Home Substantial portion KLA CORP MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

KLA CORP MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
may be forward-looking statements. You can identify these and other
forward-looking statements by the use of words such as "may," "will," "could,"
"would," "should," "expects," "plans," "anticipates," "relies," "believes,"
"estimates," "predicts," "intends," "potential," "continues," "thinks," "seeks,"
or the negative of such terms, or other comparable terminology. Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing statements. Such forward-looking statements include those regarding,
among others: the future impacts of the COVID-19 pandemic; forecasts of the
future results of our operations, including profitability; orders for our
products and capital equipment generally; sales of semiconductors; the
investments by our customers in advanced technologies and new materials; growth
of revenue in the semiconductor industry, the semiconductor capital equipment
industry and our business; technological trends in the semiconductor industry;
future developments or trends in the global capital and financial markets; our
future product offerings and product features; the success and market acceptance
of new products; timing of shipment of backlog; our future product shipments and
product and service revenues; our future gross margins; our future research and
development ("R&D") expenses and selling, general and administrative ("SG&A")
expenses; international sales and operations; our ability to maintain or improve
our existing competitive position; success of our product offerings; creation
and funding of programs for R&D; results of our investment in leading edge
technologies; the effects of hedging transactions; the effect of the sale of
trade receivables and promissory notes from customers; our future effective
income tax rate; our recognition of tax benefits; the effects of any audits or
litigation; future payments of dividends to our stockholders; the completion of
any acquisitions of third parties, or the technology or assets thereof; benefits
received from any acquisitions and development of acquired technologies;
sufficiency of our existing cash balance, investments, cash generated from
operations and the unfunded portion of our Revolving Credit Facility (as defined
below) to meet our operating and working capital requirements, including debt
service and payment thereof; future dividends, and stock repurchases; our
compliance with the financial covenants under the Credit Agreement (as defined
below) for our Revolving Credit Facility; the adoption of new accounting
pronouncements; and our repayment of our outstanding indebtedness.
Our actual results may differ significantly from those projected in the
forward-looking statements in this report. Factors that might cause or
contribute to such differences include, but are not limited to:
•The impact of the COVID-19 pandemic on the global economy and on our business,
financial condition and results of operations, including the supply chain
constraints we are experiencing as a result of the pandemic;
•Economic, political and social conditions in the countries in which we, our
customers and our suppliers operate, including global trade policies;
•Disruption to our manufacturing facilities or other operations, or the
operations of our customers, due to natural catastrophic events, health
epidemics or terrorism;
•Ongoing changes in the technology industry, and the semiconductor industry in
particular, including future growth rates, pricing trends in end-markets, or
changes in customer capital spending patterns;
•Our ability to timely develop new technologies and products that successfully
anticipate or address changes in the semiconductor industry;
•Our ability to maintain our technology advantage and protect our proprietary
rights;
•Our ability to compete with new products introduced by our competitors;
•Our ability to attract, onboard and retain key personnel;
•Cybersecurity threats, cyber incidents affecting our and our customers,
suppliers and other service providers' systems and networks and our and their
ability to access critical information systems for daily business operations;
•Liability to our customers under indemnification provisions if our products
fail to operate properly or contain defects or our customers are sued by third
parties due to our products;
•Exposure to a highly concentrated customer base;
•Availability and cost of the wide range of materials used in the production of
our products;
•Our ability to operate our business in accordance with our business plan;
•Legal, regulatory and tax environments in which we perform our operations and
conduct our business and our ability to comply with relevant laws and
regulations;
•Our ability to pay interest and repay the principal of our current indebtedness
is dependent upon our ability to
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manage our business operations, our credit rating and the ongoing interest rate
environment, among other factors;
•Instability in the global credit and financial markets;
•Our exposure to currency exchange rate fluctuations, or declining economic
conditions in those countries where we conduct our business;
•Changes in our effective tax rate resulting from changes in the tax rates
imposed by jurisdictions where our profits are determined to be earned and
taxed, expiration of tax holidays in certain jurisdictions, resolution of issues
arising from tax audits with various authorities or changes in tax laws or the
interpretation of such tax laws; and
•Our ability to identify suitable acquisition targets and successfully integrate
and manage acquired businesses.
For a more detailed discussion of these and other risk factors that might cause
or contribute to differences from the forward-looking statements in this report,
see Part II, Item 1A, "Risk Factors" in this report as well as Part I, Item 1,
"Business" and Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the year ended June 30, 2021. You should carefully review these risks and
also review the risks described in other documents we file from time to time
with the Securities and Exchange Commission ("SEC"). You are cautioned not to
place undue reliance on these forward-looking statements, and we expressly
assume no obligation and do not intend to update the forward-looking statements
in this report after the date hereof.
EXECUTIVE SUMMARY
We are a leading supplier of process control and yield management solutions and
services for the semiconductor and related electronics industries. Our broad
portfolio of inspection and metrology products, and related service, software
and other offerings, support R&D and manufacturing of integrated circuits
("IC"), wafers and reticles. Our products, services and expertise are used by
our customers to measure, detect, analyze and resolve critical and nanometric
level product defects, helping them to manage manufacturing process challenges
and to obtain higher finish product yields at lower cost. We also offer advanced
technology solutions to address various manufacturing needs of Printed Circuit
Boards ("PCB"), Flat Panel Displays ("FPD"), Specialty Semiconductor Devices and
other electronic components, including advanced packaging, light-emitting
diodes, power devices, compound semiconductors, and data storage, as well as
general materials research.
The pervasive and increasing needs for semiconductors in many consumer and
industrial products, the rapid proliferation of new applications for more
advanced semiconductor devices, and the increasing complexity associated with
leading edge semiconductor manufacturing drives demand for our process control
and yield management solutions, and this demand is expected to continue for the
foreseeable future. At the same time, technology is transforming how we live and
work, and the data driven economy is fundamentally changing how businesses
operate and deliver value. This digital transformation is enabling secular
demand drivers such as High-Performance Computing, Artificial Intelligence,
Machine Learning, and rapid growth in new automotive electronics and 5G
communications markets. Each trend is driving investments and innovation in
advanced Logic and Memory semiconductor devices, as well as new and increasingly
more complex advanced packaging and PCB technologies. The favorable end-market
dynamics are driving our customers to make increased investments in our process
control and yield management solutions as part of their overall capital
investment plans. These trends also drive demand for our other products such as
those used in PCB, FPD and Specialty Semiconductor manufacturing, where the
increase in technology complexity is expected to continue and further accelerate
as more devices become interconnected and dependent on other electronic devices.
As a result of these factors, we saw a general strengthening of demand for our
products throughout fiscal 2021 and in the first half of fiscal 2022. We
continue to focus on our close collaborative relationships with our customers,
which allows us improved insight into customer demand to more efficiently manage
our business, ranging from product development to balancing inventory levels, in
order to meet their needs.
We are organized into four reportable segments. We manage our Specialty
Semiconductor Process and PCB, Display and Component Inspection reporting
segments within our Electronics, Packaging and Components ("EPC") group.
•Semiconductor Process Control ("SPC"): a comprehensive portfolio of inspection,
metrology and data analytics products as well as related service offerings that
help IC manufacturers achieve target yields throughout the semiconductor
fabrication process.
•Specialty Semiconductor Process: advanced vacuum deposition and etching process
tools used by a broad range of specialty semiconductor customers.
•PCB, Display and Component Inspection: a range of inspection, testing and
measurement, and direct imaging for patterning products used by manufacturers of
PCBs, FPDs, advanced packaging, microelectromechanical systems and other
electronic components.
•Other: products that do not fall into the three segments above.
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China is emerging as a major region for manufacturing of logic and memory chips,
adding to its role as the world's largest consumer of ICs. Additionally, a
significant portion of global FPD and PCB manufacturing has migrated to China.
Government initiatives are propelling China to expand its domestic manufacturing
capacity and attracting investment from semiconductor manufacturers from Taiwan,
Korea, Japan and the United States. Although China is currently seen as an
important long-term growth region for the semiconductor and electronics capital
equipment sector, the United States Department of Commerce ("Commerce") has
added certain China-based entities to the U.S. Entity List, restricting our
ability to provide products and services to such entities without a license. In
addition, Commerce has imposed export licensing requirements on China-based
customers engaged in military end uses, as well as requiring our customers to
obtain an export license when they use certain semiconductor capital equipment
based on U.S. technology to manufacture products connected to Huawei or its
affiliates. While these rules have not significantly impacted our operations to
date, such actions by the U.S. government or another country could impact our
ability to provide our products and services to existing and potential customers
and adversely affect our business. For additional information regarding risks
related to our international operations, see Part II, Item 1A, "Risk Factors" in
this report.
The following table sets forth some of our key quarterly unaudited financial
information:
                                                                         Three Months Ended
(In thousands, except net income  December 31,         September 30,           June 30,            March 31,           December 31,
per share)                            2021                 2021                  2021                 2021                 2020
Total revenues                   $ 2,352,630          $  2,083,838          $ 1,925,471          $ 1,803,773          $ 1,650,870
Costs of revenues                $   908,162          $    813,624          $   772,241          $   709,629          $   669,733
Gross margin                              61  %                 61  %                60  %                61  %                59  %
Net income attributable to
KLA(1)                           $   717,444          $  1,068,417          $   632,978          $   567,496          $   457,251
Diluted net income per share
attributable to KLA(2)           $      4.71          $       6.96          $      4.10          $      3.66          $      2.94


