KLA Corporation (KLA) — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, KLA’s first quarter of fiscal 2021 (not calendar 2020 Q1). Unaudited results are compared with the three months ended September 30, 2019. KLA supplies process-control and yield-management equipment and services for semiconductor and related electronics industries.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $1.539 billion | $1.413 billion | Up 9% |
| Gross profit / margin | $918.1 million / 59.7% | $809.2 million / 57.2% | Margin up 2.5 percentage points |
| Income before taxes | $483.8 million | $371.5 million | Up 30% |
| Net income attributable to KLA | $420.6 million | $346.5 million | Up 21% |
| Diluted EPS | $2.69 | $2.16 | Up 25% |
| Operating cash flow | $512.2 million | $496.2 million | Up $15.9 million |
Product revenue increased 8% to $1.145 billion; service revenue increased 11% to $393.1 million. Gross-margin improvement primarily reflected a more profitable product and service mix, partly offset by higher service and manufacturing costs. R&D expense rose 4% to $219.0 million; SG&A fell 8% to $172.6 million, mainly due to lower travel and intangible amortization costs. The effective tax rate rose to 13.2% from 6.8%, primarily reflecting a changed geographic mix of earnings and the UK statutory tax rate.
Segments, cash, debt and liquidity
- Semiconductor Process Control revenue grew 9% to $1.268 billion; Specialty Semiconductor Process grew 29% to $89.0 million; PCB, Display and Component Inspection grew 1% to $181.2 million. Other revenue was $0.1 million.
- China represented 32% of revenue, up from 24% a year earlier. Two customers accounted for approximately 14% and 12% of quarterly revenue.
- Cash, cash equivalents and marketable securities totaled $2.043 billion at September 30, 2020, up $63.0 million from June 30. Working capital was $3.01 billion. Cash from operations was partly offset by $134.3 million used in investing and $404.2 million used in financing.
- Debt principal was $3.45 billion ($3.420 billion carrying value); KLA repaid the remaining $50 million revolver balance and had no revolver borrowings outstanding. The $1.0 billion revolving facility remained available. KLA reported compliance with debt covenants and stated that existing liquidity and expected operating cash flows should meet requirements for at least 12 months.
- Financing uses included $187.9 million of share repurchases and $141.2 million of dividends paid. The quarterly dividend was increased to $0.90 per share. Approximately $843.7 million remained authorized for repurchases.
Changes, outlook and material items
- Management attributed higher product sales principally to strong wafer-inspection demand and growth in 5G infrastructure and advanced RF/mobile technologies; softer FPD demand and oversupply partly offset growth. Service revenue benefited from a larger installed base.
- KLA reported strong semiconductor customer demand and progress in supply-chain recovery, but said COVID-19 effects remained uncertain. Freight costs increased, while lower travel costs reduced expenses. No specific forward quarterly revenue or earnings guidance is provided in the supplied filing text.
- Remaining performance obligations were $2.20 billion, primarily orders to deliver products and services. The filing says approximately 5%–15% is expected to be recognized as revenue beyond the next 12 months; orders may be delayed, pushed out or canceled, generally with limited or no penalties.
- The ongoing workforce-reduction plan generated $3.5 million of restructuring charges this quarter; $7.0 million remained accrued, and additional charges are expected. The plan is expected to be completed in the second half of fiscal 2021, primarily in PCB, Display and Component Inspection.
- Adoption of the expected-credit-loss standard (ASC 326) on July 1 reduced opening retained earnings by $5.5 million. Credit losses recognized in the quarter were not significant.
- COVID-19, semiconductor-industry cyclicality, customer concentration, supply availability, export restrictions affecting certain China-based customers, foreign-exchange and interest-rate exposure, and cybersecurity are identified risks. KLA said U.S. export restrictions had not significantly affected operations to date.
- Orbotech’s Israeli tax dispute remains unresolved: tax decrees were approximately $73 million including interest and linkage adjustments; KLA said recorded unrecognized tax benefits were sufficient, and the case was in pre-trial proceedings. An associated criminal investigation remained ongoing, with no decision on indictment disclosed. The company cautions that tax-audit outcomes may differ materially from accruals.
Important facts for investors to verify
- Whether wafer-inspection and broader semiconductor demand, including China-related sales, remains strong and converts into shipments and cash collections.
- How COVID-19, supply-chain constraints, freight costs and customer order delays affect future revenue and gross margins.
- Customer concentration and the potential effect of individual customer cancellations or capital-spending changes.
- The status and potential financial consequences of the Israeli tax decrees and related criminal investigation.
- Future cash generation and capital allocation against $3.45 billion of debt, dividends, buybacks and approximately $804.3 million of supplier and other purchase commitments, primarily due within 12 months.