KLA Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2021, ended December 31, 2020; comparisons are with the corresponding 2019 periods. The filing was signed February 4, 2021. Amounts below are in U.S. dollars.
Business context
KLA supplies process-control, inspection, metrology and related services to semiconductor and electronics manufacturers. Its four reportable segments are Semiconductor Process Control, Specialty Semiconductor Process, PCB, Display and Component Inspection, and Other. Semiconductor Process Control is the largest segment.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Six months ended Dec. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1.651 billion | +9% | $3.189 billion | +9% |
| Gross margin | 59.4% | 58.0% prior year | 59.5% | 57.6% prior year |
| Income before taxes | $527.4 million | +24% | $1.011 billion | +27% |
| Net income attributable to KLA | $457.3 million | +20% | $877.8 million | +21% |
| Diluted EPS | $2.94 | $2.40 prior year | $5.62 | $4.56 prior year |
| Operating cash flow | Not separately stated for the quarter | $1.073 billion | $884.0 million prior year |
Quarterly product revenue grew 8% and service revenue 13%. Management attributed growth primarily to semiconductor memory and logic demand, inspection products, and demand related to 5G, work-from-home needs and high-performance computing. Softer demand and oversupply in flat-panel displays partly offset growth. Gross-margin improvement reflected product and service mix and higher volume, partly offset by increased service and manufacturing costs.
For the six-month period, R&D expense increased 4% to $448.1 million, while SG&A declined 7% to $354.5 million, principally reflecting reduced travel and lower intangible amortization. The effective tax rate was 13.3%, up from 8.8% in the prior-year period.
Liquidity, cash flow and debt
At December 31, 2020, cash and cash equivalents were $1.431 billion and marketable securities were $865.1 million, totaling $2.297 billion. Working capital was $3.20 billion, up from $3.02 billion at June 30, 2020. Six-month operating cash flow of $1.073 billion was supported by higher collections; investing used $230.2 million and financing used $665.6 million. Financing uses included $365.4 million of share repurchases and $280.7 million of dividends.
Debt carrying value was $3.461 billion, including $20 million of short-term notes; principal outstanding was approximately $3.45 billion. KLA had no borrowings under its $1.0 billion revolving credit facility at period-end and reported compliance with debt covenants. Management said existing cash, operating cash generation and revolver availability should meet requirements for at least the next 12 months. Approximately $912.5 million of cash, cash equivalents and securities were held abroad; KLA intends to indefinitely reinvest $607.7 million of that amount.
Changes, outlook and risks
- Revenue, earnings and cash generation increased versus the prior-year periods. Semiconductor Process Control revenue grew 11% in the quarter; Specialty Semiconductor Process grew 21%. PCB, Display and Component Inspection revenue declined 4%.
- Quarter-end remaining performance obligations were $2.57 billion, primarily orders to deliver products and services. KLA expected approximately 5%–15% to be recognized as revenue beyond the next 12 months; orders may be delayed, pushed out or canceled, often with limited or no penalty.
- The filing provides no specific quantitative revenue or EPS guidance for the next quarter or full fiscal year. Management described semiconductor demand as strong and supply-chain recovery as progressing, but emphasized that COVID-19 effects remained uncertain. Pandemic-related freight costs increased, while reduced travel costs lowered expenses.
- Risks include customer concentration and cyclical customer capital spending, supply-chain disruption, COVID-19, foreign-exchange movements, and export restrictions affecting sales or service to certain China-based entities. Two customers each represented approximately 14% of quarterly revenue.
- Tax matters include an Israeli tax assessment of approximately $73 million for Orbotech’s 2012–2014 years under appeal, a further assessment of approximately $68 million for 2015–2018 to which KLA planned to object, and an ongoing Israeli criminal investigation concerning Orbotech, employees and its tax consultant. KLA stated that recorded unrecognized tax benefits were sufficient for the assessments; outcomes remain uncertain.
- A workforce-reduction plan, primarily affecting PCB, Display and Component Inspection, generated $4.6 million of restructuring charges in the quarter and $8.1 million for the six months. Further charges were expected. Separately, KLA recorded goodwill impairment charges totaling $256.7 million in the prior fiscal year’s third quarter; it reported no subsequent significant goodwill valuation events as of this filing.
- Other commitments include approximately $994.9 million of significant purchase commitments, primarily due within 12 months. The filing reports no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether semiconductor demand, segment mix and customer investment remain strong, and whether display-market weakness worsens.
- Whether the $2.57 billion of remaining performance obligations convert to revenue on expected timing, given customer cancellation and pushout provisions.
- Developments and potential financial consequences of the Israeli tax assessments, tax audits and criminal investigation.
- Exposure to major customers, China export controls, COVID-19 disruptions and component availability.
- Cash availability and potential tax costs associated with repatriating foreign-held funds, alongside debt service, dividends, repurchases and purchase commitments.