assets acquired is recorded as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which will not exceed one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of the purchase price of our acquisitions, whichever comes first, any subsequent adjustments are recorded to our condensed 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. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Derivative Financial Instruments.
We use financial instruments, such as forward exchange contracts and currency options, to hedge a portion of, but not all, existing and forecasted foreign currency denominated transactions. The purpose of our foreign currency program is to manage the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The effect of exchange rate changes on forward exchange contracts is expected to offset the effect of exchange rate changes on the underlying hedged items. We also use interest rate lock agreements to hedge the risk associated with the variability of cash flows due to changes in the benchmark interest rate of the intended debt financing. We believe these financial instruments do not subject us to speculative risk that would otherwise result from changes in currency exchange rates or interest rates. All of our derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments adjusted for risk of counterparty non-performance.
For derivative instruments designated and qualifying as cash flow hedges of forecasted foreign currency denominated transactions or debt financing expected to occur within twelve to eighteen months, the effective portion of the gains or losses is reported in accumulated other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Prior to adopting the new accounting guidance for hedge accounting, time value was excluded from the assessment of effectiveness for derivative instruments designated as cash flow hedges. Time value was amortized on a mark-to-market basis and recognized in earnings over the life of the derivative contract. For derivative contracts executed after adopting the new accounting guidance, the election to include time value for the assessment of effectiveness is made on all forward contracts designated as cash flow hedges. The change in fair value of the derivative are recorded in OCI until the hedged transaction is recognized in earnings. The assessment effectiveness of options contracts designated as cash flow hedges continue to exclude time value after adopting the new accounting guidance. The initial value of the component excluded from the assessment of effectiveness are recognized in earnings over the life of the derivative contracts. Any difference between change in the fair value of the excluded components and the amounts recognized in earnings are recorded in OCI. For derivative instruments that are not designated as a cash flow hedge, gains and losses are recognized in other expense (income), net. We use foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivative instruments are largely offset by the changes in the fair value of the assets or liabilities being hedged.
Global Intangible Low-Taxed Income.
The Tax Cuts and Jobs Act (the “Act”) includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate in general. As a result, the Company’s deferred tax assets and liabilities were being evaluated to determine if the deferred tax assets and liabilities should be recognized for the basis differences expected to reverse as a result of GILTI provisions that are effective for the Company after the fiscal year ending June 30, 2018, or should the tax on GILTI provisions be recognized as period costs in each year incurred. The Company has 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.
NOTE 2 – REVENUE
New Revenue Accounting Standard
Method and Impact of Adoption
At the beginning of the fiscal year 2019, we adopted ASC 606 using the modified retrospective transition approach for all contracts completed and not completed as of the date of adoption. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with ASC 605. A cumulative effect of applying ASC 606 was recorded to the beginning retained earnings to reflect the impact of all existing arrangements under ASC 606.
The cumulative effect of applying ASC 606 represents a net decrease of
$21.0 million
as of
July 1, 2018
, which primarily related to the following:
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A decrease of approximately
$97.0 million
in retained earnings related to the deferral of estimated fair value of the warranty services provided with our products for which revenue will be recognized in future periods under ASC 606. Further, upon adoption of ASC 606, we will recognize the standard warranty for a majority of products as a separate performance obligation, while in prior periods, we accounted for the estimated warranty cost as a charge to costs of sales when revenue was recognized. This was partially offset by an increase in retained earnings of approximately
$37.0 million
related to reversal of standard warranty expense, which was charged to cost of revenues in prior periods.
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•
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An increase in retained earnings of approximately
$26.0 million
due to a change in the timing of transfer of control over products to the customers.
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Under ASC 606, revenue is recognized earlier than it would have been recognized under legacy guidance primarily due to our assessment of timing of transfer of control. Additionally, we render standard warranty coverage on our products for
12 months
, providing labor and parts necessary to repair and maintain the products during the warranty period. Prior to adoption of ASC 606, we accounted for the estimated warranty cost as a charge to costs of sales when revenue was recognized. Upon adoption of ASC 606, the standard warranty for the majority of products is recognized as a separate performance obligation in service revenue.
Orbotech adopted ASC 606 on January 1, 2018, and the effect of adopting the ASC 606 on Orbotech’s revenues and operating income was not material. Orbotech’s contracts under ASC 606 supports the recognition of revenue at a point in time for the majority of its contracts, which is consistent with its legacy revenue recognition model. Revenue on the majority of Orbotech’s contracts will continue to be recognized upon delivery because this represents the point in time at which control is transferred to the customers. Revenues derived from performance obligations such as warranty and service contracts will continue to be recognized over the period of the service.
The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our condensed consolidated balance sheet as of
March 31, 2019
:
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March 31, 2019 (In thousands)
|
As reported under
ASC 606
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Prior to
adoption of
ASC 606
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Effect of changes
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ASSETS
|
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Accounts receivable, net
|
$
|
958,021
|
|
|
$
|
1,064,002
|
|
|
$
|
(105,981
|
)
|
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Other current assets
|
270,079
|
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|
130,172
|
|
|
139,907
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Deferred income taxes
|
205,820
|
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|
197,392
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|
8,428
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LIABILITIES
|
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Deferred system revenue
|
$
|
228,745
|
|
|
$
|
—
|
|
|
$
|
228,745
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Deferred service revenue
|
182,119
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|
97,190
|
|
|
84,929
|
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Deferred system profit
|
—
|
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|
323,107
|
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|
(323,107
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)
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Other current liabilities
|
833,747
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|
866,870
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|
(33,123
|
)
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Deferred service revenue, non-current
|
90,610
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82,176
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|
8,434
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STOCKHOLDERS
’
EQUITY
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Retained earnings
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$
|
928,086
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$
|
851,740
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$
|
76,346
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Accumulated other comprehensive income (loss)
|
(68,907
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)
|
|
(69,038
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)
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|
131
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The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our condensed consolidated statements of operations for the
three months ended
March 31, 2019
:
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Three months ended March 31, 2019 (In thousands, except per share amounts)
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As reported under
ASC 606
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Prior to
adoption of
ASC 606
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Effect of changes
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Revenues:
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Product
|
$
|
793,224
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$
|
854,393
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$
|
(61,169
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)
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Service
|
304,087
|
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|
266,333
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37,754
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Costs and expenses:
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Costs of revenues
|
486,945
|
|
|
499,209
|
|
|
(12,264
|
)
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Other expense (income), net
|
(9,282
|
)
|
|
(9,041
|
)
|
|
(241
|
)
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Provision for income taxes
|
28,745
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|
29,755
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|
(1,010
|
)
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Net income attributable to KLA-Tencor
|
192,728
|
|
|
202,627
|
|
|
(9,899
|
)
|
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Net income per share attributable to KLA-Tencor
|
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Basic
|
$
|
1.23
|
|
|
$
|
1.30
|
|
|
$
|
(0.07
|
)
|
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Diluted
|
$
|
1.23
|
|
|
$
|
1.29
|
|
|
$
|
(0.06
|
)
|
The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our condensed consolidated statements of operations for the
nine months ended
March 31, 2019
:
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Nine months ended March 31, 2019 (In thousands, except per share amounts)
|
As reported under
ASC 606
|
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Prior to
adoption of
ASC 606
|
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Effect of changes
|
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Revenues:
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Product
|
$
|
2,474,652
|
|
|
$
|
2,430,481
|
|
|
$
|
44,171
|
|
|
Service
|
835,817
|
|
|
726,976
|
|
|
108,841
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
Costs of revenues
|
1,276,592
|
|
|
1,233,999
|
|
|
42,593
|
|
|
Other expense (income), net
|
(28,535
|
)
|
|
(28,253
|
)
|
|
(282
|
)
|
|
Provision for income taxes
|
107,232
|
|
|
94,090
|
|
|
13,142
|
|
|
Net income attributable to KLA-Tencor
|
957,772
|
|
|
860,212
|
|
|
97,560
|
|
|
Net income per share attributable to KLA-Tencor:
|
|
|
|
|
|
|
Basic
|
$
|
6.20
|
|
|
$
|
5.57
|
|
|
$
|
0.63
|
|
|
Diluted
|
$
|
6.17
|
|
|
$
|
5.54
|
|
|
$
|
0.63
|
|
Contract Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
|
|
|
(In thousands, except for percentage)
|
March 31, 2019
|
|
July 1, 2018
|
|
$ Change
|
|
% Change
|
|
Accounts receivable, net
|
$
|
958,021
|
|
|
$
|
635,878
|
|
|
$
|
322,143
|
|
|
51
|
%
|
|
Contract assets
|
$
|
91,518
|
|
|
$
|
14,727
|
|
|
$
|
76,791
|
|
|
521
|
%
|
|
Contract liabilities
|
$
|
501,474
|
|
|
$
|
556,691
|
|
|
$
|
(55,217
|
)
|
|
(10
|
)%
|
Our payment terms and conditions vary by contract type, although terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of shipment, with the remainder payable within 30 days of acceptance
.
The change in contract assets during the
nine months ended
March 31, 2019
was mainly due to an increase in contract assets of
$71.1 million
from the Orbotech Acquisition in the third quarter of fiscal year 2019 and
$19.4 million
of revenue recognized in excess of the amounts billed to the customers, partially offset by
$14.7 million
of contract assets reclassified to net accounts receivable as our right to consideration for these contract assets became unconditional. Contract assets are included in Other current assets on our condensed consolidated balance sheet.
During the
nine months ended
March 31, 2019
, we recognized revenue of
$422.3 million
that was included in contract liabilities as of
July 1, 2018
. This was partially offset by an increase in contract liabilities of
$28.8 million
from the Orbotech Acquisition in the third quarter of fiscal year 2019, and the value of products and services billed to customers for which control of the products and service has not transferred to the customers. Contract liabilities are included in current and non-current liabilities on our condensed consolidated balance sheets.
Remaining Performance Obligations
As of
March 31, 2019
, we had
$1.73 billion
of remaining performance obligations, which represents our obligation to deliver products and services, and consists primarily of sales orders where written customer requests have been received. We expect to recognize approximately
5%
to
15%
of these performance obligations as revenue beyond the next twelve months, subject to risk of delays, pushouts, and cancellation by the customer, usually with limited or no penalties.
Refer to Note 17 “Segment Reporting and Geographic Information” for information related to revenue by geographic region as well as significant product and service offerings.
Practical expedients
We apply the following practical expedients:
|
|
|
|
•
|
We account for shipping and handling costs as activities to fulfill the promise to transfer the goods, instead of a promised service to our customer.
|
|
|
|
|
•
|
We have elected to not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less.
|
|
|
|
|
•
|
We have elected to expense costs to obtain a contract as incurred because the expected amortization period is one year or less.
|
|
|
|
|
•
|
We have elected to reflect the aggregate effect of all modifications that occurred before
July 1, 2018
in determining the transaction price, identifying the satisfied and unsatisfied performance obligations, and allocating the transaction price to the performance obligations.
|
NOTE 3 – FAIR VALUE MEASUREMENTS
Our financial assets and liabilities are measured and recorded at fair value, except for our debt and certain equity investments in privately-held companies. Prior to
July 1, 2018
, the equity investments were generally accounted for under the cost method of accounting and were periodically assessed for other-than-temporary impairment when an event or circumstance indicated that an other-than-temporary decline in value may have occurred. Effective
July 1, 2018
, equity investments without a readily available fair value are accounted for using the measurement alternative. The measurement alternative is calculated as cost minus impairment, if any, plus or minus changes resulting from observable price changes.
Our non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.
Fair Value of Financial Instruments.
We have evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of our cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate their carrying amounts due to the relatively short maturity of these items.
Fair Value Hierarchy.
The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
|
|
|
|
|
|
|
Level 1
|
|
Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
|
|
|
Level 2
|
|
Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
|
|
|
|
Level 3
|
|
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
As of
March 31, 2019
, the types of instruments valued based on quoted market prices in active markets included money market funds, certain U.S. Treasury securities and U.S. Government agency securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs included corporate debt securities and sovereign securities. The market inputs used to value these instruments generally consist of market yields, reported trades and broker/dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants generally are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
The fair value of deferred payments and contingent consideration payable, the majority of which were recorded in connection with business combinations during the three months ended
March 31, 2019
, were classified as Level 3 and estimated using significant inputs that were not observable in the market. See Note 6 “Business Combinations” for additional information.
Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis, as of the date indicated below, were presented on our Condensed Consolidated Balance Sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019 (In thousands)
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Little or no market activity
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds and other
|
$
|
592,141
|
|
|
$
|
592,141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
U.S. Treasury securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
439,246
|
|
|
—
|
|
|
439,246
|
|
|
—
|
|
|
Sovereign securities
|
10,991
|
|
|
—
|
|
|
10,991
|
|
|
—
|
|
|
U.S. Government agency securities
|
166,092
|
|
|
166,092
|
|
|
—
|
|
|
—
|
|
|
U.S. Treasury securities
|
187,080
|
|
|
187,080
|
|
|
—
|
|
|
—
|
|
|
Total cash equivalents and marketable securities
(1)
|
1,395,550
|
|
|
945,313
|
|
|
450,237
|
|
|
—
|
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Derivative assets
|
4,246
|
|
|
—
|
|
|
4,246
|
|
|
—
|
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
|
Executive Deferred Savings Plan
|
203,286
|
|
|
153,528
|
|
|
49,758
|
|
|
—
|
|
|
Total financial assets
(1)
|
$
|
1,603,082
|
|
|
$
|
1,098,841
|
|
|
$
|
504,241
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
(1,816
|
)
|
|
$
|
—
|
|
|
$
|
(1,816
|
)
|
|
$
|
—
|
|
|
Deferred payments
|
(8,800
|
)
|
|
—
|
|
|
—
|
|
|
(8,800
|
)
|
|
Contingent consideration payable
|
(13,840
|
)
|
|
—
|
|
|
—
|
|
|
(13,840
|
)
|
|
Total financial liabilities
|
$
|
(24,456
|
)
|
|
$
|
—
|
|
|
$
|
(1,816
|
)
|
|
$
|
(22,640
|
)
|
________________
(1) Excludes cash of
$446.7 million
held in operating accounts and time deposits of
$55.0 million
as of
March 31, 2019
.
Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis, as of the date indicated below, were presented on our Condensed Consolidated Balance Sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018 (In thousands)
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Assets
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
4,995
|
|
|
$
|
—
|
|
|
$
|
4,995
|
|
|
Money market funds and other
|
863,115
|
|
|
863,115
|
|
|
—
|
|
|
U.S. Government agency securities
|
7,675
|
|
|
—
|
|
|
7,675
|
|
|
U.S. Treasury securities
|
1,996
|
|
|
—
|
|
|
1,996
|
|
|
Marketable securities:
|
|
|
|
|
|
|
Corporate debt securities
|
735,408
|
|
|
—
|
|
|
735,408
|
|
|
Sovereign securities
|
17,142
|
|
|
—
|
|
|
17,142
|
|
|
U.S. Government agency securities
|
316,022
|
|
|
299,501
|
|
|
16,521
|
|
|
U.S. Treasury securities
|
405,654
|
|
|
364,574
|
|
|
41,080
|
|
|
Total cash equivalents and marketable securities
(1)
|
2,352,007
|
|
|
1,527,190
|
|
|
824,817
|
|
|
Other current assets:
|
|
|
|
|
|
|
Derivative assets
|
5,385
|
|
|
—
|
|
|
5,385
|
|
|
Other non-current assets:
|
|
|
|
|
|
|
Executive Deferred Savings Plan
|
197,213
|
|
|
143,580
|
|
|
53,633
|
|
|
Total financial assets
(1)
|
$
|
2,554,605
|
|
|
$
|
1,670,770
|
|
|
$
|
883,835
|
|
|
Liabilities
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
(6,828
|
)
|
|
$
|
—
|
|
|
$
|
(6,828
|
)
|
|
Total financial liabilities
|
$
|
(6,828
|
)
|
|
$
|
—
|
|
|
$
|
(6,828
|
)
|
________________
(1) Excludes cash of
$473.8 million
held in operating accounts and time deposits of
$54.5 million
as of
June 30, 2018
.
There were no transfers between Level 1 and Level 2 fair value measurements during the
nine
months ended
March 31, 2019
. We did not have any assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of
June 30, 2018
. See Note 8 “Debt” for disclosure of the fair value of our Senior Notes.
NOTE 4 – FINANCIAL STATEMENT COMPONENTS
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of
March 31, 2019
|
|
As of
June 30, 2018
|
|
Accounts receivable, net:
|
|
|
|
|
Accounts receivable, gross
|
$
|
970,291
|
|
|
$
|
663,317
|
|
|
Allowance for doubtful accounts
|
(12,270
|
)
|
|
(11,639
|
)
|
|
|
$
|
958,021
|
|
|
$
|
651,678
|
|
|
Inventories:
|
|
|
|
|
Customer service parts
|
$
|
337,720
|
|
|
$
|
253,639
|
|
|
Raw materials
|
466,133
|
|
|
331,065
|
|
|
Work-in-process
|
314,480
|
|
|
280,208
|
|
|
Finished goods
|
198,927
|
|
|
66,933
|
|
|
|
$
|
1,317,260
|
|
|
$
|
931,845
|
|
|
Other current assets:
|
|
|
|
|
Contract assets
|
$
|
91,518
|
|
|
$
|
—
|
|
|
Deferred costs of revenue
(1)
|
48,389
|
|
|
—
|
|
|
Prepaid expenses
|
76,507
|
|
|
47,088
|
|
|
Prepaid income and other taxes
|
34,479
|
|
|
23,452
|
|
|
Other current assets
|
19,186
|
|
|
14,619
|
|
|
|
$
|
270,079
|
|
|
$
|
85,159
|
|
|
Land, property and equipment, net:
|
|
|
|
|
Land
|
$
|
41,422
|
|
|
$
|
40,599
|
|
|
Buildings and leasehold improvements
|
389,270
|
|
|
335,647
|
|
|
Machinery and equipment
|
662,025
|
|
|
577,077
|
|
|
Office furniture and fixtures
|
28,475
|
|
|
22,171
|
|
|
Construction-in-process
|
27,766
|
|
|
9,180
|
|
|
|
1,148,958
|
|
|
984,674
|
|
|
Less: accumulated depreciation
|
(737,106
|
)
|
|
(698,368
|
)
|
|
|
$
|
411,852
|
|
|
$
|
286,306
|
|
|
Other non-current assets:
|
|
|
|
|
Executive Deferred Savings Plan
(2)
|
$
|
203,286
|
|
|
$
|
197,213
|
|
|
Other non-current assets
|
56,804
|
|
|
38,869
|
|
|
|
$
|
260,090
|
|
|
$
|
236,082
|
|
|
Other current liabilities:
|
|
|
|
|
Compensation and benefits
|
$
|
246,429
|
|
|
$
|
173,774
|
|
|
Executive Deferred Savings Plan
(2)
|
204,349
|
|
|
199,505
|
|
|
Other accrued expenses
|
176,677
|
|
|
123,869
|
|
|
Customer credits and advances
|
148,389
|
|
|
116,440
|
|
|
Interest payable
|
44,046
|
|
|
16,947
|
|
|
Warranty
|
6,740
|
|
|
42,258
|
|
|
Income taxes payable
|
7,117
|
|
|
23,287
|
|
|
|
$
|
833,747
|
|
|
$
|
696,080
|
|
|
Other non-current liabilities:
|
|
|
|
|
Income taxes payable
|
$
|
390,904
|
|
|
$
|
371,665
|
|
|
Pension liabilities
|
67,103
|
|
|
66,786
|
|
|
Other non-current liabilities
|
117,592
|
|
|
54,791
|
|
|
|
$
|
575,599
|
|
|
$
|
493,242
|
|
________________
|
|
|
|
(1)
|
Deferred costs of revenue were previously included under deferred system profit prior to the adoption of ASC 606.
|
|
|
|
|
(2)
|
We have a non-qualified deferred compensation plan (known as “Executive Deferred Savings Plan” or “EDSP”) under which certain employees and non-employee directors may defer a portion of their compensation. The expense (benefit) associated with changes in the EDSP liability included in selling, general and administrative expense was
$19.3 million
and
$0.9 million
during the
three months ended
March 31, 2019
and
2018
, respectively and was
$7.0 million
and
$14.7 million
during the
nine
months ended
March 31, 2019
and
2018
, respectively. The amount of net gains (losses) associated with changes in the EDSP assets included in selling, general and administrative expense was
$19.7 million
and
$0.5 million
during the
three months ended
March 31, 2019
and
2018
, respectively and was
$7.7 million
and
$14.4 million
the
nine
months ended
March 31, 2019
and
2018
, respectively. For additional details, refer to Note 1, “Description of Business and Summary of Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
.
|
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) (“OCI”) as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Currency Translation Adjustments
|
|
Unrealized Gains (Losses) on Available-for-Sale Securities
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Unrealized Gains (Losses) on Defined Benefit Plans
|
|
Total
|
|
Balance as of March 31, 2019
|
$
|
(43,630
|
)
|
|
$
|
(3,181
|
)
|
|
$
|
(6,266
|
)
|
|
$
|
(15,830
|
)
|
|
$
|
(68,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
$
|
(29,974
|
)
|
|
$
|
(11,032
|
)
|
|
$
|
1,932
|
|
|
$
|
(14,859
|
)
|
|
$
|
(53,933
|
)
|
The effects on net income (loss) of amounts reclassified from accumulated OCI to the Condensed Consolidated Statement of Operations for the indicated period were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location in the Condensed Consolidated
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
Accumulated OCI Components
|
|
Statements of Operations
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contracts
(1)
|
|
Revenues
|
|
$
|
655
|
|
|
$
|
(65
|
)
|
|
$
|
3,343
|
|
|
$
|
1,300
|
|
|
|
|
Costs of revenues
|
|
(17
|
)
|
|
570
|
|
|
(309
|
)
|
|
1,908
|
|
|
|
|
Interest expense
|
|
150
|
|
|
189
|
|
|
527
|
|
|
567
|
|
|
|
|
Other expense (income), net
|
|
158
|
|
|
—
|
|
|
158
|
|
|
—
|
|
|
|
|
Net gains (losses) reclassified from accumulated OCI
|
|
$
|
946
|
|
|
$
|
694
|
|
|
$
|
3,719
|
|
|
$
|
3,775
|
|
|
Unrealized gains (losses) on available-for-sale securities
|
|
Other expense (income), net
|
|
$
|
(313
|
)
|
|
$
|
2
|
|
|
$
|
(1,263
|
)
|
|
$
|
(61
|
)
|
__________________
|
|
|
|
(1)
|
Reflects the adoption of the new accounting guidance for hedge accounting in the second quarter of fiscal year 2019. For additional details, refer to Note 15, “Derivative Instruments and Hedging Activities.”
|
The amounts reclassified out of accumulated OCI related to our defined benefit pension plans, which were recognized as a component of net periodic cost for the
three
and
nine
months ended
March 31, 2019
were
$0.2 million
and
$0.6 million
, respectively. The amounts reclassified out of accumulated OCI related to our defined benefit pension plans, which were recognized as a component of net periodic cost for the
three
and
nine
months ended
March 31, 2018
were
$0.4 million
and
$1.2 million
, respectively. For additional details, refer to Note 11, “Employee Benefit Plans” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
.
NOTE 5 – MARKETABLE SECURITIES
The amortized cost and fair value of marketable securities as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019 (In thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Corporate debt securities
|
$
|
441,279
|
|
|
$
|
43
|
|
|
$
|
(2,076
|
)
|
|
$
|
439,246
|
|
|
Money market funds and other
|
592,141
|
|
|
—
|
|
|
—
|
|
|
592,141
|
|
|
Sovereign securities
|
11,037
|
|
|
—
|
|
|
(46
|
)
|
|
10,991
|
|
|
U.S. Government agency securities
|
166,867
|
|
|
1
|
|
|
(776
|
)
|
|
166,092
|
|
|
U.S. Treasury securities
|
188,283
|
|
|
—
|
|
|
(1,203
|
)
|
|
187,080
|
|
|
Subtotal
|
1,399,607
|
|
|
44
|
|
|
(4,101
|
)
|
|
1,395,550
|
|
|
Add: Time deposits
(1)
|
54,986
|
|
|
—
|
|
|
—
|
|
|
54,986
|
|
|
Less: Cash equivalents
|
645,431
|
|
|
—
|
|
|
—
|
|
|
645,431
|
|
|
Marketable securities
|
$
|
809,162
|
|
|
$
|
44
|
|
|
$
|
(4,101
|
)
|
|
$
|
805,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018 (In thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Corporate debt securities
|
$
|
747,763
|
|
|
$
|
148
|
|
|
$
|
(7,508
|
)
|
|
$
|
740,403
|
|
|
Money market funds and other
|
863,115
|
|
|
—
|
|
|
—
|
|
|
863,115
|
|
|
Sovereign securities
|
17,293
|
|
|
—
|
|
|
(151
|
)
|
|
17,142
|
|
|
U.S. Government agency securities
|
326,508
|
|
|
16
|
|
|
(2,827
|
)
|
|
323,697
|
|
|
U.S. Treasury securities
|
411,329
|
|
|
3
|
|
|
(3,682
|
)
|
|
407,650
|
|
|
Subtotal
|
2,366,008
|
|
|
167
|
|
|
(14,168
|
)
|
|
2,352,007
|
|
|
Add: Time deposits
(1)
|
54,537
|
|
|
—
|
|
|
—
|
|
|
54,537
|
|
|
Less: Cash equivalents
|
930,608
|
|
|
—
|
|
|
—
|
|
|
930,608
|
|
|
Marketable securities
|
$
|
1,489,937
|
|
|
$
|
167
|
|
|
$
|
(14,168
|
)
|
|
$
|
1,475,936
|
|
________________
(1) Time deposits excluded from fair value measurements.