__________________
(1)Our net income attributable to KLA increased to $717.4 million in the three
months ended December 31, 2021 compared to the three months ended December 31,
2020 primarily as a result of higher revenues partially offset by higher costs
of revenues and higher income taxes. Refer to the sections below for further
information.
(2)Diluted net income per share is computed independently for each of the
quarters presented based on the weighted-average fully diluted shares
outstanding for each quarter. Therefore, the sum of quarterly diluted net income
per share information may not equal annual (or other multiple-quarter
calculations of) diluted net income per share.
Impact of COVID-19
Events surrounding the ongoing COVID-19 pandemic had resulted in a reduction in
economic activity across the globe in calendar year 2020 and early 2021.
Vaccinations and pandemic containment measures have now created an environment
that is driving economic growth, even as the pace of economic recovery remains
uneven in various geographies. The resumption of growth has caused us to
experience new constraints in our supply chain. Supply chain lead times are
extended and shortages have sometimes required us to plan further ahead and
increase our purchase commitments to secure critical components on a timely
basis. We continue to monitor our supply chain and work with our suppliers to
identify and mitigate potential gaps to ensure continuity of supply.
While all of our global sites are currently operational, any local pandemic
outbreaks or advent of new variants could require us to temporarily curtail
production levels or temporarily cease operations based on government mandates
or due to outbreaks affecting our manufacturing employees. We remain committed
to the health and safety of our employees, contractors, suppliers, customers and
communities, and are following government policies and recommendations designed
to slow the spread of COVID-19.
Our efforts to respond to the pandemic have included health screenings, social
distancing, employee separation protocols at our facilities, suspension of
non-essential business travel and work from home to the extent possible. We have
also developed augmented reality-based solutions for remote services that allow
for rapid response to customer needs. We are working with government authorities
in the jurisdictions where we operate, and continuing to monitor our operations
in an effort to ensure we follow government requirements, relevant regulations,
industry standards, and best practices to help safeguard our team members, while
safely continuing operations to the extent possible at our sites across the
globe.
We believe these actions are appropriate and prudent to safeguard our employees,
contractors, suppliers, customers, and communities, while allowing us to safely
continue operations. We will continue to actively monitor the situation and may
take
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further actions or alter our business operations that we determine are in the
best interests of our employees, customers, partners, suppliers, and
stakeholders, or as required by federal, state, or local authorities.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our Condensed Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions in applying our accounting
policies that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
these estimates and assumptions on historical experience and evaluate them on an
ongoing basis to ensure that they remain reasonable under current conditions.
Actual results could differ from those estimates. We discuss the development and
selection of the critical accounting estimates with the Audit Committee of our
Board of Directors on a quarterly basis, and the Audit Committee has reviewed
our related disclosure in this Quarterly Report on Form 10-Q.
There have been no material changes in our critical accounting estimates and
policies since our Annual Report on Form 10-K for the fiscal year ended June 30,
2021. Refer to Note 1 "Basis of Presentation" to our Condensed Consolidated
Financial Statements for additional details. In addition, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for
our fiscal year ended June 30, 2021 for a complete description of our critical
accounting policies and estimates.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including those recently
adopted and the expected dates of adoption as well as estimated effects, if any,
on our Condensed Consolidated Financial Statements of those not yet adopted, see
Note 1 "Basis of Presentation" to our Condensed Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Revenues and Gross Margin
Revenues
Our business is affected by the concentration of our customer base and our
customers' capital equipment procurement schedules as a result of their
investment plans. Our product revenues in any particular period are
significantly impacted by the amount of new orders we receive during that period
and, depending upon the duration of manufacturing and installation cycles, in
the preceding period. Revenue is also impacted by average customer pricing,
customer revenue deferrals associated with volume purchase agreements, and the
effect of fluctuations in foreign currency exchange rates.
Service revenues are generated from product maintenance and support services, as
well as billable time and material service calls made to our customers. The
amount of our service revenues is typically a function of the number of systems
installed at our customers' sites and the utilization of those systems, but it
is also impacted by other factors, such as our rate of service contract
renewals, the types of systems being serviced and fluctuations in foreign
currency exchange rates.

