KLA Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, KLA’s first quarter of fiscal 2022. Comparisons are to the three months ended September 30, 2020 (Q1 FY2021), unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $2.084 billion | $1.539 billion | Up 35% |
| Product revenue | $1.630 billion | $1.145 billion | Up 42% |
| Service revenue | $454 million | $393 million | Up 15% |
| Gross margin | 61.0% | 59.7% | Up 1.3 percentage points |
| Income before taxes | $766 million | $484 million | Up 58% |
| Net income attributable to KLA | $1.068 billion | $421 million | Up 154% |
| Diluted earnings per share | $6.96 | $2.69 | Up 159% |
| Operating cash flow | $864 million | $512 million | Up $352 million |
Revenue growth was led by Semiconductor Process Control (SPC), up 40% to $1.779 billion. Specialty Semiconductor Process revenue rose 15% to $102 million, and PCB, Display and Component Inspection rose 12% to $203 million. Wafer Inspection revenue was $888 million, up from $520 million.
Research and development expense increased 18% to $258 million; selling, general and administrative expense increased 12% to $193 million. Other expense, net, was $14 million versus $3 million, mainly reflecting an $11.3 million fair-value loss on an equity security. Interest expense was $38 million, down slightly year over year.
Balance sheet, cash flow and capital allocation
- At September 30, 2021, cash and cash equivalents were $1.510 billion and marketable securities were $1.115 billion, totaling $2.625 billion, up $130 million from June 30, 2021.
- Total debt carrying value was $3.443 billion, including $20 million short-term debt and $3.423 billion long-term debt. Approximate net debt, comparing debt with cash and marketable securities, was $819 million. KLA reported no revolver borrowings at quarter-end.
- Current assets were $6.145 billion and current liabilities were $2.523 billion; reported working capital was $3.62 billion.
- Operating cash flow of $864 million was primarily supported by increased collections, partly offset by higher accounts payable and employee payments. Investing cash use was $175 million; financing cash use was $609 million.
- KLA repurchased approximately 1.19 million shares for $400 million and paid $163 million in dividends and dividend equivalents. The quarterly dividend was $1.05 per share. At quarter-end, $1.69 billion remained authorized for repurchases.
- Inventory increased to $1.715 billion from $1.575 billion at June 30. Accounts receivable rose to $1.464 billion from $1.305 billion.
Material changes and unusual items
- Non-recurring tax benefit: The reported $302 million income tax benefit included a $395 million benefit from transferring certain intellectual property rights to a Singapore subsidiary. The transfers generated deferred tax assets; the filing says the transfers did not result in taxable gains. The effective tax rate was negative 39.4%, versus 13.2% in the prior-year quarter. As a result, reported net income and EPS were substantially elevated; pretax income was $766 million.
- Demand and margins: Management attributed higher product revenue to strong demand, especially for inspection and metrology, and growth in advanced packaging, 5G infrastructure and automotive markets. Higher revenue volume supported the gross-margin increase, partly offset by higher service and manufacturing costs.
- Supply constraints: KLA reported extended supplier lead times and component shortages, prompting longer-range planning and increased purchase commitments. Significant purchase commitments were approximately $1.9 billion, primarily due within 12 months.
- Acquisitions: KLA acquired Anchor Semiconductor on July 1 for preliminary consideration of $80.3 million, including contingent consideration. Separately, it signed a September 17 agreement to acquire a privately held company for $460 million, subject to closing terms.
Outlook, risks and contingencies
The filing gives no specific quarterly revenue, earnings or margin guidance. Management described demand as generally strengthening and identified secular drivers including advanced computing, AI, automotive electronics and 5G. KLA reported $6.25 billion of remaining performance obligations, primarily sales orders; it expected approximately 5% to 15% to be recognized beyond the next 12 months. Supply constraints, customer pushouts or cancellations, and shipment or installation delays could affect timing.
- KLA said existing cash, operating cash generation and available revolver capacity should be sufficient for operating needs, capital expenditures, dividends, repurchases and debt obligations for at least the next 12 months.
- COVID-related supply disruptions, availability and cost of components, and potential manufacturing or customer-site interruptions remain risks.
- Customer concentration is significant: one customer represented approximately 24% of quarterly revenue. China and Taiwan together accounted for 63% of revenue by ship-to location. Export controls and licensing restrictions could limit sales or service to certain China-based customers.
- KLA had $3.45 billion principal amount of senior notes outstanding and a $1 billion unsecured revolving credit facility maturing in November 2023. It reported compliance with debt covenants; the reported leverage ratio was 1.07 to 1.00 against a 3.00-to-1.00 maximum.
- Orbotech tax matters include Israeli tax assessments of approximately $73 million for 2012–2014 and $68 million for 2015–2018, both disputed, and an ongoing criminal investigation. KLA believes recorded unrecognized tax benefits are sufficient, but outcomes and timing remain uncertain.
- Ordinary-course litigation, product indemnities and other contingencies could result in costs above recorded amounts; the filing says outcomes are difficult to predict. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Separate recurring operating performance from the $395 million one-time tax benefit when assessing net income, EPS and the period’s effective tax rate.
- Monitor whether supply constraints, the $1.9 billion purchase commitments and rising inventory translate into shipments and revenue, or instead create delays, cancellations or inventory risk.
- Track customer concentration and regional exposure, particularly the 24% revenue contribution from one customer and the effects of China-related export controls.
- Assess cash conversion, working-capital movements and the sustainability of buybacks and dividends alongside debt service and acquisition spending.
- Follow the proposed $460 million acquisition, Anchor Semiconductor contingent consideration, and the resolution of Orbotech’s tax assessments and investigation.