KLA(US:KLAC)2024-04-26 20:05PART I Financial Statements (Unaudited) KLA Corporation's unaudited financial statements reveal decreased revenue and net income, influenced by market slowdowns and goodwill impairment Condensed Consolidated Balance Sheets The balance sheets show increased total assets from marketable securities and inventories, and higher total liabilities due to deferred revenue and short-term debt Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | June 30, 2023 | | :--- | :--- | :--- | | Total current assets | $9,528,082 | $8,372,032 | | Total assets | $14,957,289 | $14,072,357 | | Total current liabilities | $4,458,538 | $3,742,842 | | Total liabilities | $11,862,404 | $11,152,604 | | Total stockholders' equity | $3,094,885 | $2,919,753 | - Total assets increased by approximately $0.885 billion, primarily driven by a rise in marketable securities and inventories, while total liabilities increased by about $0.71 billion, largely due to deferred system revenue and short-term debt10 Condensed Consolidated Statements of Operations The statements of operations show a year-over-year decline in total revenues and net income, significantly impacted by goodwill and intangible asset impairment charges Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2024 | Three Months Ended Mar 31, 2023 | Nine Months Ended Mar 31, 2024 | Nine Months Ended Mar 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $2,359,830 | $2,432,608 | $7,243,512 | $8,140,919 | | Net income attributable to KLA | $601,541 | $697,837 | $1,925,450 | $2,702,623 | | Diluted EPS | $4.43 | $5.03 | $14.11 | $19.16 | - The company recorded a goodwill and purchased intangible assets impairment charge of $70.5 million for the three months ended March 31, 2024, and a total of $289.5 million for the nine-month period, with no such charges in prior year periods12 - Revenues for the three and nine months ended March 31, 2024, decreased by 3% and 11% year-over-year respectively, with net income also declining due to lower revenues and impairment charges12 Condensed Consolidated Statements of Cash Flows Cash from operations decreased due to lower net income, while cash used in investing increased significantly, and cash used in financing decreased due to debt activities Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Mar 31, 2024 | Nine Months Ended Mar 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,415,960 | $2,710,690 | | Net cash used in investing activities | ($1,338,193) | ($408,087) | | Net cash used in financing activities | ($1,157,156) | ($2,318,968) | | Net decrease in cash and cash equivalents | ($79,698) | ($16,395) | - Cash from operations decreased primarily due to lower net income, partially offset by working capital changes, while cash used in investing increased significantly from higher marketable securities purchases, and cash used in financing decreased due to lower debt repayments and higher new debt issuance proceeds22 Notes to Condensed Consolidated Financial Statements The notes detail remaining performance obligations, significant goodwill impairment charges, debt issuance, share repurchases, effective tax rate changes, and geographical revenue distribution - As of March 31, 2024, the company had $9.90 billion in remaining performance obligations (RPO), with an estimated 40% to 45% expected to be recognized beyond the next 12 months38 - The company recorded total goodwill impairment charges of $263.1 million during the nine months ended March 31, 2024, related to its PCB and Display businesses, following a significant deterioration in their long-term forecast and a decision to exit most of the Display business697274 - In February 2024, KLA issued $750.0 million in senior notes, bringing total debt as of March 31, 2024, to $6.63 billion7980 - The company repurchased 2.4 million shares of common stock for $1.28 billion during the nine months ended March 31, 2024, with $2.64 billion remaining available for repurchase as of March 31, 2024114115 - The effective tax rate for the nine months ended March 31, 2024, was 14.2%, up from 10.3% in the prior year, primarily due to non-deductible goodwill impairment charges118217 Revenues by Geography (Nine Months Ended March 31) | Region | 2024 Revenue (in thousands) | 2024 % of Total | 2023 Revenue (in thousands) | 2023 % of Total | | :--- | :--- | :--- | :--- | :--- | | China | $3,050,609 | 42% | $2,156,380 | 26% | | Taiwan | $1,214,518 | 17% | $1,996,188 | 24% | | Korea | $731,783 | 10% | $1,466,624 | 18% | | North America | $761,319 | 11% | $941,771 | 12% | | Japan | $792,179 | 11% | $702,986 | 9% | | Europe and Israel | $421,148 | 6% | $542,823 | 7% | | Rest of Asia | $271,956 | 3% | $334,147 | 4% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, noting revenue declines due to semiconductor slowdowns and U.S. export regulations, alongside significant goodwill impairment charges, while maintaining strong liquidity and capital return programs Executive Summary The executive summary highlights long-term demand drivers like AI and 5G, tempered by a recent macro-driven slowdown in semiconductor demand and the impact of U.S. export control rules on China sales - The company's business is driven by long-term demand for AI, 5G, automotive electrification, and IoT, though a recent macro-driven slowdown has impacted semiconductor demand, leading customers to reduce capital expenditures172173 - U.S. government (BIS) export control rules, updated in October 2022 and October 2023, impose significant licensing requirements for products and services supplied to certain advanced IC fabs in China, creating uncertainty and potential disruption for a key growth region175176 Results of Operations Results of operations show declines in total and product revenues due to market slowdowns, while service revenue grew, and significant goodwill impairment charges impacted gross profit Revenue and Gross Margin Analysis | Metric | Three Months Ended Mar 31, 2024 | Three Months Ended Mar 31, 2023 | Nine Months Ended Mar 31, 2024 | Nine Months Ended Mar 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $2,359.8M (-3% YoY) | $2,432.6M | $7,243.5M (-11% YoY) | $8,140.9M | | Product Revenue | $1,769.4M (-7% YoY) | $1,903.5M | $5,527.8M (-16% YoY) | $6,562.5M | | Service Revenue | $590.5M (+12% YoY) | $529.1M | $1,715.7M (+9% YoY) | $1,578.4M | | Gross Margin | 57.9% | 58.7% | 59.7% | 60.0% | - Product revenue decline is attributed to a broad, macro-driven slowdown impacting semiconductor demand and customer capital expenditure, while service revenue increased due to a larger installed base of equipment191192 - The PCB, Display and Component Inspection segment gross profit decreased by 102% in Q3 2024 versus Q3 2023, primarily due to non-cash expenses to write off excess and obsolete inventory related to discontinued Display product lines199200 - Goodwill and purchased intangible asset impairment charges of $219.0 million were recorded in Q2 2024, with an additional $70.5 million goodwill impairment in Q3 2024, both related to the PCB and Display businesses208 Liquidity and Capital Resources The company's liquidity improved with increased cash and marketable securities, despite a decrease in operating cash flow, while continuing capital returns through dividends and share repurchases - As of March 31, 2024, total cash, cash equivalents, and marketable securities amounted to $4.29 billion, an increase of $1.05 billion from June 30, 2023220221 - Net cash from operating activities for the nine months ended March 31, 2024, was $2.42 billion, a decrease from $2.71 billion in the prior year, mainly due to lower customer collections and higher income tax payments226 - The company paid $575.5 million in dividends and repurchased $1.27 billion of its common stock during the nine months ended March 31, 2024221224225 - In December 2023, Fitch upgraded KLA's senior unsecured credit rating from A- to A232 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in interest rates, foreign currency exchange rates, and equity prices, with hedging strategies in place to mitigate potential impacts - The company's fixed income securities portfolio of $1.69 billion is subject to interest rate risk, where a 100 basis point increase in market interest rates would cause a $16.0 million decline in its fair value235 - The fair value of the company's $6.70 billion in fixed-rate Senior Notes is subject to interest rate risk, with its fair value decreasing as market rates rise, and was $6.39 billion as of March 31, 2024236 - Foreign currency risk is managed through forward and option contracts, where a 10% adverse move in exchange rates would decrease contract fair value by $125.9 million, offset by an increase in underlying hedged exposures240 Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that as of March 31, 2024, the company's disclosure controls and procedures were effective at a reasonable assurance level242 - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter246 PART II OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings and claims in the normal course of business, including commercial, intellectual property, and employment matters - The company is party to various lawsuits and legal proceedings related to commercial, intellectual property (IP), customer, and labor claims, considered normal in the course of business127248 Risk Factors This section details significant risks to the business, including vulnerability to industry cycles, U.S. export controls on China sales, intellectual property disputes, cybersecurity threats, customer concentration, supply chain disruptions, and a leveraged capital structure - A primary risk is the impact of U.S. (BIS) and other government trade restrictions, particularly those targeting China, which could significantly disrupt global operations, product shipments, and revenue, with China revenue at 27% of total in fiscal 2023262264265 - The business is exposed to the cyclicality of the semiconductor industry and a highly concentrated customer base, where orders from a few manufacturers account for a substantial portion of sales, increasing volatility and pricing pressure312314 - Cybersecurity incidents affecting KLA or its suppliers pose a significant risk, potentially causing operational disruptions, data theft, and financial loss, as evidenced by a supplier ransomware event in February 2023 that caused shipment delays279280 - The company has a leveraged capital structure with $6.70 billion in debt as of March 31, 2024, requiring significant cash flow for service payments and adherence to financial covenants, potentially constraining operational flexibility331335 - The company may incur significant restructuring, inventory write-off, or asset impairment charges, having recorded material goodwill and intangible asset impairment charges in the second and third quarters of fiscal 2024344346 Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activity, including shares repurchased during the quarter and the remaining availability under the authorized program Stock Repurchases for the Three Months Ended March 31, 2024 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2024 | 243,342 | $577.50 | | Feb 2024 | 160,251 | $641.27 | | Mar 2024 | 184,625 | $697.51 | | Total | 588,218 | - | - As of March 31, 2024, approximately $2.64 billion remained available for future repurchases under the company's publicly announced stock repurchase program, which has no expiration date350 Other Information During the third quarter of fiscal 2024, several executive officers adopted Rule 10b5-1 trading plans to sell shares of company common stock - Four executive officers, including Ahmad Khan (President, Semiconductor Process Control) and Mary Beth Wilkinson (EVP, Chief Legal Officer), adopted Rule 10b5-1 trading plans during the quarter to sell company stock353