                                      Three Months Ended December 31,                  Q2 FY22
                                                                                         vs.
(Dollar amounts in thousands)          2021                        2020                Q2 FY21
Revenues:
Product                         $     1,895,769               $ 1,238,023       $ 657,746        53  %
Service                                 456,861                   412,847          44,014        11  %
Total revenues                  $     2,352,630               $ 1,650,870       $ 701,760        43  %
Costs of revenues               $       908,162               $   669,733       $ 238,429        36  %
Gross margin                               61.4   %                  59.4  %


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                                       Six Months Ended December 31,              Q2 FY22 YTD
                                                                                      vs.
  (Dollar amounts in thousands)           2021                 2020               Q2 FY21 YTD
  Revenues:
  Product                          $     3,525,657        $ 2,383,518       $ 1,142,139        48  %
  Service                                  910,811            805,972           104,839        13  %
  Total revenues                   $     4,436,468        $ 3,189,490       $ 1,246,978        39  %
  Costs of revenues                $     1,721,786        $ 1,290,295       $   431,491        33  %
  Gross margin                                61.2   %           59.5  %


Product revenues during the three and six months ended December 31, 2021
increased compared to the three and six months ended December 31, 2020,
respectively, primarily due to strong demand for many of our products,
especially our inspection portfolio, as well as increases from continued growth
in the advanced packaging, 5G infrastructure and specialty semiconductor
markets.
Service revenues during the three and six months ended December 31, 2021
increased compared to the three and six months ended December 31, 2020,
primarily due to an increase in our installed base.
Revenues by segment(1)

                                                       Three Months Ended December 31,                       Q2 FY22
                                                                                                               vs.
(Dollar amounts in thousands)                             2021                    2020                       Q2 FY21
Revenues:
SPC                                               $       2,052,202          $ 1,380,184          $  672,018               49  %
Specialty Semiconductor Process                             112,738               90,587              22,151               24  %
PCB, Display and Component Inspection                       187,977              179,267               8,710                5  %
Other                                                             -                  449                (449)            (100) %
Total revenues for reportable segments            $       2,352,917          $ 1,650,487          $  702,430               43  %



                                                  Six Months Ended December 31,                       Q2 FY22 YTD
                                                                                                          vs.
(Dollar amounts in thousands)                       2021                    2020                      Q2 FY21 YTD

Income:

SPC                                          $      3,831,285          $ 2,648,138          $ 1,183,147               45  %
Specialty Semiconductor Process                       214,767              179,540               35,227               20  %
PCB, Display and Component Inspection                 390,785              360,444               30,341                8  %
Other                                                       -                  590                 (590)            (100) %

