KLA Corporation (KLAC) — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019. The filing also reports fourth-quarter results for the three months ended June 30, 2019; it is not a fiscal 2018 10-K. KLA supplies semiconductor process-control, inspection and metrology equipment and services, and expanded into specialty semiconductor processing, PCB and display markets through its February 2019 acquisition of Orbotech.
Key financial results
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $4.569 billion | $4.037 billion | +13% |
| Gross margin | 59.1% | 64.1% | Down 5.0 percentage points |
| Operating expenses: R&D | $711 million | $609 million | +17% |
| Operating expenses: SG&A | $599 million | $442 million | +35% |
| Income before tax | $1.296 billion | $1.456 billion | Down 11% |
| Net income attributable to KLA | $1.176 billion | $802 million | +47% |
| Diluted EPS | $7.49 | $5.10 | +47% |
| Operating cash flow | $1.153 billion | $1.229 billion | Down $76 million |
Revenue growth reflected semiconductor process-control demand, higher service revenue and the partial-year contribution from Orbotech. Service revenue rose 34% to $1.177 billion; product revenue rose 7% to $3.392 billion. The lower gross margin primarily reflected Orbotech’s lower-margin business, higher service and manufacturing costs, and lower revenue volume, partly offset by favorable mix.
Net income increased despite lower pretax income, principally because the effective tax rate fell to 9.4% from 44.9%. FY2018 tax expense included substantial one-time Tax Cuts and Jobs Act transition-tax and deferred-tax effects. FY2019 includes a $19.3 million tax benefit related to the transition-tax liability.
Fourth quarter: Revenue was $1.258 billion, versus $1.070 billion in Q4 FY2018. Gross profit was $666 million versus $692 million, implying a gross margin of approximately 52.9% versus 64.7%. Net income attributable to KLA was $218 million, or $1.35 diluted EPS, compared with $349 million, or $2.22 diluted EPS. FY2019 comparisons are affected by the Orbotech acquisition and adoption of ASC 606.
Liquidity, debt and capital returns
- At June 30, 2019, cash, cash equivalents and marketable securities totaled $1.739 billion, down from $2.880 billion a year earlier; working capital was $2.547 billion.
- Operating cash flow of $1.153 billion was below FY2018’s $1.229 billion. Investing cash outflow was $1.181 billion, including $1.818 billion of net cash used for acquisitions; financing cash outflow was $360 million.
- Senior-note principal totaled $3.450 billion; balance-sheet debt net of discounts and issuance costs was $3.423 billion. No borrowings were outstanding under the $1.0 billion revolving facility at year-end. The company reported compliance with its debt covenants.
- KLA repurchased $1.103 billion of shares in FY2019 and paid $469 million in regular dividends and dividend equivalents. The quarterly dividend was $0.75 per share; approximately $859 million remained under the $2.0 billion repurchase authorization at year-end.
- Management stated that operating cash generation, existing liquidity and the revolving facility were expected to cover requirements, including debt service, for at least the next 12 months.
Material developments, outlook and risks
- Orbotech acquisition: Completed February 20, 2019, for approximately $3.26 billion. KLA reported $388.9 million of post-acquisition Orbotech revenue and a $61.6 million net loss contribution. Purchase accounting included $1.554 billion of acquired intangible assets and $1.812 billion of goodwill; valuations remained subject to measurement-period adjustments.
- Market outlook: Management’s view aligned with industry analysts’ expectations for lower memory equipment spending in calendar 2019, while leading-edge foundry and logic spending was strengthening and expected to remain strong. Management cited longer-term demand drivers including AI, EUV, IoT, 5G, automotive electronics and advanced packaging. The filing does not provide specific company revenue or EPS guidance.
- Accounting comparability: KLA adopted ASC 606 on July 1, 2018, using the modified retrospective method; prior-year results were not restated. Management said FY2019 revenue was favorably affected by earlier transfer of control and separate recognition of warranty revenue. The adoption increased reported FY2019 net income by $113 million versus the company’s presentation under prior guidance.
- Concentration and cyclicality: One customer accounted for approximately 15% of FY2019 revenue; one customer represented about 21% in FY2018. Semiconductor capital spending is cyclical, and orders may be delayed or cancelled with limited penalties. China represented 27% of FY2019 revenue, versus 16% in FY2018.
- Tax and legal uncertainty: Orbotech’s Israeli tax assessment was approximately $61 million, and an associated criminal investigation involving Orbotech, certain employees and its tax consultant remained ongoing. KLA said recorded unrecognized tax benefits were sufficient for the assessment, but the outcome was uncertain.
- Other notable exposures: Risks include export restrictions and trade tensions, including limits on serving JHICC; dependence on concentrated customers and suppliers; acquisition integration and goodwill valuation; foreign currency and interest-rate exposure; cybersecurity; and uninsured earthquake and terrorism risks. The auditor issued an unqualified opinion on the financial statements and internal controls, but Orbotech was excluded from the internal-control assessment and audit for FY2019.
Key facts for investors to verify
- How much future revenue and operating profit Orbotech contributes, and whether integration and expected synergies offset its effect on consolidated margins.
- Underlying semiconductor demand by memory, foundry and logic customers, including the effect of customer concentration, order timing and cancellations.
- The sustainability of FY2019’s unusually low effective tax rate, tax-holiday benefits and the resolution of Orbotech’s Israeli tax matters.
- Debt repayment capacity and the balance among acquisition spending, repurchases, dividends and liquidity needs.
- The effects of ASC 606 on revenue timing and margins when comparing FY2019 with periods reported under prior accounting guidance.