Our investment portfolio consists of both corporate and government securities that have a maximum maturity of
three years
. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. Most of our unrealized losses are due to changes in market interest rates and bond yields. We believe that we have the ability to realize the full value of all of these investments upon maturity. As of
March 31, 2019
, we had 296 investments in an unrealized loss position. The following table summarizes the fair value and gross unrealized losses of our investments that were in an unrealized loss position as of the date indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019 (In thousands)
|
Fair Value
|
|
Gross
Unrealized
Losses
(1)
|
|
Corporate debt securities
|
$
|
397,009
|
|
|
$
|
(2,076
|
)
|
|
U.S. Treasury securities
|
187,080
|
|
|
(1,203
|
)
|
|
U.S. Government agency securities
|
163,445
|
|
|
(776
|
)
|
|
Sovereign securities
|
10,991
|
|
|
(46
|
)
|
|
Total
|
$
|
758,525
|
|
|
$
|
(4,101
|
)
|
__________________
(1) As of
March 31, 2019
, we had investments in a continuous loss position for
12
months or more with a gross amount
$4.1 million
.
The contractual maturities of securities classified as available-for-sale, regardless of their classification on our Condensed Consolidated Balance Sheet, as of the date indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019 (In thousands)
|
Amortized Cost
|
|
Fair Value
|
|
Due within one year
|
$
|
606,043
|
|
|
$
|
603,536
|
|
|
Due after one year through three years
|
203,119
|
|
|
201,569
|
|
|
|
$
|
809,162
|
|
|
$
|
805,105
|
|
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Realized gains and losses on available-for-sale securities for the
three
and
nine
months ended
March 31, 2019
and
2018
were immaterial.
NOTE 6 - BUSINESS COMBINATIONS
Orbotech Acquisition
On February 20, 2019, we completed the acquisition of
100%
of the outstanding shares of Orbotech for aggregate purchase consideration of approximately
$3.26 billion
which was paid in part by cash of
$1.90 billion
, in part by KLA common shares with a fair value of
$1.32 billion
and the balance by the assumption of stock options and RSUs. Orbotech is a global supplier of yield-enhancing and process-enabling solutions for the manufacture of electronics products. KLA acquired Orbotech to extend and enhance its portfolio of products to address market opportunities in the printed circuit board, flat panel display, advanced packaging and semiconductor manufacturing areas.
Preliminary Purchase Price Allocation
The aggregate purchase consideration has been preliminarily allocated as follows (in thousands):
|
|
|
|
|
|
|
|
Purchase Price
|
|
|
Cash for outstanding Orbotech shares
(1)
|
$
|
1,901,948
|
|
|
Fair value of KLA-Tencor common stock issued for outstanding Orbotech shares
(2)
|
1,324,657
|
|
|
Cash for Orbotech equity awards
(3)
|
9,543
|
|
|
Fair value of KLA-Tencor common stock issued to settle Orbotech equity awards
(4)
|
6,129
|
|
|
Stock options and RSUs assumed
(5)
|
13,281
|
|
|
Total purchase consideration
|
3,255,558
|
|
|
Less: cash acquired
|
(215,640
|
)
|
|
Total purchase consideration, net of cash acquired
|
$
|
3,039,918
|
|
|
|
|
|
Allocation
|
|
|
Total current assets
|
$
|
694,143
|
|
|
Property, plant and equipment
|
94,290
|
|
|
Goodwill
|
1,773,544
|
|
|
Intangible assets
|
1,629,070
|
|
|
Other non-current assets
|
77,780
|
|
|
Total current liabilities
(6)
|
(301,090
|
)
|
|
Deferred tax liability
|
(825,341
|
)
|
|
Total non-current liabilities
(6)
|
(65,896
|
)
|
|
Non-controlling interest
|
(36,582
|
)
|
|
|
$
|
3,039,918
|
|
________________
|
|
|
|
(1)
|
Represents the total cash paid to settle
48.9 million
outstanding Orbotech Shares as of February 20, 2019 at
$38.86
per Orbotech share.
|
|
|
|
|
(2)
|
Represents the fair value of
12.2 million
shares of our common stock issued to settle
48.9 million
outstanding Orbotech shares. KLA issued
0.25
shares for each Orbotech share. The fair value of KLA’s common stock was $
108.26
per share on the Acquisition Date.
|
|
|
|
|
(3)
|
Represents primarily cash consideration for the settlement of the vested stock options and restricted stock units for which services were rendered by the employees of Orbotech prior to the closing, and a small portion for the settlement of fractional shares.
|
|
|
|
|
(4)
|
Represents the fair value of share of
56,614
shares of KLA common stock issued to settle the vested Orbotech stock options. The fair value of KLA’s common stock was
$108.26
per share on the Acquisition Date.
|
|
|
|
|
(5)
|
Represents the fair value of the assumed stock options and RSUs to the extent those related to services provided by the employee of Orbotech prior to closing. Also refer to Note 9, “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” for additional information about assumed stock options and RSUs.
|
|
|
|
|
(6)
|
On December 24, 2018, Orbotech, as part of its strategy to invest in the high growth area of the software business within the Printed Circuit Boards (“PCB”) industry, acquired the remaining
50%
shares of Frontline, which was prior to that accounted as an equity investee, from Mentor Graphics Development Services (Israel) Ltd. Orbotech acquired all of the joint venture interests it did not previously own for
$85.0 million
in cash on hand and agreed to pay an additional
$10.0 million
in cash over
four years
plus a cash earn-out of not less than
$5.0 million
and up to
$20.0 million
. The earn out amounts are based on revenues from a Frontline product currently under development. As of February 20, 2019, the estimated fair market values of the
four
-year cash payment and the earn-out are
$8.8 million
and
$7.1 million
, respectively. As of February 20, 2019, these amounts have been included in current and non-current liabilities at
$4.3 million
and
$11.6 million
respectively.
|
KLA allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates
of
their estimated fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management at the time of the Orbotech Acquisition and are subject to change during the measurement period which is not expected to exceed one year. The primary tasks that are required to be completed include validation of business level forecasts, jurisdictional forecasts, customer attrition rates and synergies expected to be derived from the acquisition of Orbotech, including any related tax impacts. Any adjustments to our preliminary purchase price allocation identified during the measurement period will be recognized in the period in which the adjustments are determined.
The operating results of Orbotech have been included in our consolidated financial statements for the three and nine months ended
March 31, 2019
from the Acquisition Date. The goodwill was primarily attributable to the assembled workforce of Orbotech, planned growth in new markets and synergies expected to be achieved from the combined operations of KLA-Tencor and Orbotech.
None
of the goodwill is deductible for income tax purposes. Goodwill arising from the Orbotech Acquisition has been allocated to Orbotech which KLA is treating as a separate component as of March 31, 2019. As disclosed in Note 17 "Segment Reporting and Geographic Informaion", KLA is still in the process of completing the analysis of its segment reporting structure and upon completion of that analysis, goodwill associated with the Orbotech acquisition will be assigned to the appropriate reporting units.
Intangible Assets
The estimated fair value and weighted average useful life of the Orbotech intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Fair Value
|
|
Weighted Average Useful Lives
|
|
Existing technology
(1)
|
$
|
1,023,000
|
|
|
8
|
|
Customer-related assets
(2)
|
299,000
|
|
|
8
|
|
Backlog
(3)
|
29,000
|
|
|
1
|
|
Trade name
(4)
|
92,500
|
|
|
7
|
|
Off market leases
(5)
|
2,070
|
|
2,070
|
|
7
|
|
Total identified finite-lived intangible assets
|
1,445,570
|
|
|
|
|
In-process research and development
(6)
|
183,500
|
|
|
N/A
|
|
Total identified intangible assets
|
$
|
1,629,070
|
|
|
|
________________
|
|
|
|
(1)
|
Existing technology was identified from the products of Orbotech and its fair value was determined using the Relief-from-Royalty Method under the income approach, which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset. The discount rate used was determined at the time of measurement based on an analysis of the implied internal rate of return of the transaction, weighted average cost of capital and weighted average return on assets. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.
|
|
|
|
|
(2)
|
Customer contracts and related relationships represent the fair value of the existing relationships with the Orbotech customers and its fair value was determined using the Multi-Period Excess Earning Method which involves isolating the net earnings attributable to the asset being measured based on present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. The economic useful life was determined based on historical customer turnover rates.
|
|
|
|
|
(3)
|
Backlog primarily relates to the dollar value of purchase arrangements with customers, effective, as of a given point in time, that are based on mutually agreed terms which, in some cases, may still be subject to completion of written documentation and may be changed or cancelled by the customer, often without penalty. Orbotech’s backlog consists of these arrangements with assigned shipment dates expected, in most cases, within three to twelve months. The fair value was determined using the Multi-Period Excess Earning Method. The economic useful life is based on the time to fulfill the outstanding order backlog obligation.
|
|
|
|
|
(4)
|
Trade name primarily relates to the “Orbotech” trade name. The fair value was determined by applying the relief-from-royalty method under the income approach. The economic useful life was determined based on the expected life of the trade name.
|
|
|
|
|
(5)
|
The favorable / unfavorable components of the acquired leases were determined using the Income Approach which involves present valuing the difference in future cash flows between the contracted lease payments and the rent payable to a market participant over the lease terms. The economic useful life is based on the remaining lease term.
|
|
|
|
|
(6)
|
The fair value of in-process research and development (“IPR&D”) was determined using the relief-from-royalty method under the income approach, which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset.
|
We believe the amounts of purchased intangible assets recorded above represent the fair values of and approximate the amounts a market participant would pay for, these intangible assets as of the acquisition date.
Our statements of operations for the three and nine months ended March 31, 2019 included revenue of
$161.3 million
and a net loss of
$28.7 million
from Orbotech.
Other Fiscal 2019 Acquisitions
During the three months ended
March 31, 2019
we acquired
three
privately-held companies primarily to expand our products and services offerings for an aggregate purchase price of
$118.0 million
, including the fair value of the promise to pay additional consideration of up to
$13.0 million
contingent on the achievement of certain milestones.
As of March 31, 2019
, the estimated fair value of the additional consideration was
$4.8 million
, which is classified as a current liability on the condensed consolidated balance sheet.
During the three months ended September 30, 2018 we acquired
two
privately-held companies for an aggregate purchase price of
$15.4 million
, including the fair value of the promise to pay total additional consideration of up to
$6.0 million
contingent on the achievement of certain milestones.
As of March 31, 2019
, the estimated fair value of the additional consideration was
$1.9 million
, which is classified as a current liability on the condensed consolidated balance sheet.
None of these acquisitions were individually material to our consolidated financial statements.
The aggregate purchase price of the other fiscal 2019 acquisitions was allocated on a preliminary basis as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
Fair Value
|
|
Net tangible assets (including Cash and cash equivalents of $2.6 million)
|
$
|
13,468
|
|
|
Identifiable intangible assets
|
76,630
|
|
|
Goodwill
|
43,357
|
|
|
Total
|
$
|
133,455
|
|
A portion of the goodwill is deductible for income tax purposes. Our statements of operations for the three and nine months ended March 31, 2019 included revenues of
$2.3 million
and
$3.1 million
, respectively, and net losses of
$2.8 million
and
$3.5 million
, respectively, from these privately-held companies.
KLA, in the aggregate for the Orbotech and other fiscal 2019 acquisitions, incurred approximately
$37.2 million
of acquisition-related costs, which are primarily included within selling, general and administrative expenses in our condensed consolidated statements of operations.