Total revenue for reportable segments $4,436,837 $3,188,712 $1,248,125

               39  %


__________

(1)Segment revenues exclude corporate allocations and the effects of changes in
foreign currency exchange rates. For additional details, refer to Note 18
"Segment Reporting and Geographic Information" to our Condensed Consolidated
Financial Statements.
Revenues from our SPC segment during the three and six months ended December 31,
2021 increased compared to the three and six months ended December 31, 2020,
respectively, primarily due to strong demand for many of our products especially
from our inspection portfolio. Revenues in the EPC group during the three and
six months ended December 31, 2021 increased compared to the three and six
months ended December 31, 2020, respectively, primarily due to continued growth
in advanced packaging, 5G infrastructure and specialty semiconductor markets.
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Revenues by region
The following is a summary of revenues by geographic region, based on ship-to
location, for the indicated periods:
                                              Three Months Ended December 31,                                              Six Months Ended December 31,
(Dollar amounts in
thousands)                                2021                                 2020                                   2021                                   2020
Taiwan                      $       776,442            33  %       $   380,785            23  %       $     1,403,526                31  %       $   749,886            24  %
China                               544,537            23  %           382,157            23  %             1,229,693                28  %           868,246            27  %
Korea                               323,095            14  %           347,947            21  %               562,278                13  %           537,465            17  %
North America                       271,594            12  %           214,808            13  %               449,334                10  %           384,984            12  %
Japan                               196,282             8  %           156,721            10  %               371,449                 8  %           321,140            10  %
Europe and Israel                   175,195             7  %           100,201             6  %               262,635                 6  %           183,318             6  %
Rest of Asia                         65,485             3  %            68,251             4  %               157,553                 4  %           144,451             4  %
Total                       $     2,352,630           100  %       $ 1,650,870           100  %       $     4,436,468               100  %       $ 3,189,490           100  %


A significant portion of our revenues continues to be generated in Asia, where a
substantial portion of the world's semiconductor manufacturing capacity is
located, and we expect that trend to continue.
Gross margin
Our gross margin fluctuates with revenue levels and product mix and is affected
by variations in costs related to manufacturing and servicing our products,
including our ability to scale our operations efficiently and effectively in
response to prevailing business conditions.
The following table summarizes the major factors that contributed to the changes
in gross margin:
                                                                                  Gross Margin
                                                             Three Months Ended                    Six Months Ended
December 31, 2020                                                   59.4%                               59.5%
Revenue volume of products and services                             2.9%                                 2.8%
Mix of products and services sold                                   0.2%                                  -%

Manufacturing labor, overhead and efficiencies                     (0.1)%                               (0.2)%
Other service and manufacturing costs                              (1.0)%                               (0.9)%

December 31, 2021                                                   61.4%                               61.2%


Changes in gross margin, which are driven by the revenue volume of products and
services, reflect our ability to leverage existing infrastructure to generate
higher revenues. Changes in gross margin from the mix of products and services
sold reflect the impact of changes within the composition of product and service
offerings. Changes in gross margin from manufacturing labor, overhead and
efficiencies reflect our ability to manage costs and drive productivity as we
scale our manufacturing activity to respond to customer requirements, and
amortization of intangible assets. Changes in gross margin from other service
and manufacturing costs include the impact of customer support costs, including
the efficiencies with which we deliver services to our customers, and the
effectiveness with which we manage our production plans and inventory risk.
The increase in our gross margin during the comparative periods presented is
primarily due to a higher revenue volume of products and services sold,
partially offset by an increase in service and manufacturing costs.
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Segment gross profit(1)

                                                        Three Months Ended                                        Q2 FY22
                                                           December 31,                                             vs.
(Dollar amounts in thousands)                              2021                        2020                       Q2 FY21
Segment gross profit:
SPC                                                  $   1,342,937                $   884,090                      $ 458,847               52  %
Specialty Semiconductor Process                             60,274                     51,171                          9,103               18  %
PCB, Display and Component Inspection                       82,322                     84,584                         (2,262)              (3) %
Other                                                            -                       (121)                           121             (100) %
                                                     $   1,485,533                $ 1,019,724                      $ 465,809               46  %



                                                      Six Months Ended December 31,                      Q2 FY22 YTD
                                                                                                             vs.
(Dollar amounts in thousands)                           2021                    2020                     Q2 FY21 YTD
Segment gross profit:
SPC                                              $      2,504,866          $ 1,698,900          $  805,966               47  %
Specialty Semiconductor Process                           114,995              101,099              13,896               14  %
PCB, Display and Component Inspection                     176,798              174,753               2,045                1  %
Other                                                           -                 (108)                108             (100) %
                                                 $      2,796,659          $ 1,974,644          $  822,015               42  %


________________
(1)  Segment gross profit is calculated as segment revenues less segment costs
of revenues and excludes corporate allocations, amortization of intangible
assets, inventory fair value adjustments, acquisition related costs, and the
effects of changes in foreign currency exchange rates. For additional details,
refer to Note 18 "Segment Reporting and Geographic Information" to our Condensed
Consolidated Financial Statements.
Gross profit in the SPC segment during the three and six months ended
December 31, 2021 increased compared to the three and six months ended
December 31, 2020, respectively, primarily due to a higher revenue volume of
products and services sold, partially offset by an increase in other service and
manufacturing costs. Gross profit in the Specialty Semiconductor Process segment
during the three and six months ended December 31, 2021 increased compared to
the three and six months ended December 31, 2020, respectively, primarily due to
higher revenue volume, partially offset by a less favorable mix of products and
services sold. Gross profit in the PCB, Display and Component Inspection segment
during the three months ended December 31, 2021 decreased compared to the three
months ended December 31, 2020 primarily due to a less favorable mix of products
and services sold as well as an increase in other service and manufacturing
costs. Gross profit in the PCB, Display and Component Inspection segment for the
six months ended December 31, 2021 remained relatively unchanged from the six
months ended December 31, 2020.
Research and Development ("R&D")
R&D expenses may fluctuate with product development phases and project timing as
well as our R&D efforts. As technological innovation is essential to our
success, we may incur significant costs associated with R&D projects, including
compensation for engineering talent, engineering material costs and other
expenses.

