KLA(US:KLAC)2023-10-26 16:00PART I: FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited Condensed Consolidated Financial Statements for the quarter ended September 30, 2023, highlighting a year-over-year decrease in revenue and net income due to a semiconductor market slowdown Condensed Consolidated Statements of Operations Highlights (Q1 FY24 vs Q1 FY23) | Financial Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $2,396,956 | $2,724,424 | -12.0% | | Gross Profit | $1,450,065 | $1,683,198 | -13.8% | | Income before income taxes | $851,711 | $1,070,028 | -20.4% | | Net Income attributable to KLA | $741,375 | $1,025,991 | -27.7% | | Diluted Net Income per Share | $5.41 | $7.20 | -24.9% | Condensed Consolidated Balance Sheet Highlights | Account | Sep 30, 2023 (in thousands) | Jun 30, 2023 (in thousands) | | :--- | :--- | :--- | | Total current assets | $8,430,791 | $8,372,032 | | Total assets | $14,136,841 | $14,072,357 | | Total current liabilities | $3,817,743 | $3,742,842 | | Total liabilities | $11,146,624 | $11,152,604 | | Total stockholders' equity | $2,990,217 | $2,919,753 | Condensed Consolidated Statements of Cash Flows Highlights (Q1 FY24 vs Q1 FY23) | Cash Flow Activity | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $883,740 | $1,011,545 | | Net cash used in investing activities | ($391,671) | ($53,475) | | Net cash used in financing activities | ($705,156) | ($705,727) | | Net (decrease) increase in cash and cash equivalents | ($216,295) | $234,372 | Notes to Condensed Consolidated Financial Statements Detailed notes disclose accounting policies, with $10.85 billion in remaining performance obligations impacted by market slowdown and U.S. export regulations, and an effective tax rate increase to 13.0% - As of September 30, 2023, the company had $10.85 billion of remaining performance obligations (RPO), representing future product and service deliveries. This is subject to elevated risk of modification or cancellation due to market slowdown and U.S. export regulations targeting China3435 - Total long-term debt as of September 30, 2023, was approximately $5.89 billion, primarily consisting of various series of Senior Notes with maturities ranging from 2024 to 206271 - The effective tax rate for the quarter was 13.0%, a significant increase from 4.1% in the same period last year. The prior year's rate was lower due to a decrease in deferred tax liabilities and unrecognized tax benefits from examination settlements109196197 Revenues by Geographic Region (Q1 FY24 vs Q1 FY23) | Region | Q1 2024 Revenue (in thousands) | Q1 2024 % | Q1 2023 Revenue (in thousands) | Q1 2023 % | | :--- | :--- | :--- | :--- | :--- | | China | $1,025,944 | 43% | $839,661 | 31% | | Taiwan | $405,343 | 17% | $748,334 | 27% | | North America | $250,713 | 10% | $233,754 | 9% | | Japan | $227,377 | 10% | $217,709 | 8% | | Korea | $219,821 | 9% | $407,462 | 15% | | Europe and Israel | $168,436 | 7% | $164,073 | 6% | | Rest of Asia | $99,322 | 4% | $113,431 | 4% | Item 2. MD&A of Financial Condition and Results of Operations Management attributes the 12% year-over-year revenue decline to a semiconductor market slowdown, with product revenues falling 16% while service revenues grew 6%, and maintains a strong liquidity position with $3.35 billion in cash - Product revenues decreased primarily due to a macro-driven slowdown causing the semiconductor industry to rebalance its supply chain and reduce capital expenditure plans for calendar 2023179163 - Service revenues increased due to a larger installed base of KLA's systems at customer sites180 - The U.S. government's 2022 and 2023 BIS Rules impose significant export licensing requirements for advanced semiconductor technology sold to China, which could materially impact future business165167169 Gross Margin Change Analysis (Q1 FY23 to Q1 FY24) | Factor | Contribution to Margin Change (%) | | :--- | :--- | | Q1 FY23 Gross Margin | 61.8% | | Revenue volume of products and services | (1.7)% | | Mix of products and services sold | 0.8% | | Manufacturing labor, overhead and efficiencies | (0.3)% | | Other service and manufacturing costs | (0.1)% | | Q1 FY24 Gross Margin | 60.5% | - As of September 30, 2023, the company had $3.35 billion in cash, cash equivalents, and marketable securities. Net cash from operations was $883.7 million for the quarter198199 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and foreign currency fluctuations, with a 100 basis point interest rate increase potentially decreasing its $1.50 billion fixed-income portfolio by $15.5 million - The company's $1.50 billion fixed income securities portfolio is subject to interest rate risk; a uniform 100 bps increase in market rates would cause a $15.5 million decline in fair value214 - The fair value of the company's $5.89 billion in long-term fixed-rate Senior Notes is subject to interest rate risk, with a fair value of $5.31 billion as of September 30, 2023215 - The company hedges certain foreign currency exposures. A 10% adverse move in all relevant exchange rates would decrease the fair value of its hedge contracts by $97.1 million, which would be largely offset by gains in the underlying hedged exposures219 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the end of the period, the company's disclosure controls and procedures were effective at a reasonable assurance level221 - No changes in internal control over financial reporting were identified during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls225 PART II: OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, with uncertain outcomes that could potentially have a material adverse effect on financial results - The company is involved in various legal proceedings and claims (commercial, IP, customer, labor) in the normal course of business. The outcomes are difficult to predict and could have a material adverse effect on financial results117227 Item 1A. Risk Factors The company faces significant risks from U.S. export controls impacting China sales, semiconductor industry cyclicality, a concentrated customer base, cybersecurity threats, and geopolitical instability, including the war in Israel - Evolving U.S. export rules (2022 and 2023 BIS Rules) significantly restrict sales and services to certain customers in China, which represented 43% of revenue in Q1 FY24. Failure to obtain licenses could materially harm business241242244 - The business is exposed to the cyclical nature of the semiconductor industry. Current down-cycles affect customer capital spending, order timing, and revenue predictability293 - The customer base is highly concentrated, exposing the company to increased volatility, pricing pressure, and risks tied to the financial health and strategic shifts of a few large customers288290 - The company faces significant risk from cybersecurity incidents, which could disrupt operations, lead to theft of intellectual property, and result in significant financial and reputational damage258259 - The company has significant operations in Israel and identifies the war between Israel and Hamas as a risk that could materially impact business, operations, and financial results271 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 956,272 shares of common stock and authorized an additional $2.0 billion for its repurchase program, leaving $3.45 billion available Stock Repurchases for the Three Months Ended September 30, 2023 | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | July 2023 | 231,293 | $466.52 | | August 2023 | 365,551 | $486.55 | | September 2023 | 359,428 | $471.96 | | Total | 956,272 | | - The Board of Directors approved a $2.0 billion increase to the stock repurchase program in the first quarter of fiscal 2024. As of September 30, 2023, approximately $3.45 billion remained available for repurchases331 Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - None332 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable333 Item 5. Other Information No director or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended September 30, 2023334 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate documents and required CEO and CFO certifications - The exhibits filed with this report include CEO and CFO certifications pursuant to Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350336