Fiscal 2018 Acquisition
In the fiscal year ended
June 30, 2018
, we acquired a product line from Keysight Technologies, Inc., a related party, for a total purchase consideration of
$12.1 million
, of which
$5.2 million
was allocated to goodwill based on the fair value at the acquisition date. Goodwill recognized was deductible for income tax purposes. For additional details, refer to Note 5 “Business Combinations,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
.
Supplemental Unaudited Pro Forma Information:
The following unaudited pro forma financial information summarizes the combined results of operations for KLA-Tencor, Orbotech, and the three acquisitions completed in the third quarter of fiscal 2019 as if the companies were combined as of the beginning of fiscal year 2018. The unaudited pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, the purchase accounting effect on inventory acquired, the purchase accounting effect on deferred revenue, interest expense and amortization of debt issuance costs associated with the Senior Notes financing, and transaction costs.
The table below reflects the impact of material and nonrecurring adjustments to the unaudited pro forma results for the three and nine months ended March 31, 2019 and 2018 that are directly attributable to the acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
March 31,
|
|
March 31,
|
|
Non-recurring Adjustments
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Decrease/ (increase) to revenue as a result of deferred revenue fair value adjustment
|
$
|
—
|
|
|
$
|
(536
|
)
|
|
$
|
—
|
|
|
$
|
5,625
|
|
|
(Decrease) / increase to expense as a result of inventory fair value adjustment
|
$
|
78
|
|
|
$
|
468
|
|
|
$
|
1,029
|
|
|
$
|
85,904
|
|
|
(Decrease) / increase to expense as a result of transaction costs
|
$
|
(53,342
|
)
|
|
$
|
(8,615
|
)
|
|
$
|
(61,378
|
)
|
|
$
|
65,535
|
|
|
(Decrease) / increase to expense as a result of compensation costs
|
$
|
1,724
|
|
|
$
|
3,009
|
|
|
$
|
7,918
|
|
|
$
|
39,820
|
|
The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisitions actually occurred at the beginning of fiscal year 2018 or of the results of our future operations of the combined businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
Pro Forma
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
March 31,
|
|
March 31,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenues
|
$
|
1,160,678
|
|
|
$
|
1,271,326
|
|
|
$
|
4,165,268
|
|
|
$
|
3,730,272
|
|
|
Net income attributable to KLA-Tencor
|
$
|
192,577
|
|
|
$
|
293,593
|
|
|
$
|
1,033,653
|
|
|
$
|
260,537
|
|
We have not included pro forma results of operations for the acquisition of privately-held companies completed in the first quarter of fiscal 2019 herein as they were not material to us on either an individual or in aggregate. We included the results of operations of each acquisition in our condensed consolidated statements of operations from the date of each acquisition.
NOTE 7 – GOODWILL AND PURCHASED INTANGIBLE ASSETS
Goodwill
We currently have
four
reporting units: Wafer Inspection, Patterning, Global Service and Support (“GSS”), and Others. The assignment of goodwill associated with Orbotech Acquisition to the reporting units has not yet been completed and therefore shown as a separate component. Refer to Note 17 “Segment Reporting and Geographic Information” for additional details. The following table presents goodwill carrying value and the movements during the
nine
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Wafer Inspection
|
|
Patterning
|
|
GSS
|
|
Others
|
|
Orbotech
|
|
Total
|
|
Balance as of June 30, 2018
|
|
$
|
281,005
|
|
|
$
|
53,255
|
|
|
$
|
8,039
|
|
|
$
|
12,399
|
|
|
$
|
—
|
|
|
$
|
354,698
|
|
|
Acquired goodwill
|
|
—
|
|
|
24,863
|
|
|
17,318
|
|
|
1,176
|
|
|
1,773,544
|
|
|
1,816,901
|
|
|
Foreign currency and other adjustments
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,317
|
|
|
1,303
|
|
|
Balance as of March 31, 2019
|
|
$
|
280,991
|
|
|
$
|
78,118
|
|
|
$
|
25,357
|
|
|
$
|
13,575
|
|
|
$
|
1,774,861
|
|
|
$
|
2,172,902
|
|
The change in goodwill during the
nine
months ended
March 31, 2019
resulted primarily from
$1.77 billion
related to the Orbotech Acquisition and
$43.4 million
related to the acquisition of the privately-held companies during the period. For additional details, refer to Note 6 “Business Combinations”.
We performed a qualitative assessment of the goodwill for our wafer inspection, patterning, GSS, and others reporting units during the three months ended March 31, 2019. Based on this assessment we concluded that it was more likely than not that the fair value of each of the reporting units exceeded its carrying amount. As a result of our determination based on our qualitative assessment, it was not necessary to perform the quantitative goodwill impairment test at this time. In assessing the qualitative factors, we considered the impact of key factors, including changes in the industry and competitive environment, market capitalization, stock price, earnings multiples, budgeted-to-actual revenue performance from prior year, gross margin and cash flows from operating activities. In addition, for goodwill associated with the Orbotech acquisition, no impairment indicators were identified as part of our goodwill impairment process.
Based on our assessment, goodwill in the reporting units was not impaired as of
March 31, 2019
or
June 30, 2018
.
Purchased Intangible Assets
The components of purchased intangible assets as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
As of
March 31, 2019
|
|
As of
June 30, 2018
|
|
Category
|
Range of
Useful Lives
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization,
Impairment, and Other
|
|
Net
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
and
Impairment
|
|
Net
Amount
|
|
Existing technology
|
4-8 years
|
|
$
|
1,238,037
|
|
|
$
|
161,827
|
|
|
$
|
1,076,210
|
|
|
$
|
160,859
|
|
|
$
|
144,202
|
|
|
$
|
16,657
|
|
|
Trade name/Trademark
|
5-7 years
|
|
115,573
|
|
|
21,638
|
|
|
93,935
|
|
|
20,993
|
|
|
20,060
|
|
|
933
|
|
|
Customer relationships
|
4-9 years
|
|
370,665
|
|
|
59,740
|
|
|
310,925
|
|
|
56,680
|
|
|
55,136
|
|
|
1,544
|
|
|
Backlog and other
|
<1-8.5 years
|
|
35,437
|
|
|
5,267
|
|
|
30,170
|
|
|
660
|
|
|
461
|
|
|
199
|
|
|
Intangible assets subject to amortization
|
|
|
1,759,712
|
|
|
248,472
|
|
|
1,511,240
|
|
|
239,192
|
|
|
219,859
|
|
|
19,333
|
|
|
In-process research and development
|
|
|
183,500
|
|
|
427
|
|
|
183,073
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
|
$
|
1,943,212
|
|
|
$
|
248,899
|
|
|
$
|
1,694,313
|
|
|
$
|
239,192
|
|
|
$
|
219,859
|
|
|
$
|
19,333
|
|
Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The change in purchased intangible assets gross carrying amount resulted primarily from the Orbotech Acquisition and the acquisition of the privately-held companies. For additional details, refer to Note 6 “Business Combinations.”
Amortization expense for purchased intangible assets for the periods indicated below was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
March 31,
|
|
March 31,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amortization expense- Cost of revenues
|
$
|
15,770
|
|
|
$
|
1,122
|
|
|
$
|
17,628
|
|
|
$
|
3,366
|
|
|
Amortization expense- Selling, general and administrative
|
10,086
|
|
|
65
|
|
|
10,973
|
|
|
220
|
|
|
Amortization expense- Research and development
|
12
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
Total
|
$
|
25,868
|
|
|
$
|
1,187
|
|
|
$
|
28,613
|
|
|
$
|
3,586
|
|
Based on the purchased intangible assets gross carrying amount recorded as of
March 31, 2019
, the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:
|
|
|
|
|
|
|
|
Fiscal year ending June 30:
|
Amortization
(In thousands)
|
|
2019 (remaining 3 months)
|
$
|
59,114
|
|
|
2020
|
216,956
|
|
|
2021
|
196,915
|
|
|
2022
|
196,915
|
|
|
2023
|
195,691
|
|
|
Thereafter
|
645,649
|
|
|
Total
|
$
|
1,511,240
|
|
NOTE 8 – DEBT
The following table summarizes our debt as of
March 31, 2019
and
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
As of June 30, 2018
|
|
|
Amount
(In thousands)
|
|
Effective
Interest Rate
|
|
Amount
(In thousands)
|
|
Effective
Interest Rate
|
|
Fixed-rate 3.375% Senior Notes due on November 1, 2019
|
$
|
250,000
|
|
|
3.377
|
%
|
|
$
|
250,000
|
|
|
3.377
|
%
|
|
Fixed-rate 4.125% Senior Notes due on November 1, 2021
|
500,000
|
|
|
4.128
|
%
|
|
500,000
|
|
|
4.128
|
%
|
|
Fixed-rate 4.650% Senior Notes due on November 1, 2024
|
1,250,000
|
|
|
4.682
|
%
|
|
1,250,000
|
|
|
4.682
|
%
|
|
Fixed-rate 5.650% Senior Notes due on November 1, 2034
|
250,000
|
|
|
5.670
|
%
|
|
250,000
|
|
|
5.670
|
%
|
|
Fixed-rate 4.1000% Senior Notes due on March 15, 2029
|
800,000
|
|
|
4.159
|
%
|
|
—
|
|
|
—
|
%
|
|
Fixed-rate 5.000% Senior Notes due on March 15, 2049
|
400,000
|
|
|
5.047
|
%
|
|
—
|
|
|
—
|
%
|
|
Total
|
3,450,000
|
|
|
|
|
2,250,000
|
|
|
|
|
Unamortized discount
|
(8,948
|
)
|
|
|
|
(2,523
|
)
|
|
|
|
Unamortized debt issuance costs
|
(18,406
|
)
|
|
|
|
(10,075
|
)
|
|
|
|
Total
|
$
|
3,422,646
|
|
|
|
|
$
|
2,237,402
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
249,997
|
|
|
|
|
$
|
—
|
|
|
|
|
Long-term debt
|
3,172,649
|
|
|
|
|
2,237,402
|
|
|
|
|
Total
|
$
|
3,422,646
|
|
|
|
|
$
|
2,237,402
|
|
|
|
As of
March 31, 2019
, future principal payments for the long-term debt are
$250.0 million
in fiscal year
2020
;
$500.0 million
in fiscal year
2022
; and
$2.70 billion
after fiscal year
2023
.
Senior Notes:
In March 2019 and November 2014, we issued
$1.20 billion
and
$2.50 billion
, respectively (each, a “2019 Senior Notes”, a “2014 Senior Notes”, and collectively the “Senior Notes”), aggregate principal amount of senior, unsecured long-term notes.
The interest rate specified for each series of the 2014 Senior Notes will be subject to adjustments from time to time if Moody’s Investor Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”) or, under certain circumstances, a substitute rating agency selected by us as a replacement for Moody’s or S&P, as the case may be (a “Substitute Rating Agency”), downgrades (or subsequently upgrades) its rating assigned to the respective series of the 2014 Senior Notes such that the adjusted rating is below investment grade. For additional details, refer to Note 7 “Debt” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
. Unlike the 2014 Senior Notes, the interest rate for each series of the 2019 Senior Notes will not be subject to such adjustments. During the
three
months ended
June 30, 2018
, we entered into a series of forward contracts (the “2018 Rate Lock Agreements”) to lock the benchmark interest rate with notional amount of
$500.0 million
in aggregate. In October 2014, we entered into a series of forward contracts to lock the 10-year treasury rate (“benchmark rate”) on a portion of the 2014 Senior Notes with a notional amount of
$1.00 billion
in aggregate. For additional details on the forward contracts, refer to Note 15, “Derivative Instruments and Hedging Activities” of this report.
The original discounts on the 2019 Senior Notes and the 2014 Senior Notes amounted to
$6.7 million
and
$4.0 million
, respectively and are being amortized over the life of the debt. Interest is payable
semi-annually
on May 1 and November 1 of each year for the 2014 Senior Notes and semi-annually on March 15 and September 15 of each year for the 2019 Senior Notes. The indenture for the Senior Notes (the “Indenture”) includes covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are not restricted.
In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two of Moody’s, S&P and Fitch Inc., unless we have exercised our rights to redeem the Senior Notes of such series, we will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s Senior Notes of that series pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, we will be required to offer payment in cash equal to
101%
of the aggregate principal amount of Senior Notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, up to, but not including, the date of repurchase.
Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as of
March 31, 2019
and
June 30, 2018
was approximately
$3.61 billion
and
$2.33 billion
, respectively. While the Senior Notes are recorded at cost, the fair value of the long-term debt was determined based on quoted prices in markets that are not active; accordingly, the long-term debt is categorized as Level 2 for purposes of the fair value measurement hierarchy.