                                                Three Months Ended December 31,                      Q2 FY22
                                                                                                       vs.
(Dollar amounts in thousands)                      2021                    2020                      Q2 FY21
R&D expenses                                $       265,031           $   229,064          $ 35,967              16  %
R&D expenses as a percentage of total
revenues                                                 11   %             

14%


R&D expenses during the three months ended December 31, 2021 increased compared
to the three months ended December 31, 2020, primarily due to an increase in
employee-related expenses of $43.5 million as a result of additional engineering
headcount as well as higher employee compensation and benefit costs, partially
offset by a decrease in engineering project material costs of $9.0 million.
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                                                 Six Months Ended December 31,                     Q2 FY22 YTD
                                                                                                       vs.
(Dollar amounts in thousands)                      2021                   2020                     Q2 FY21 YTD
R&D expenses                                $      523,184           $   448,102          $    75,082              17  %
R&D expenses as a percentage of total
revenues                                                12   %              

14%


R&D expenses during the six months ended December 31, 2021 increased compared to
the six months ended December 31, 2020, primarily due to an increase in
employee-related expenses of $71.2 million as a result of additional engineering
headcount as well as higher employee compensation and benefit costs, an
in-process R&D write-off of $6.0 million, and an increase in consulting costs of
$5.6 million, partially offset by a decrease in engineering project material
costs of $10.5 million.
Our future operating results will depend significantly on our ability to produce
products and provide services that have a competitive advantage in our
marketplace. To do this, we believe we must continue to make substantial and
focused investments in our R&D. We remain committed to product development in
new and emerging technologies.
Selling, General and Administrative ("SG&A")

                                                   Three Months Ended December 31,                      Q2 FY22
                                                                                                          vs.
(Dollar amounts in thousands)                         2021                    2020                      Q2 FY21
SG&A expenses                                  $       213,479           $   181,909          $ 31,570              17  %
SG&A expenses as a percentage of total
revenues                                                     9   %          

11%


SG&A expenses during the three months ended December 31, 2021 increased compared
to the three months ended December 31, 2020, primarily due to increases in the
following: employee-related expenses of $22.6 million as a result of additional
headcount as well as higher employee compensation and benefit costs,
facilities-related expense of $2.4 million, depreciation expense of $1.9 million
and consulting costs of $1.4 million.

                                                 Six Months Ended December 31,                     Q2 FY22 YTD
                                                                                                       vs.
(Dollar amounts in thousands)                      2021                   2020                     Q2 FY21 YTD
SG&A expenses                               $      406,740           $   354,540          $    52,200              15  %
SG&A expenses as a percentage of total
revenues                                                 9   %              

11%


SG&A expenses during the six months ended December 31, 2021 increased compared
to the six months ended December 31, 2020, primarily due to increases in the
following: employee-related expenses of $34.1 million as a result of additional
headcount as well as higher employee compensation and benefit costs, consulting
costs of $6.2 million, facilities-related expense of $3.7 million, depreciation
expense of $2.6 million and travel-related expense of $2.2 million.
Restructuring Charges
Restructuring charges were $0.5 million and $4.6 million for the three months
ended December 31, 2021 and 2020, respectively. Restructuring charges were
$0.9 million and $8.1 million for the six months ended December 31, 2021 and
2020, respectively. Restructuring charges for the three and six months ended
December 31, 2020, included $1.0 million and $2.0 million, respectively, of
non-cash charges for accelerated depreciation related to certain right-of-use
assets and fixed assets to be abandoned. As of December 31, 2021, the accrual
for restructuring charges was $2.9 million.
For additional information refer to Note 19 "Restructuring Charges" to our
Condensed Consolidated Financial Statements.
Interest Expense and Other Expense (Income), Net
Other expense (income), net is comprised primarily of realized gains or losses
on sales of marketable securities, gains or losses from revaluations of certain
foreign currency denominated assets and liabilities as well as foreign currency
contracts, interest-related accruals (such as interest and penalty accruals
related to our tax obligations) and interest income earned on our invested cash,
cash equivalents and marketable securities.
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                                                    Three Months Ended December 31,                     Q2 FY22
                                                                                                          vs.
(Dollar amounts in thousands)                           2021                   2020                     Q2 FY21
Interest expense                                 $        37,852           $  38,880          $ (1,028)             (3) %
Other expense (income), net                                1,201               3,882            (2,681)            (69) %
Interest expense as a percentage of total
revenues                                                       2   %               2  %
Other expense (income), net as a percentage of
total revenues                                                  < 1%        


Interest expense during the three months ended December 31, 2021
decreased compared to the three months ended December 31, 2020, primarily due to
lower interest expense on our Revolving Credit Facility.
Other expense (income), net during the three months ended December 31, 2021
decreased compared to the three months ended December 31, 2020, primarily due to
more favorable exchange rates.

