KLA Corporation — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2019. Comparisons are with the periods ended December 31, 2018. KLA supplies process-control and yield-management equipment and services to semiconductor and related electronics industries. Results include Orbotech from its February 2019 acquisition, limiting year-over-year comparability.
Financial performance and liquidity
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $1.509 billion, up 35% | $2.923 billion, up 32% |
| Gross margin | 58.0%, down from 63.5% | 57.6%, down from 64.3% |
| Income before taxes | $424.9 million, versus $416.0 million | $796.4 million, versus $843.5 million |
| Net income attributable to KLA | $380.6 million, versus $369.1 million | $727.1 million, versus $765.0 million |
| Diluted EPS | $2.40, versus $2.42 | $4.56, versus $4.96 |
| Operating cash flow | $884.0 million for six months, versus $663.6 million |
Quarterly product revenue rose 34% and service revenue 36%. Management attributed growth principally to strong wafer-inspection demand, service growth, and Orbotech. The acquired business contributed $171.2 million of quarterly product revenue and $69.0 million of quarterly service revenue. Semiconductor Process Control revenue grew 14% in the quarter; lower shipments to memory customers partly offset product growth.
Gross margin declined mainly due to Orbotech’s lower product margins, unfavorable product/service mix, and increased service and manufacturing costs. R&D was $220.8 million, up 33%; SG&A was $192.3 million, up 71%, with both increases reflecting Orbotech and higher employee-related costs, among other items. Interest expense increased to $40.5 million, primarily reflecting the $1.2 billion of notes issued in March 2019.
At December 31, cash, cash equivalents and marketable securities totaled $1.678 billion, down from $1.739 billion at June 30. Working capital was $2.66 billion. Six-month investing cash outflow was $154.8 million and financing cash outflow was $805.6 million. Capital expenditures were $67.4 million. Principal debt was $3.425 billion, including $225 million drawn on a $1.0 billion revolver; $775 million remained undrawn. KLA reported compliance with debt covenants and said available liquidity and expected operating cash flows should cover requirements for at least 12 months.
Material changes and notable items
- Orbotech, acquired for approximately $3.26 billion in February 2019, materially expanded KLA’s PCB, display and specialty semiconductor businesses and affects period comparisons. Acquisition-related intangible amortization was $56.8 million for the quarter and $114.7 million for six months.
- Share repurchases totaled $509.1 million over six months; dividends paid were $256.3 million. The quarterly dividend was $0.85 per share, compared with $0.75 a year earlier. The board authorized an additional $1.0 billion repurchase capacity in September 2019.
- KLA adopted lease accounting standard ASC 842 on July 1, 2019, recording $110.7 million of lease assets and $108.7 million of lease liabilities; management reported no material effect on earnings.
- Management approved workforce reductions, primarily in PCB, Display and Component Inspection, expected to be completed in the second half of fiscal 2021, and is considering a disposition of the solar business. Restructuring charges were $2.8 million for six months; additional charges are expected.
Outlook, risks and contingencies
The filing provides no specific forward quarterly revenue or earnings guidance. KLA reported $2.07 billion of remaining performance obligations; approximately 5% to 15% is expected to be recognized beyond the next 12 months. Orders may be delayed, pushed out or canceled, often with limited or no penalty. Management described long-term demand drivers including advanced technology, EUV, 5G, IoT and automotive electronics, while emphasizing cyclical customer capital spending and uncertainty in shipment timing.
Key business risks include semiconductor-industry cyclicality, concentrated customers, technology and pricing competition, supply-chain constraints, and substantial exposure to Asian markets. Two customers represented approximately 24% and 10% of quarterly revenue; Taiwan and China together represented 55%. The filing also flags the then-recent coronavirus outbreak as a possible source of operational disruption.
Orbotech faces an Israeli tax assessment of approximately $74 million, including interest and indexation, for 2012–2014. Orbotech appealed; KLA said recorded unrecognized tax benefits were sufficient, but the outcome is uncertain. A related criminal investigation remained ongoing, with no decision on whether to indict reported. KLA also disclosed ordinary-course litigation and approximately $804.1 million of significant purchase commitments, primarily due within 12 months. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Separate organic performance from Orbotech’s acquired revenue and assess whether margin pressure persists.
- Track memory and other customer spending, customer concentration, order pushouts/cancellations, and the conversion of remaining performance obligations into revenue.
- Monitor debt, interest costs, revolver usage, covenant headroom, and cash returned through repurchases and dividends.
- Follow the Israeli tax appeal and criminal investigation, restructuring costs, and any solar-business disposition.
- Review subsequent disclosures on the coronavirus-related operational and customer-demand risks noted in this filing.