As of
March 31, 2019
, we were in compliance with all of our covenants under the Indenture associated with the Senior Notes.
Revolving Credit Facility:
In November 2017, we entered into a Credit Agreement (the “Credit Agreement”) providing for a
$750.0 million
five
-year unsecured Revolving Credit Facility (the “Revolving Credit Facility”), which replaced our prior Credit Facility. Subject to the terms of the Credit Agreement, the Revolving Credit Facility may be increased in an amount up to
$250.0
million in the aggregate. In November 2018, we entered into an Incremental Facility, Extension and Amendment Agreement (the “Amendment”), which amends the Credit Agreement to (a) extend the Maturity Date (the “Maturity Date”) from
November 30, 2022
to
November 30, 2023
, (b) increase the total commitment by
$250.0 million
and (c) effect certain other amendments to the Credit Agreement as set forth in the Amendment. After giving effect to the Amendment, the total commitments under the Credit Agreement are
$1.00 billion
. During the third quarter of the fiscal year ending June 30, 2019, we made borrowings of
$900.0 million
from the Revolving Credit Facility, which were paid in full in the same quarter. As of
March 31, 2019
, we had
no
outstanding borrowings under the Revolving Credit Facility.
We may borrow, repay and reborrow funds under the Revolving Credit Facility until the Maturity Date, at which time such Revolving Credit Facility will terminate, and all outstanding loans under such facility, together with all accrued and unpaid interest, must be repaid. We may prepay outstanding borrowings under the Revolving Credit Facility at any time without a prepayment penalty.
Borrowings under the Revolving Credit Facility will bear interest, at our option, at either: (i) the Alternative Base Rate (“ABR”) plus a spread, which ranges from
0 bps
to
75 bps
, or (ii) the London Interbank Offered Rate (“LIBOR”) plus a spread, which ranges from
100 bps
to
175 bps
. The spreads under ABR and LIBOR are subject to adjustment in conjunction with credit rating downgrades or upgrades. We are also obligated to pay an annual commitment fee on the daily undrawn balance of the Revolving Credit Facility, which ranges from
10 bps
to
25 bps
, subject to an adjustment in conjunction with changes to our credit rating. As of
March 31, 2019
, we pay an annual commitment fee of
12.5 bps
on the daily undrawn balance of the Revolving Credit Facility.
The Revolving Credit Facility requires us to maintain an interest expense coverage ratio as described in the Credit Agreement, on a quarterly basis, covering the trailing
four
consecutive fiscal quarters of no less than
3.50
to 1.00. In addition, we are required to maintain the maximum leverage ratio as described in the Credit Agreement, on a quarterly basis of
3.00
to 1.00, covering the trailing
four
consecutive fiscal quarters for each fiscal quarter, which can be increased to
4.00
to 1.00 for a period of time in connection with a material acquisition or a series of material acquisitions. As of
March 31, 2019
, we elected to increase the maximum allowed leverage ratio to
4.00
to 1.00 following the Orbotech Acquisition.
We were in compliance with all covenants under the Credit Agreement as of
March 31, 2019
.
NOTE 9 – EQUITY, LONG-TERM INCENTIVE COMPENSATION PLANS AND NON-CONTROLLING INTEREST
Equity Incentive Program
As of
March 31, 2019
, we were able to issue new equity incentive awards, such as restricted stock units (“RSUs”) and stock options, to our employees, consultants and members of our Board of Directors under our 2004 Equity Incentive Plan (the “2004 Plan”) with
11.8 million
shares available for issuance.
For details of the 2004 Plan refer to Note 8 “Equity and Long-Term Incentive Compensation Plans,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
.
Assumed Equity Plans
As of the Acquisition Date we assumed outstanding equity incentive awards under the following Orbotech equity incentive plans: (i) Equity Remuneration Plan for Key Employees of Orbotech Ltd. and its Affiliates and Subsidiaries (as Amended and Restated in 2005), (ii) 2010 Equity-Based Incentive Plan, and (iii) 2015 Equity-Based Incentive Plan (each, an “Assumed Equity Plan” and collectively the “Assumed Equity Plans”). The awards under the Assumed Equity Plans, previously issued in the form of stock options and restricted share units (“RSUs”), were generally settled as follows:
|
|
|
|
a)
|
Each award of Orbotech’s stock options and RSUs that was outstanding and vested immediately prior to the Acquisition Date (collectively the “Vested Equity Awards”) was canceled and terminated and converted into the right to receive the purchase consideration in respect of such Vested Equity Awards as of the Acquisition Date, and in the case of stock options, less the exercise price.
|
|
|
|
|
b)
|
Each award of Orbotech’s stock options and RSUs that was outstanding and unvested immediately prior to the Acquisition Date was assumed by us (each, an “Assumed Option” and “Assumed RSU”, and collectively the “Assumed Equity Awards”) and converted to stock options and RSUs exercisable for the number of shares of our common stock equal to the product of (i) the number of Orbotech shares underlying such Assumed Equity Awards as of immediately prior to the Acquisition Date multiplied by (ii) the exchange ratio defined in the Acquisition Agreement. The Assumed Equity Awards generally retain all of the rights, terms and conditions of the respective plans under which they were originally granted, including the same service-based vesting schedule, applicable thereto.
|
As of the Acquisition Date, the estimated fair value of the Assumed Equity Awards was
$55.0 million
, of which
$13.3 million
was recognized as goodwill and the balance of
$41.7 million
will be recognized as stock-based compensation expense over the remainder term of the Assumed Equity Awards. The fair value of the Assumed Equity Awards for services rendered through the Acquisition Date was recognized as a component of the merger consideration, with the remaining fair value related to the post-combination services to be recorded as stock-based compensation over the remaining vesting period.
A total of
14,558
and
518,971
shares of our common stock underly the Assumed Options and RSUs and have an estimated weighted average fair value at the Acquisition Date of
$53.27
and
$104.49
per share, respectively. As of
March 31, 2019
, there were
14,558
and
482,317
shares of our common stock underlying the outstanding Assumed Options and RSUs, respectively, under the Assumed Equity Plans. The weighted-average remaining contractual terms, the aggregate intrinsic values, and the weighted average exercise price for the stock options outstanding under the Assumed Equity Plans as of
March 31, 2019
were
4.67 years
,
$1.0 million
, and
$54.00
per share, respectively. No Assumed Options were exercised during the three months ended
March 31, 2019
.
Equity Incentive Plans - General Information
The following table summarizes the combined activity under our equity incentive plans:
|
|
|
|
|
|
|
(In thousands)
|
Available
For Grant
(1) (5)
|
|
Balance as of June 30, 2018
|
3,680
|
|
|
Plan shares increased
|
12,000
|
|
|
Restricted stock units granted
(2)(3)
|
(2,209
|
)
|
|
Restricted stock units granted adjustment
(4)
|
5
|
|
|
Restricted stock units canceled
|
20
|
|
|
Plan shares expired (1998 Director Plan)
|
(1,660
|
)
|
|
Balance as of March 31, 2019
|
11,836
|
|
__________________
|
|
|
|
(1)
|
The number of RSUs reflects the application of the award multiplier (
1.8
x or
2.0
x depending on the grant date of the applicable award).
|
|
|
|
|
(2)
|
Includes RSUs granted to senior management during the
nine
months ended
March 31, 2019
with performance-based vesting criteria (in addition to service-based vesting criteria for any of such RSUs that are deemed to have been earned) (“performance-based RSUs”). As of
March 31, 2019
, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied. Therefore, this line item includes all such performance-based RSUs granted during the
nine
months ended
March 31, 2019
, reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (
0.7 million
shares for the
nine
months ended
March 31, 2019
reflects the application of the multiplier described above).
|
|
|
|
|
(3)
|
Includes RSUs granted to executive management during the three months ended
March 31, 2019
with both a market condition and a service condition (“market-based RSUs”). Under the award agreements, the vesting of the market-based RSUs is contingent on achieving total stockholder return (including stock price appreciation and cash dividends) objectives on a per share basis of equal to or greater than
150%
,
175%
and
200%
multiplied by the measurement price of
$116.39
during the
five
-year period ending March 20, 2024. The awards are split into three tranches and, to the extent that total stockholder return targets have been met, one-third of the maximum number of shares available under these awards will vest on each of the third, fourth, and fifth anniversaries of the grant date. This line item includes all such market-based RSUs granted during the
three months ended
March 31, 2019
reported at the maximum possible number of shares that may ultimately be issuable if all applicable market-based criteria are met at their maximum levels and all applicable service-based criteria are fully satisfied (
0.5 million
shares for the nine months ended
March 31, 2019
reflects the application of the multiplier described above).
|
|
|
|
|
(4)
|
Represents the portion of RSUs granted with performance-based vesting criteria and reported at the actual number of shares issued upon achievement of the performance vesting criteria during the
nine
months ended
March 31, 2019
.
|
|
|
|
|
(5)
|
No additional stock options, RSUs or other awards will be granted under the Assumed Equity Plans.
|
The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For RSUs granted without “dividend equivalent” rights, fair value is calculated using the closing price of our common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on those RSUs. The fair value for RSUs granted with “dividend equivalent” rights is determined using the closing price of our common stock on the grant date. The fair value for market-based RSUs is estimated on the grant date using a Monte Carlo simulation model with the following assumptions: expected volatility of
28.14%
, based on a combination of implied volatility from traded options on our common stock and the historical volatility of our common stock; dividend yield of
2.47%
, based on our current expectations about our anticipated dividend policy; risk-free interest rate of
2.38%
, based on the implied yield available on U.S. Treasury zero-coupon issues with terms equal to the contractual terms of each tranche; and an expected term which takes into consideration the vesting term and the contractual term of the market-based award. The awards are amortized over service periods of
3
,
4
, and
5
years, which is the longer of the explicit service period or the period in which the market target is expected to be met. The fair value for purchase rights under our Employee Stock Purchase Plan is determined using a Black-Scholes model.
The following table shows stock-based compensation expense for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
(In thousands)
|
2019
(1)
|
|
2018
|
|
2019
|
|
2018
|
|
Stock-based compensation expense by:
|
|
|
|
|
|
|
|
|
Costs of revenues
|
$
|
3,105
|
|
|
$
|
2,386
|
|
|
$
|
6,759
|
|
|
$
|
5,458
|
|
|
Research and development
|
4,986
|
|
|
3,185
|
|
|
9,988
|
|
|
7,631
|
|
|
Selling, general and administrative
|
26,102
|
|
|
10,639
|
|
|
49,279
|
|
|
30,891
|
|
|
Total stock-based compensation expense
|
$
|
34,193
|
|
|
$
|
16,210
|
|
|
$
|
66,026
|
|
|
$
|
43,980
|
|
__________________
|
|
|
|
(1)
|
Includes
$10.9 million
of stock-based compensation expense acceleration for certain equity awards for Orbotech employees.
|
The following table shows stock-based compensation capitalized as inventory as of the dates indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of
March 31, 2019
|
|
As of
June 30, 2018
|
|
Inventory
|
$
|
4,943
|
|
|
$
|
4,580
|
|
Restricted Stock Units
The following table shows the activity and weighted-average grant date fair value for RSUs during the
nine
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(1)
(In thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Outstanding restricted stock units as of June 30, 2018
(2)
|
2,014
|
|
|
$
|
76.50
|
|
|
Granted
(2)
|
1,104
|
|
|
$
|
103.59
|
|
|
Granted adjustments
(3)
|
(2
|
)
|
|
$
|
50.88
|
|
|
Assumed upon Orbotech Acquisition
(4)
|
519
|
|
|
$
|
104.49
|
|
|
Vested and released
|
(409
|
)
|
|
$
|
68.73
|
|
|
Withheld for taxes
|
(285
|
)
|
|
$
|
68.73
|
|
|
Forfeited
|
(10
|
)
|
|
$
|
81.55
|
|
|
Outstanding restricted stock units as of March 31, 2019
(2)
|
2,931
|
|
|
$
|
93.46
|
|
__________________
|
|
|
|
(1)
|
Share numbers reflect actual shares subject to awarded RSUs. Under the terms of the 2004 Plan, the number of shares subject to each award reflected in this number is multiplied by either
1.8
x or
2.0
x (depending on the grant date of the award) to calculate the impact of the award on the share reserve under the 2004 Plan.
|
|
|
|
|
(2)
|
Includes performance-based and market-based RSUs. As of
March 31, 2019
, it had not yet been determined the extent to which (if at all) the performance-based or market-based vesting criteria had been satisfied. Therefore, this line item includes all such RSUs reported at the maximum possible number of shares (
42 thousand
shares for the fiscal year ended June 30, 2017,
0.2 million
shares for the fiscal year ended June 30, 2018 and
0.6 million
shares for the
nine
months ended
March 31, 2019
) that may ultimately be issuable if all applicable performance-based and market-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.
|
|
|
|
|
(3)
|
Represents the portion of RSUs granted with performance-based vesting criteria and reported at the actual number of shares issued upon achievement of the performance vesting criteria during
nine
months ended
March 31, 2019
.
|
|
|
|
|
(4)
|
Represents Assumed RSUs under the Assumed Equity Plans. Since the Assumed RSUs do not have “dividend equivalent” rights, the fair value was calculated using the closing price of our common stock on the Acquisition Date, adjusted to exclude the present value of dividends.
|
The RSUs granted by us generally vest (a) with respect to awards with only service-based vesting criteria, over periods ranging from
two
to
four
years and (b) with respect to awards with both performance-based and service-based vesting criteria, in
two
equal installments on the third and fourth anniversaries of the grant date and (c) with respect to awards with both market-based and service-based vesting criteria in three equal installments on the third, fourth and fifth anniversaries of the grant date, in each case subject to the recipient remaining employed by us as of the applicable vesting date. The RSUs granted to the independent members of the Board of Directors vest annually.