                                                   Six Months Ended December 31,                    Q2 FY22 YTD
                                                                                                        vs.
(Dollar amounts in thousands)                         2021                  2020                    Q2 FY21 YTD
Interest expense                               $       76,164           $  78,266          $    (2,102)             (3) %
Other expense (income), net                    $       15,341           $   7,079                8,262             117  %
Interest expense as a percentage of total
revenues                                                    2   %               2  %
Other expense (income), net as a percentage of
total revenues                                               < 1%           


Interest expense during the six months ended December 31, 2021
decreased compared to the six months ended December 31, 2020, primarily due to
lower interest expense on our Revolving Credit Facility.
Other expense (income), net during the six months ended December 31, 2021
increased compared to the six months ended December 31, 2020, primarily due to a
fair value loss of $8.9 million from an equity security in the six months ended
December 31, 2021..
Provision for Income Taxes
The following table provides details of income taxes:
                                             Three Months Ended December 31,                Six Months Ended December 31,
(Dollar amounts in thousands)                    2021                   2020                  2021                    2020
Income before income taxes                $       926,905           $ 527,402          $     1,693,253           $ 1,011,208
Provision (benefit) for income taxes              209,388              70,419                  (92,749)              134,083
Effective tax rate                                   22.6   %            13.4  %                  (5.5)  %              13.3  %


The effective tax rate during the three months ended December 31, 2021 was
higher compared to the three months ended December 31, 2020 primarily due to the
impact of the following items:
•Tax expense increased by $163.7 million during the three months ended December
31, 2021 relating to a non-recurring tax expense resulting from a new Israel tax
law enacted on November 15, 2021. The new Israel tax law limits our ability to
maintain our previous representation that the historical earnings were
permanently reinvested in Israel. We recorded deferred tax liability and related
tax expense of $163.7 million in accordance with the new Israel tax law;
partially offset by
•Tax expense decreased by $69.1 million during the three months ended December
31, 2021 relating to an internal restructuring reducing the deferred tax
liability on unremitted earnings.
The effective tax rate during the six months ended December 31, 2021 was lower
compared to the six months ended December 31, 2020 primarily due to the impact
of the following items:
•Tax expense decreased by $394.5 million during the six months ended December
31, 2021 relating to a non-recurring tax benefit resulting from the intra-entity
transfers of certain intellectual property rights ("IP rights"). During the
three months ended September 30, 2021, we completed intra-entity transfers of IP
rights to one of our Singapore subsidiaries in order to better align the
ownership of these rights with how our business operates. The transfers did not
result in taxable gains; however, our Singapore subsidiary recognized deferred
tax assets for the book and tax basis
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difference of the eligible transferred IP rights; and
•Tax expense decreased by $69.1 million during the six months ended December
31,2021 relating to an internal restructuring reducing the deferred tax
liability on unremitted earnings; partially offset by
•Tax expense increased by $163.7 million during the six months ended December
31, 2021 relating to a non-recurring tax expense resulting from a new Israel tax
law enacted on November 15, 2021. The new Israel tax law limits our ability to
maintain our previous assertion that certain historical earnings of our
subsidiaries were permanently reinvested in Israel. Given this, we recorded a
deferred tax liability and related tax expense of $163.7 million during the
three months ended December 31, 2021 for the future Israel income tax due upon
repatriation of these historical earnings in accordance with the new Israel tax
law.
Our future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income, the amount of our
pre-tax income as business activities fluctuate, non-deductible expenses
incurred in connection with acquisitions, R&D credits as a percentage of
aggregate pre-tax income, non-taxable or non-deductible increases or decreases
in the assets held within our Executive Deferred Savings Plan, the tax effects
of employee stock activity and the effectiveness of our tax planning strategies.
For discussions on tax examinations, assessments and certain related
proceedings, see Note 13 "Income Taxes" to our Condensed Consolidated Financial
Statements.
Liquidity and Capital Resources
                                                                      As of                    As of
(Dollar amounts in thousands)                                   December 31, 2021          June 30, 2021
Cash and cash equivalents                                      $       1,657,057          $  1,434,610
Marketable securities                                                  1,153,404             1,059,912
Total cash, cash equivalents and marketable securities         $       2,810,461          $  2,494,522
Percentage of total assets                                                    24  %                 24  %

                                                                     Six Months Ended December 31,
(In thousands)                                                         2021                    2020
Cash flows:
Net cash provided by operating activities                      $       1,674,595          $  1,073,252
Net cash used in investing activities                                   (281,570)             (230,212)
Net cash used in financing activities                                 (1,166,876)             (665,583)
Effect of exchange rate changes on cash and cash equivalents              (3,702)               19,600
Net (decrease) increase in cash and cash equivalents           $         