The following table shows the weighted-average grant date fair value per unit for the RSUs granted, vested, and tax benefits realized by us in connection with vested and released RSUs for the indicated periods
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
(In thousands, except for weighted-average grant date fair value)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Weighted-average grant date fair value per unit
|
$
|
97.60
|
|
|
$
|
109.80
|
|
|
$
|
103.59
|
|
|
$
|
91.84
|
|
|
Weighted-average fair value per unit assumed upon Orbotech Acquisition
|
$
|
104.49
|
|
|
$
|
—
|
|
|
$
|
104.49
|
|
|
$
|
—
|
|
|
Grant date fair value of vested restricted stock units
|
$
|
4,740
|
|
|
$
|
745
|
|
|
$
|
47,674
|
|
|
$
|
42,601
|
|
|
Tax benefits realized by us in connection with vested and released restricted stock units
|
$
|
170
|
|
|
$
|
249
|
|
|
$
|
10,900
|
|
|
$
|
16,731
|
|
As of
March 31, 2019
, the unrecognized stock-based compensation expense balance related to RSUs was
$171.5 million
, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of
1.6 years
. The intrinsic value of outstanding RSUs as of
March 31, 2019
was
$350.0 million
.
Cash-Based Long-Term Incentive Compensation
We have adopted a cash-based long-term incentive (“Cash LTI Plan”) program for many of our employees as part of our employee compensation program. Executives and non-employee members of the board of directors are not participating in this program. During the
nine
months ended
March 31, 2019
and
2018
, we approved Cash LTI awards of
$7.9 million
and
$5.9 million
, respectively under our Cash LTI Plan. During the
three
months ended
March 31, 2019
and
2018
, we recognized
$12.2 million
and
11.6 million
, respectively, in compensation expense under the Cash LTI Plan. During the
nine
months ended
March 31, 2019
and
2018
, we recognized
$39.4 million
and
37.9 million
, respectively, in compensation expense under the Cash LTI Plan. As of
March 31, 2019
, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was
$93.7 million
. For details, refer to Note 8 “Equity and Long-Term Incentive Compensation Plans,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.
Employee Stock Purchase Plan
Our Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to
15%
of their eligible earnings toward the semi-annual purchase of our common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).
The offering period (or length of the look-back period) under the ESPP has a duration of
six months
, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to
85%
of the lesser of (i) the fair market value of our common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of our common stock on the purchase date. We estimate the fair value of purchase rights under the ESPP using a Black-Scholes model.
The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes model and the straight-line attribution approach with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Stock purchase plan:
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
36.3
|
%
|
|
31.5
|
%
|
|
33.2
|
%
|
|
28.7
|
%
|
|
Risk-free interest rate
|
2.4
|
%
|
|
1.3
|
%
|
|
2.1
|
%
|
|
1.1
|
%
|
|
Dividend yield
|
3.3
|
%
|
|
2.4
|
%
|
|
3.1
|
%
|
|
2.5
|
%
|
|
Expected life (in years)
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
The following table shows the tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except for weighted-average fair value per share)
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Total cash received from employees for the issuance of shares under the ESPP
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,556
|
|
|
$
|
20,579
|
|
|
Number of shares purchased by employees through the ESPP
|
—
|
|
|
—
|
|
|
270
|
|
|
264
|
|
|
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP
|
$
|
444
|
|
|
$
|
787
|
|
|
$
|
1,047
|
|
|
$
|
1,681
|
|
|
Weighted-average fair value per share based on Black-Scholes model
|
$
|
21.25
|
|
|
$
|
23.61
|
|
|
$
|
21.67
|
|
|
$
|
21.89
|
|
The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of
2.0 million
shares or the number of shares which we estimate will be required to be issued under the ESPP during the forthcoming fiscal year. As of
March 31, 2019
, a total of
2.4 million
shares were reserved and available for issuance under the ESPP.
Quarterly cash dividends
On
January 31, 2019
, our Board of Directors declared a regular quarterly cash dividend of
$0.75
per share on the outstanding shares of our common stock, which was paid on
March 1, 2019
to the stockholders of record as of the close of business on
February 15, 2019
. The total amount of regular quarterly cash dividends and dividend equivalents paid during the
three
months ended
March 31, 2019
and
2018
was
$113.6 million
and
$92.1 million
, respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid by us during the
nine
months ended
March 31, 2019
and
2018
was
$348.0 million
and
$278.8 million
, respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of
March 31, 2019
and
June 30, 2018
was
$6.5 million
and
$6.7 million
, respectively. These amounts will be paid upon vesting of the underlying RSUs.
Special cash dividend
On November 19, 2014, our Board of Directors declared a special cash dividend of
$16.50
per share on our outstanding common stock. The declaration and payment of the special cash dividend was part of our leveraged recapitalization transaction under which the special cash dividend was financed through a combination of existing cash and proceeds from the debt financing disclosed in Note 8 “Debt” that was completed during the three months ended December 31, 2014. The total amount of the special cash dividend accrued by us at the declaration date was substantially paid out during the three months ended December 31, 2014, except for the aggregate special cash dividend of
$43.0 million
that was accrued for the unvested RSUs and to be paid when such underlying unvested RSUs vest. During the second quarter of fiscal 2019, all of the special cash dividends accrued with respect to outstanding RSUs were vested and paid in full. During the
nine
months ended
March 31, 2019
and
2018
, the total special cash dividends paid with respect to vested RSUs were
$2.9 million
and
$6.3 million
, respectively. For details of the special cash dividend, refer to Note 8 “Equity and Long-Term Incentive Compensation Plans,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
.
Non-controlling Interest
We have consolidated the results of Orbotech LT Solar, LLC (“OLTS”) and Orbograph Ltd. (“Orbograph”), in which we own approximately
84%
and
94%
of the outstanding equity interest, respectively. OLTS is engaged in the research, development and marketing of products for the deposition of thin film coating of various materials on crystalline silicon photovoltaic wafers for solar energy panels through plasma-enhanced chemical vapor deposition (“PECVD”). Orbograph is engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers.
Additionally, we have consolidated the results of PixCell, an Israeli company developing diagnostic equipment for point-of-care hematology applications of which we own approximately
52%
of the outstanding equity interest and are entitled to appoint the majority of this company’s directors.
NOTE 10 – STOCK REPURCHASE PROGRAM
Our Board of Directors has authorized a program which permits us to repurchase up to
$2.00 billion
of our common stock, reflecting an increase from
$1.00 billion
upon the close of the Orbotech Acquisition. For additional details, refer to Note 1, “Basis of Presentation”. The intent of this program is to offset the dilution from our equity incentive plans, employee stock purchase plan, the issuance of shares in the Orbotech Acquisition, as well as to return excess cash to our stockholders. Subject to market conditions, applicable legal requirements and other factors, the repurchases were made in the open market in compliance with applicable securities laws, including the Securities Exchange Act of 1934 and the rules promulgated thereunder, such as Rule 10b-18 and Rule 10b5-1. This stock repurchase program has no expiration date and may be suspended at any time. As of
March 31, 2019
, an aggregate of approximately
$1.21 billion
was available for repurchase under our stock repurchase program.
Share repurchases for the indicated periods (based on the trade date of the applicable repurchase) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Number of shares of common stock repurchased
|
1,770
|
|
|
796
|
|
|
7,107
|
|
|
1,618
|
|
|
Total cost of repurchases
|
$
|
206,017
|
|
|
$
|
83,435
|
|
|
$
|
756,204
|
|
|
$
|
165,078
|
|
As of
March 31, 2019
, we had repurchased
0.1 million
shares for
$6.0 million
, which repurchases had not settled prior to
March 31, 2019
. The amount was recorded as a component of other current liabilities for the period presented.
NOTE 11 – NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying our outstanding dilutive restricted stock units had been issued. The dilutive effect of outstanding restricted stock units is reflected in diluted net income (loss) per share by application of the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share attributable to KLA-Tencor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to KLA-Tencor
|
$
|
192,728
|
|
|
$
|
306,881
|
|
|
$
|
957,772
|
|
|
$
|
453,498
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares-basic, excluding unvested restricted stock units
|
156,349
|
|
|
156,221
|
|
|
154,561
|
|
|
156,547
|
|
|
Effect of dilutive restricted stock units and options
|
833
|
|
|
980
|
|
|
749
|
|
|
992
|
|
|
Weighted-average shares-diluted
|
157,182
|
|
|
157,201
|
|
|
155,310
|
|
|
157,539
|
|
|
Basic net income per share attributable to KLA-Tencor
|
$
|
1.23
|
|
|
$
|
1.96
|
|
|
$
|
6.20
|
|
|
$
|
2.90
|
|
|
Diluted net income per share attributable to KLA-Tencor
|
$
|
1.23
|
|
|
$
|
1.95
|
|
|
$
|
6.17
|
|
|
$
|
2.88
|
|
|
Anti-dilutive securities excluded from the computation of diluted net income per share
|
100
|
|
|
—
|
|
|
313
|
|
|
2
|
|
NOTE 12 – INCOME TAXES
The following table provides details of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
(Dollar amounts in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Income before income taxes
|
$
|
221,390
|
|
|
$
|
365,983
|
|
|
$
|
1,064,921
|
|
|
$
|
1,049,442
|
|
|
Provision for income taxes
|
$
|
28,745
|
|
|
$
|
59,102
|
|
|
$
|
107,232
|
|
|
$
|
595,944
|
|
|
Effective tax rate
|
13.0
|
%
|
|
16.1
|
%
|
|
10.1
|
%
|
|
56.8
|
%
|
Our effective tax rate is lower than the U.S. federal statutory rate primarily due to the proportion of earnings generated in jurisdictions with tax rates lower than the U.S. statutory rate.
During the three months ended
March 31, 2019
, we completed the acquisition of Orbotech Ltd. As a result of the Orbotech acquisition, we recorded
$819.8 million
of net deferred tax liabilities primarily on the excess of book basis over the tax basis of acquired intangible assets and undistributed earnings in certain foreign subsidiaries. Adjustments to deferred taxes may be required when the purchase price allocation is finalized within the measurement period.
The following table summarizes the changes to our gross unrecognized tax benefits for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
Unrecognized Tax Benefits
|
|
Balance on December 31, 2018
|
$
|
69,779
|
|
|
Addition related to acquisitions
|
61,483
|
|
|
Addition for tax positions related to current year
|
10,935
|
|
|
Addition for tax positions related to prior years
|
1,273
|
|
|
Reduction for tax positions related to prior years
|
(10,144
|
)
|
|
Balance on March 31, 2019
|
133,326
|
|
In the normal course of business, we are subject to examination by tax authorities throughout the world. We are under United States federal income tax examination for the fiscal year ended
June 30, 2016
. We are subject to state income tax examinations for all years beginning from the fiscal year ended
June 30, 2014
. We are also subject to examinations in other major foreign jurisdictions.
In May 2017, Orbotech received an assessment from the Israel Tax Authority (“ITA”) with respect to its fiscal years 2012 through 2014 (the “Assessment”, and the “Audit Period”, respectively), for an aggregate amount of tax against it, after offsetting all NOLs for tax purposes available through the end of 2014, of approximately NIS
218.0 million
(approximately
$65.0 million
as of March 31, 2019), which amount includes related interest and linkage differentials to the Israeli consumer price index (as of date of the Assessment). We believe our recorded unrecognized tax benefits are sufficient to cover the resolution of the Assessment.