222,447 $197,057


Cash, Cash Equivalents and Marketable Securities
As of December 31, 2021, our cash, cash equivalents and marketable securities
totaled $2.81 billion, which represents an increase of $315.9 million from
June 30, 2021. The increase is due to net cash provided by operating activities
of $1.67 billion, partially offset by stock repurchases of $829.6 million, cash
used for payment of dividends and dividend equivalents of $322.0 million,
capital expenditures of $133.9 million and $38.0 million in net cash paid for an
acquisition.
As of December 31, 2021, $1.22 billion of our $2.81 billion of cash, cash
equivalents and marketable securities were held by our foreign subsidiaries and
branch offices. We currently intend to indefinitely reinvest $702.2 million of
the cash, cash equivalents and marketable securities held by our foreign
subsidiaries for which we assert that earnings are permanently reinvested. If,
however, a portion of these funds were to be repatriated to the United States,
we would be required to accrue and pay state and foreign taxes of approximately
1% - 22% of the funds repatriated. The amount of taxes due will depend on the
amount and manner of the repatriation, as well as the location from which the
funds are repatriated. We have accrued state and foreign tax on the remaining
cash of $519.8 million of the $1.22 billion held by our foreign subsidiaries and
branch offices. As such, these funds can be returned to the U.S. without
accruing any additional U.S. tax expense.
Cash Dividends
During the three months ended December 31, 2021, our Board of Directors declared
a regular quarterly cash dividend of $1.05 per share on our outstanding common
stock, which was paid on December 1, 2021 to our stockholders of record as of
the
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close of business on November 15, 2021. During the same period in fiscal year
ended June 30, 2021, our Board of Directors declared and paid a regular
quarterly cash dividend of $0.90 per share on our outstanding common stock. The
total amount of regular quarterly cash dividends and dividend equivalents paid
during the three months ended December 31, 2021 and 2020 was $159.1 million and
$139.6 million, respectively. The total amount of regular quarterly cash
dividends and dividend equivalents paid during the six months ended December 31,
2021 and 2020 was $322.0 million and $280.7 million, respectively. The amount of
accrued dividend equivalents payable for regular quarterly cash dividends on
unvested RSUs with dividend equivalent rights as of December 31, 2021 and
June 30, 2021 was $10.4 million and $10.3 million, respectively. These amounts
will be paid upon vesting of the underlying unvested RSUs as described in Note
10 "Equity, Long-term Incentive Compensation Plans and Non-Controlling Interest"
to our Condensed Consolidated Financial Statements.
Stock Repurchases
The shares repurchased under our stock repurchase program have reduced our basic
and diluted weighted-average shares outstanding for the six months ended
December 31, 2021 and 2020. The stock repurchase program is intended, in part,
to offset the dilution from our equity incentive plans, shares issued in
connection with purchases under our ESPP as well as to return excess cash to our
shareholders.
Cash Flows from Operating Activities
Historically, we have financed our liquidity requirements through cash generated
from our operations. Net cash provided by operating activities during the six
months ended December 31, 2021 was $1.67 billion compared to $1.07 billion
during the six months ended December 31, 2020. This increase of $601.3 million
resulted primarily from the following:
•An increase in collections of approximately $1.25 billion mainly driven by
higher shipments and prepayments during the six months ended December 31, 2021;
•A decrease in other tax payments of approximately $17 million during the six
months ended December 31, 2021; partially offset by
•An increase in accounts payable payments of approximately $475 million during
the six months ended December 31, 2021; and
•An increase in employee related payments of approximately $87 million during
the six months ended December 31, 2021; and
•An increase in income tax payments of approximately $113 million during the six
months ended December 31, 2021.
Cash Flows used in Investing Activities
Net cash used in investing activities during the six months ended December 31,
2021 was $281.6 million compared to $230.2 million during the six months ended
December 31, 2020. This increase in cash used was mainly due to increases in
cash paid for business acquisition of $38.0 million and cash paid to purchase
fixed assets of $17.9 million, partially offset by a decrease in net purchases
of available for sale and trading securities of $7.1 million.
Cash Flows used in Financing Activities
Net cash used in financing activities during the six months ended December 31,
2021 was $1.17 billion compared to cash used in financing activities of $665.6
million during the six months ended December 31, 2020. This increase was mainly
due to increases in cash used for common stock repurchases of $464.2 million and
cash paid for dividends and dividend equivalents of $41.2 million, partially
offset by a decrease in net debt repayments of $9.7 million.
Senior Notes
We have senior unsecured notes in the aggregate principal amount of $3.45
billion outstanding as of December 31, 2021. In February 2020, we issued $750.0
million ("2020 Senior Notes") aggregate principal amount of senior, unsecured
long-term notes under which the proceeds were used to redeem $500.0 million of
Senior Notes due 2021, including associated redemption premiums, accrued
interest and other fees and expenses, to repay borrowings of $200.0 million
under the Revolving Credit Facility, and for other general corporate purposes.
In March 2019 and November 2014, we issued $1.20 billion (the "2019 Senior
Notes") and $2.50 billion (the "2014 Senior Notes" and together with the 2019
Senior Notes and the 2020 Senior Notes, the "Senior Notes"), respectively,
aggregate principal amount of senior, unsecured long-term notes. See Note 8
"Debt" to our Condensed Consolidated Financial Statements for additional
discussion of existing debt. We may seek to refinance our existing debt and may
incur additional indebtedness depending on our capital requirements and the
availability of financing.
Interest is payable as follows: semi-annually on March 1 and September 1 of each
year for the 2020 Senior Notes; semi-annually on March 15 and September 15 of
each year for the 2019 Senior Notes; and semi-annually on May 1 and November 1
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of each year for the 2014 Senior Notes. The Indenture for the Senior Notes
includes covenants that limit our ability to grant liens on our facilities and
enter into sale and leaseback transactions, subject to certain allowances under
which certain sale and leaseback transactions are not restricted.
In certain circumstances involving a change of control followed by a downgrade
of the rating of a series of Senior Notes by at least two of Moody's Investors
Service ("Moody's"), S&P Global Ratings ("S&P") and Fitch Inc. ("Fitch"), unless
we have exercised our rights to redeem the Senior Notes of such series, we will
be required to make an offer to repurchase all or, at the holder's option, any
part, of each holder's Senior Notes of that series pursuant to the offer
described below (the "Change of Control Offer"). In the Change of Control Offer,
we will be required to offer payment in cash equal to 101% of the aggregate
principal amount of Senior Notes repurchased plus accrued and unpaid interest,
if any, on the Senior Notes repurchased, up to, but not including, the date of
repurchase.
As of December 31, 2021, we were in compliance with all of our covenants under
the Indenture associated with the Senior Notes.
Revolving Credit Facility
We have a Credit Agreement (the "Credit Agreement") providing for a $1.00
billion unsecured Revolving Credit Facility (the "Revolving Credit Facility"),
with a maturity date of November 30, 2023. During the first quarter of the
fiscal year ending June 30, 2021, we made a principal payment of $50.0 million
on the Revolving Credit Facility which brought the balance under the Revolving
Credit Facility to zero. During the first quarter of the fiscal year ending
June 30, 2022, we borrowed $300.0 million from the Revolving Credit Facility,
which was paid in full in the same quarter. As of December 31, 2021, we had no
outstanding borrowings under the Revolving Credit Facility.
We may borrow, repay and reborrow funds under the Revolving Credit Facility
until the maturity date, at which time such Revolving Credit Facility will
terminate, and all outstanding loans under such facility, together with all
accrued and unpaid interest, must be repaid. We may prepay outstanding
borrowings under the Revolving Credit Facility at any time without a prepayment
penalty.
Borrowings under the Revolving Credit Facility will bear interest, at our
option, at either: (i) the Alternative Base Rate ("ABR") plus a spread, which
ranges from 0 bps to 75 bps, or (ii) the London Interbank Offered Rate ("LIBOR")
plus a spread, which ranges from 100 bps to 175 bps. The spreads under ABR and
LIBOR are subject to adjustment in conjunction with credit rating downgrades or
upgrades. We are also obligated to pay an annual commitment fee on the daily
undrawn balance of the Revolving Credit Facility, which ranges from 10 bps to 25
bps, subject to an adjustment in conjunction with changes to our credit rating.
As of December 31, 2021, we elected to pay interest on the borrowed amount under
the Revolving Credit Facility at LIBOR plus a spread of 100 bps, and we pay an
annual commitment fee of 10 bps on the daily undrawn balance of the Revolving
Credit Facility.
The Revolving Credit Facility requires us to maintain an interest expense
coverage ratio as described in the Credit Agreement, on a quarterly basis,
covering the trailing four consecutive fiscal quarters of no less than 3.50 to
1.00. In addition, we are required to maintain the maximum leverage ratio as
described in the Credit Agreement, on a quarterly basis of 3.00 to 1.00,
covering the trailing four consecutive fiscal quarters for each fiscal quarter,
which can be increased to a maximum of 4.00 to 1.00 for a period of time in
connection with a material acquisition or a series of material acquisitions. As
of December 31, 2021, our maximum allowed leverage ratio was 3.00 to 1.00.
We were in compliance with all covenants under the Credit Agreement as of
December 31, 2021 (the interest expense coverage ratio was 23.43 to 1.00 and the
leverage ratio was 0.95 to 1.00). Considering our current liquidity position,
short-term financial forecasts and ability to prepay the Revolving Credit
Facility, if necessary, we expect to continue to be in compliance with our
financial covenants at the end of our fiscal year ending June 30, 2022.
Contractual Obligations
There have been no material changes outside the ordinary course of business to
our contractual obligations as disclosed in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2021, except for an increase in purchase
obligations for inventory. For additional details regarding our debt and
commitments, refer to Note 8 "Debt" and Note 15 "Commitments and Contingencies,"
respectively, to our Condensed Consolidated Financial Statements. For additional
details regarding our contractual obligations, refer to our Annual Report Form
on 10-K for the fiscal year ended June 30, 2021.
Working Capital
Working capital was $3.93 billion as of December 31, 2021, which represents an
increase of $332.4 million compared to our working capital of $3.59 billion as
of June 30, 2021. As of December 31, 2021, our principal sources of liquidity
consisted
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of $2.81 billion of cash, cash equivalents and marketable securities. Our
liquidity may be affected by many factors, some of which are based on the normal
ongoing operations of the business, spending for business acquisitions and other
factors such as uncertainty in the global and regional economies and the
semiconductor, semiconductor-related and electronic device industries. Although
cash requirements will fluctuate based on the timing and extent of these
factors, we believe that cash generated from operations, together with the
liquidity provided by existing cash and cash equivalents balances and
availability under our Revolving Credit Facility, will be sufficient to satisfy
our liquidity requirements associated with working capital needs, capital
expenditures, cash dividends, stock repurchases and other contractual
obligations, including repayment of outstanding debt, for at least the next 12
months.
In June 2021, Moody's upgraded our senior unsecured credit rating from Baa1 to
A2. Our credit ratings as of December 31, 2021 are summarized below:
Rating Agency        Rating
Fitch                 BBB+
Moody's                A2
Standard & Poor's     BBB+


Factors that can affect our credit ratings include changes in our operating
performance, the economic environment, conditions in the semiconductor and
semiconductor equipment industries, our financial position, material
acquisitions and changes in our business strategy.
Off-Balance Sheet Arrangements
As of December 31, 2021, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably
likely to have a current or future effect on our financial position, changes in
financial condition, revenues and expenses, results of operations, liquidity,
capital expenditures, or capital resources that are material to investors. Refer
to Note 15 "Commitments and Contingencies" to our Condensed Consolidated
Financial Statements for information related to indemnification obligations.
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