On August 31, 2018, Orbotech filed an objection in respect of the tax assessment (the “Objection”). Orbotech is now in the process of the second stage, in which the claims raised by it in the Objection are examined by different personnel at the ITA. In addition, the ITA can examine additional items and may assess additional amounts in the second stage. The second stage must be completed within one year of when the Objection was filed.
In connection with the above, there is an ongoing criminal investigation in Israel against Orbotech, which became our wholly owned subsidiary as of the acquisition date, 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. To date, neither we nor Orbotech has received such an additional letter or any other correspondence or contact from the District Attorney’s Office. We will continue to monitor the progress of the District Attorney’s Office investigation, however, 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.
It is possible that certain examinations may be concluded in the next twelve months. We believe that we may recognize up to
$41.5 million
of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of examinations with various tax authorities.
NOTE 13 – LITIGATION AND OTHER LEGAL MATTERS
We are named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of our business. Actions filed against us include commercial, intellectual property, customer, and labor and employment related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws. In general, legal proceedings and claims, regardless of their merit, and associated internal investigations (especially those relating to intellectual property or confidential information disputes) are often expensive to prosecute, defend or conduct and may divert management’s attention and other company resources. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome. We believe the amounts provided in our condensed consolidated financial statements are adequate in light of the probable and estimated liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable, and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in our condensed consolidated financial statements or will not have a material adverse effect on our results of operations, financial condition or cash flows.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Factoring.
We have agreements (referred to as “factoring agreements”) with financial institutions to sell certain of our trade receivables and promissory notes from customers without recourse. We do not believe we are at risk for any material losses as a result of these agreements. In addition, we periodically sell certain letters of credit (“LCs”), without recourse, received from customers in payment for goods and services.
The following table shows total receivables sold under factoring agreements and proceeds from sales of LCs for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Receivables sold under factoring agreements
|
$
|
48,243
|
|
|
$
|
69,390
|
|
|
$
|
149,597
|
|
|
$
|
148,523
|
|
|
Proceeds from sales of LCs
|
$
|
40,303
|
|
|
$
|
—
|
|
|
$
|
59,534
|
|
|
$
|
5,571
|
|
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.
Leases.
We lease certain of our facilities, autos and equipments under arrangements that are accounted for as operating leases. Facilities rent expense was
$3.1 million
and
$2.7 million
for the
three
months ended
March 31, 2019
and
2018
, respectively and was
$7.8 million
and
$7.7 million
for the
nine
months ended
March 31, 2019
and
2018
, respectively
The following is a schedule of expected operating lease payments:
|
|
|
|
|
|
|
|
Fiscal year ending June 30,
|
Amount
(In thousands)
|
|
2019 (remaining 3 months)
|
$
|
7,360
|
|
|
2020
|
26,427
|
|
|
2021
|
18,394
|
|
|
2022
|
12,845
|
|
|
2023
|
7,668
|
|
|
2024 and thereafter
|
14,574
|
|
|
Total minimum lease payments
|
$
|
87,268
|
|
Purchase Commitments.
We maintain commitments to purchase inventory from our suppliers as well as goods, services, and other assets in the ordinary course of business. Our liability 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. Our estimate of our significant purchase commitments for primarily material, services, supplies and asset purchases is approximately
$603.3 million
as of
March 31, 2019
, which are primarily due within the next
12
months.
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 that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.
Cash Long-Term Incentive Plan.
As of
March 31, 2019
, we have committed
$130.1 million
for future payment obligations under our Cash LTI Plan. The calculation of compensation expense related to the Cash LTI Plan includes estimated forfeiture rate assumptions. Cash LTI awards issued to employees under the Cash LTI Plan vest in
three
or
four
equal installments, with
one-third
or
one-fourth
of the aggregate amount of the Cash LTI award vesting on each anniversary of the grant date over a
three
or
four
-year period. In order to receive payments under a Cash LTI award, participants must remain employed by us as of the applicable award vesting date.
Guarantees and Contingencies.
We maintain guarantee arrangements available through various financial institutions for up to
$45.1 million
, of which
$38.7 million
had been issued as of
March 31, 2019
, primarily to fund guarantees to customs authorities for value-added tax (“VAT”) and other operating requirements of our subsidiaries in Europe, Israel and Asia.
Indemnification Obligations.
Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to us. These obligations arise under the terms of our certificate of incorporation, our bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that we are required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. For example, we have paid or reimbursed legal expenses incurred in connection with the investigation of our historical stock option practices and the related litigation and government inquiries by several of our current and former directors, officers and employees. Although the maximum potential amount of future payments we could be required to make under the indemnification obligations generally described in this paragraph is theoretically unlimited, we believe the fair value of this liability, to the extent estimable, is appropriately considered within the reserve we have established for currently pending legal proceedings.
We are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which we customarily agrees to hold the other party harmless against losses arising from, or provides customers with other remedies to protect against, bodily injury or damage to personal property caused by our products, non-compliance with our product performance specifications, infringement by our products of third-party intellectual property rights and a breach of warranties, representations and covenants related to matters such as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by us is typically subject to the other party making a claim to and cooperating with us pursuant to the procedures specified in the particular contract. This usually allows us to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, our obligations under these agreements may be limited in terms of amounts, activity (typically at our option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, we may have recourse against third parties and/or insurance covering certain payments made by us.
In addition, we may in limited circumstances enter into agreements that contain customer-specific commitments on pricing, tool reliability, spare parts stocking levels, response time and other commitments. Furthermore, we may give these customers limited audit or inspection rights to enable them to confirm that we are complying with these commitments. If a customer elects to exercise its audit or inspection rights, we may be required to expend significant resources to support the audit or inspection, as well as to defend or settle any dispute with a customer that could potentially arise out of such audit or inspection. To date, we have made no significant accruals in our condensed consolidated financial statements for this contingency. While we have not in the past incurred significant expenses for resolving disputes regarding these types of commitments, we cannot make any assurance that it will not incur any such liabilities in the future.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material effect on our business, financial condition, results of operations or cash flows.
NOTE 15 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The authoritative guidance requires companies to recognize all derivative instruments and hedging activities, including foreign currency exchange contracts and interest rate lock agreements, (collectively “derivatives”) as either assets or liabilities at fair value on the condensed consolidated balance sheets. In accordance with the accounting guidance, we designate foreign currency exchange contracts and interest rate lock agreements as cash flow hedges of certain forecasted foreign currency denominated sales, purchase and spending transactions, and the benchmark interest rate of the corresponding debt financing, respectively.
Our foreign subsidiaries operate and sell our products in various global markets. As a result, we are exposed to risks relating to changes in foreign currency exchange rates. We utilize foreign currency forward exchange contracts and option contracts to hedge against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro, the pound sterling and the Israeli new shekel. We routinely hedge our exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These currency forward exchange contracts and options, designated as cash flow hedges, generally have maturities of less than
18 months
. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material losses.
In
October 2014
, we entered into a series of forward contracts (“Rate Lock Agreements”) to lock the benchmark rate on a portion of the Senior Notes. The Rate Lock Agreements were matured and terminated in the second quarter of the fiscal year ended
June 30, 2015
and we recorded the fair value of
$7.5 million
as a gain within accumulated other comprehensive income (loss) (“OCI”) as of
December 31, 2014
. As of
March 31, 2019
, the unamortized portion of the fair value of the forward contracts for the Rate Lock Agreements was
$4.2 million
. For more details, refer to Note 16, “Derivative Instruments and Hedging Activities” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
.
During the
three
months ended
June 30, 2018
, we entered into a series of forward contracts (the “2018 Rate Lock Agreements”) to lock the benchmark interest rate prior to expected debt issuances. The objective of the 2018 Rate Lock Agreements was to hedge the risk associated with the variability in interest rates due to the changes in the benchmark rate leading up to the closing of the intended financing on the notional amount being hedged. The 2018 Rate Lock Agreement had a notional amount of
$500.0 million
in aggregate, which matured and terminated in the third quarter of fiscal year ending June 30, 2019 and we recorded the fair value of
$13.6 million
as a loss within OCI. As of March 31, 2019, the unamortized portion of the fair value of the 2018 Rate Lock Agreements was
$13.5 million
.
For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gains or losses is reported in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Prior to adopting the new accounting guidance for hedge accounting, time value was excluded from the assessment of effectiveness for derivatives designated as cash flow hedges. Time value was amortized on a mark-to-market basis and recognized in earnings over the life of the derivative contract. For derivative contracts executed after adopting the new accounting guidance, the election to include time value for the assessment of effectiveness is made on all forward contracts designated as cash flow hedges. The change in fair value of the derivative are recorded in OCI until the hedged item is recognized in earnings. The assessment of effectiveness of options contracts designated as cash flow hedges continue to exclude time value after adopting the new accounting guidance. The initial value of the component excluded from the assessment of effectiveness are recognized in earnings over the life of the derivative contract. Any difference between change in the fair value of the excluded components and the amounts recognized in earnings are recorded in OCI.
For derivatives that are not designated as cash flow hedges, gains and losses are recognized in other expense (income), net. We use foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivative instruments are largely offset by the changes in the fair value of the assets or liabilities being hedged.
Derivatives in Cash Flow Hedging Relationships: Foreign Exchange and Interest Rate Contracts
The gains (losses) on derivatives in cash flow hedging relationships recognized in OCI for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
March 31,
|
|
March 31,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Rate lock agreements:
|
|
|
|
|
|
|
|
|
Amounts included in the assessment of effectiveness
|
$
|
(3,252
|
)
|
|
$
|
—
|
|
|
$
|
(8,649
|
)
|
|
$
|
—
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
Amounts included in the assessment of effectiveness
|
$
|
1,925
|
|
|
$
|
(581
|
)
|
|
$
|
2,163
|
|
|
$
|
560
|
|
|
Amounts excluded from the assessment of effectiveness
|
$
|
(53
|
)
|
|
$
|
—
|
|
|
$
|
(82
|
)
|
|
$
|
—
|
|
The locations and amounts of designated and non-designated derivative’s gains and losses reported in the condensed consolidated statements of operations for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Three months ended March 31,
|
|
|
2019
|
|
2018
|
|
(In thousands)
|
Revenue
|
|
Cost of revenues
|
|
Interest expense
|
|
Other expense (income), net
|
|
Revenue
|
|
Cost of revenues
|
|
Interest expense
|
|
Other expense (income), net
|
|
Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded
|
$
|
1,097,311
|
|
|
$
|
486,945
|
|
|
$
|
31,187
|
|
|
$
|
(9,282
|
)
|
|
$
|
1,021,294
|
|
|
$
|
368,356
|
|
|
$
|
28,119
|
|
|
$
|
(7,640
|
)
|
|
Gains (losses) on Derivatives Designated as Hedging Instruments:
|
|
Rate lock agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from accumulated OCI to earnings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Amount of gains (losses) reclassified from accumulated OCI to earnings as a result that a forecasted transaction is no longer probable of occurring
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from accumulated OCI to earnings
|
$
|
655
|
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
158
|
|
|
$
|
(65
|
)
|
|
$
|
570
|
|
|
$
|
189
|
|
|
$
|
—
|
|
|
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Amount excluded from the assessment of effectiveness
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(121
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(374
|
)
|
|
Gains (losses) on Derivatives Not Designated as Hedging Instruments:
|
|
Amount of gains (losses) recognized in earnings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
513
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31,
|
|
Nine months ended March 31,
|
|
|
2019
|
|
2018
|
|
(In thousands)
|
Revenue
|
|
Cost of revenues
|
|
Interest expense
|
|
Other income (expense), net
|
|
Revenue
|
|
Cost of revenues
|
|
Interest expense
|
|
Other income (expense), net
|
|
Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded
|
$
|
3,310,469
|
|
|
$
|
1,276,592
|
|
|
$
|
84,087
|
|
|
$
|
(28,535
|
)
|
|
$
|
2,966,697
|
|
|
$
|
1,068,475
|
|
|
$
|
86,067
|
|
|
$
|
(19,847
|
)
|
|
Gains (losses) on Derivatives Designated as Hedging Instruments:
|
|
Rate lock agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from accumulated OCI to earnings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
527
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Amount of gains (losses) reclassified from accumulated OCI to earnings as a result that a forecasted transaction is no longer probable of occurring
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from accumulated OCI to earnings
|
$
|
3,343
|
|
|
$
|
(309
|
)
|
|
$
|
—
|
|
|
$
|
158
|
|
|
$
|
1,300
|
|
|
$
|
1,908
|
|
|
$
|
567
|
|
|
$
|
—
|
|
|
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach
|
$
|
80
|
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Amount excluded from the assessment of effectiveness
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(208
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(603
|
)
|
|
Gains (losses) on Derivatives Not Designated as Hedging Instruments:
|
|
Amount of gains (losses) recognized in earnings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
576
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,808
|
)
|
The U.S. dollar equivalent of all outstanding notional amounts of foreign currency hedge contracts, with maximum remaining maturities of approximately
ten
months as of
March 31, 2019
and
June 30, 2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of
March 31, 2019
|
|
As of
June 30, 2018
|
|
Cash flow hedge contracts - foreign currency
|
|
|
|
|
Purchase
|
$
|
66,713
|
|
|
$
|
8,116
|
|
|
Sell
|
$
|
164,955
|
|
|
$
|
115,032
|
|
|
Other foreign currency hedge contracts
|
|
|
|
|
Purchase
|
$
|
231,765
|
|
|
$
|
130,442
|
|
|
Sell
|
$
|
289,502
|
|
|
$
|
154,442
|
|
The locations and fair value of our derivatives reported in our Condensed Consolidated Balance Sheets as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet
Location
|
|
As of
March 31, 2019
|
|
As of
June 30, 2018
|
|
Balance Sheet
Location
|
|
As of
March 31, 2019
|
|
As of
June 30, 2018
|
|
(In thousands)
|
|
Fair Value
|
|
|
Fair Value
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock contracts
|
Other current assets
|
|
$
|
—
|
|
|
$
|
219
|
|
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
5,158
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
1,957
|
|
|
3,259
|
|
|
Other current liabilities
|
|
254
|
|
|
312
|
|
|
Total derivatives designated as hedging instruments
|
|
|
1,957
|
|
|
3,478
|
|
|
|
|
254
|
|
|
5,470
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
2,289
|
|
|
1,907
|
|
|
Other current liabilities
|
|
1,562
|
|
|
1,358
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
2,289
|
|
|
1,907
|
|
|
|
|
1,562
|
|
|
1,358
|
|
|
Total derivatives
|
|
|
$
|
4,246
|
|
|
$
|
5,385
|
|
|
|
|
$
|
1,816
|
|
|
$
|
6,828
|
|
The changes in OCI, before taxes, related to derivatives for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Beginning balance
|
$
|
(5,615
|
)
|
|
$
|
6,186
|
|
|
$
|
2,346
|
|
|
$
|
8,126
|
|
|
Amount reclassified to earnings
|
(946
|
)
|
|
(694
|
)
|
|
(3,719
|
)
|
|
(3,775
|
)
|
|
Net change in unrealized gains or losses
|
(1,379
|
)
|
|
(581
|
)
|
|
(6,567
|
)
|
|
560
|
|
|
Ending balance
|
$
|
(7,940
|
)
|
|
$
|
4,911
|
|
|
$
|
(7,940
|
)
|
|
$
|
4,911
|
|
Offsetting of Derivative Assets and Liabilities
We present derivatives at gross fair values in the Condensed Consolidated Balance Sheets. We have entered into arrangements with each of our counterparties, which reduce credit risk by permitting net settlement of transactions with the same counterparty under certain conditions. The information related to the offsetting arrangements for the periods indicated was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
|
|
|
|
Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
|
|
|
|
Description
|
|
Gross Amounts of Derivatives
|
|
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
|
|
Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Net Amount
|
|
Derivatives - Assets
|
|
$
|
4,246
|
|
|
$
|
—
|
|
|
$
|
4,246
|
|
|
$
|
(1,209
|
)
|
|
$
|
—
|
|
|
$
|
3,037
|
|
|
Derivatives - Liabilities
|
|
$
|
(1,816
|
)
|
|
$
|
—
|
|
|
$
|
(1,816
|
)
|
|
$
|
1,209
|
|
|
$
|
—
|
|
|
$
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
|
|
|
|
Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
|
|
|
|
Description
|
|
Gross Amounts of Derivatives
|
|
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
|
|
Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Net Amount
|
|
Derivatives - Assets
|
|
$
|
5,385
|
|
|
$
|
—
|
|
|
$
|
5,385
|
|
|
$
|
(1,888
|
)
|
|
$
|
—
|
|
|
$
|
3,497
|
|
|
Derivatives - Liabilities
|
|
$
|
(6,828
|
)
|
|
$
|
—
|
|
|
$
|
(6,828
|
)
|
|
$
|
1,888
|
|
|
$
|
—
|
|
|
$
|
(4,940
|
)
|
NOTE 16 – RELATED PARTY TRANSACTIONS
During the
three
and
nine
months ended
March 31, 2019
and
2018
, we purchased from, or sold to, several entities, where one or more of our executive officers or members of our Board of Directors, or their immediate family members, were, during the periods presented, an executive officer or a board member of a subsidiary, including Citrix Systems, Inc., Integrated Device Technology, Inc., Keysight Technologies, Inc., MetLife Insurance K.K., NetApp, Inc., and Proofpoint, Inc. The following table provides the transactions with these parties for the indicated periods (for the portion of such period that they were considered related):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Total revenues
|
$
|
1,972
|
|
|
$
|
6
|
|
|
$
|
1,985
|
|
|
$
|
463
|
|
|
Total purchases
(1)
|
$
|
354
|
|
|
$
|
594
|
|
|
$
|
2,560
|
|
|
$
|
1,840
|
|
__________________
|
|
|
|
(1)
|
During the
three
months ended
June 30, 2018
, we acquired a product line from Keysight Technologies, Inc. (“Keysight”) and entered into a transition services agreement pursuant to which Keysight provides certain manufacturing services to us. For additional details refer to Note 6, “Business Combinations”. We recorded the manufacturing services fees under the transition services agreement with Keysight within cost of revenues, which was immaterial for the
three
and
nine
months ended
March 31, 2019
.
|
Our receivable balances from these parties were
$1.9 million
as of
March 31, 2019
and immaterial for
June 30, 2018
. Our payable balance from these parties was immaterial at
March 31, 2019
and
June 30, 2018
.
NOTE 17 – SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
While we operate our business in multiple operating segments, we have only
one
reportable segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
Our chief operating decision maker, who is our Chief Executive Officer, is in the process of completing an assessment of our reporting structure as of the filing date of this Quarterly Report on Form 10-Q. We are in the process of determining the related impacts to our determination of operating and reportable segments. Accordingly, the disclosures for the three and nine months ending March 31, 2019 reflects the current segment reporting disclosures of our operations with Orbotech presented as a separate component, where noted. We currently expect to complete our assessment of our segment reporting structure within the fourth quarter.
All operating segments have been aggregated due to their inter-dependencies, commonality of long-term economic characteristics, products and services, the production processes, class of customer and distribution processes. Our service products are an extension of the system product portfolio and provide customers with spare parts and fab management services (including system preventive maintenance and optimization services) to improve yield, increase production uptime and throughput, and lower the cost of ownership. Since we operate in
one
reportable segment, all financial segment information required by the authoritative guidance can be found in the condensed consolidated financial statements.
Our significant operations outside the United States include manufacturing facilities in China, Germany, Israel and Singapore and sales, marketing and service offices in Japan, the rest of the Asia Pacific region and Europe. For geographical revenue reporting, revenues are attributed to the geographic location in which the customer is located. Long-lived assets consist of land, property and equipment, net and are attributed to the geographic region in which they are located.
The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Nine months ended March 31,
|
|
(Dollar amounts in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
$
|
275,507
|
|
|
25
|
%
|
|
$
|
156,428
|
|
|
15
|
%
|
|
$
|
796,478
|
|
|
24
|
%
|
|
$
|
511,778
|
|
|
17
|
%
|
|
China
|
206,164
|
|
|
19
|
%
|
|
143,761
|
|
|
14
|
%
|
|
816,176
|
|
|
25
|
%
|
|
378,560
|
|
|
13
|
%
|
|
Korea
|
196,490
|
|
|
18
|
%
|
|
314,062
|
|
|
31
|
%
|
|
476,959
|
|
|
14
|
%
|
|
858,924
|
|
|
29
|
%
|
|
North America
|
156,824
|
|
|
14
|
%
|
|
113,477
|
|
|
11
|
%
|
|
409,066
|
|
|
12
|
%
|
|
391,769
|
|
|
13
|
%
|
|
Japan
|
146,069
|
|
|
13
|
%
|
|
199,066
|
|
|
19
|
%
|
|
461,930
|
|
|
14
|
%
|
|
500,263
|
|
|
17
|
%
|
|
Europe and Israel
|
76,054
|
|
|
7
|
%
|
|
53,043
|
|
|
6
|
%
|
|
228,341
|
|
|
7
|
%
|
|
218,706
|
|
|
7
|
%
|
|
Rest of Asia
|
40,203
|
|
|
4
|
%
|
|
41,457
|
|
|
4
|
%
|
|
121,519
|
|
|
4
|
%
|
|
106,697
|
|
|
4
|
%
|
|
Total
|
$
|
1,097,311
|
|
|
100
|
%
|
|
$
|
1,021,294
|
|
|
100
|
%
|
|
$
|
3,310,469
|
|
|
100
|
%
|
|
$
|
2,966,697
|
|
|
100
|
%
|
The following is a summary of revenues by major products and for Orbotech in total for the indicated periods (as a percentage of total revenues):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Nine months ended March 31,
|
|
(Dollar amounts in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wafer Inspection
|
$
|
334,070
|
|
|
30
|
%
|
|
$
|
486,662
|
|
|
48
|
%
|
|
$
|
1,312,261
|
|
|
40
|
%
|
|
$
|
1,276,666
|
|
|
43
|
%
|
|
Patterning
|
285,815
|
|
|
26
|
%
|
|
251,253
|
|
|
25
|
%
|
|
884,021
|
|
|
27
|
%
|
|
820,471
|
|
|
28
|
%
|
|
Global Service and Support
(1)
|
287,116
|
|
|
26
|
%
|
|
262,389
|
|
|
26
|
%
|
|
855,309
|
|
|
26
|
%
|
|
796,692
|
|
|
27
|
%
|
|
Orbotech
|
161,344
|
|
|
15
|
%
|
|
—
|
|
|
—
|
%
|
|
161,344
|
|
|
5
|
%
|
|
—
|
|
|
—
|
%
|
|
Other
|
28,966
|
|
|
3
|
%
|
|
20,990
|
|
|
1
|
%
|
|
97,534
|
|
|
2
|
%
|
|
72,868
|
|
|
2
|
%
|
|
Total
|
$
|
1,097,311
|
|
|
100
|
%
|
|
$
|
1,021,294
|
|
|
100
|
%
|
|
$
|
3,310,469
|
|
|
100
|
%
|
|
$
|
2,966,697
|
|
|
100
|
%
|
__________________
(1) The Global Service and Support revenues include service revenues as presented in the Condensed Consolidated Statements of Operations as well as certain product revenues, primarily revenues from our K-T Pro business.
In the
three
months ended
March 31, 2019
,
one
customer accounted for approximately
19%
of total revenues. In the
three
months ended
March 31, 2018
,
two
customers accounted for approximately
22%
and
11%
of total revenues. In the
nine
months ended
March 31, 2019
,
two
customers accounted for approximately
15%
and
11%
of total revenues. In the
nine
months ended
March 31, 2018
,
one
customer accounted for approximately
22%
of total revenues.
One
and
three
customers on an individual basis accounted for greater than 10% of net accounts receivables as of
March 31, 2019
and
June 30, 2018
, respectively.
Long-lived assets by geographic region as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of
March 31, 2019
|
|
As of
June 30, 2018
|
|
Long-lived assets:
|
|
|
|
|
United States
|
$
|
222,444
|
|
|
$
|
187,352
|
|
|
Singapore
|
49,764
|
|
|
47,009
|
|
|
Israel
|
65,113
|
|
|
26,980
|
|
|
Europe
|
57,096
|
|
|
12,924
|
|
|
Rest of Asia
|
17,435
|
|
|
12,041
|
|
|
Total
|
$
|
411,852
|
|
|
$
|
286,306
|
|
NOTE 18 – SUBSEQUENT EVENTS
On
May 3, 2019
, we announced that our Board of Directors had declared a quarterly cash dividend of
$0.75
per share to be paid on
June 4, 2019
to stockholders of record as of the close of business on
May 15, 2019
.