SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934. All statements other than statements of historical factmay be forward-looking statements. You can identify these and otherforward-looking statements by the use of words such as "may," "will," "could,""would," "should," "expects," "plans," "anticipates," "relies," "believes,""estimates," "predicts," "intends," "potential," "continues," "thinks," "seeks,"or the negative of such terms, or other comparable terminology. Forward-lookingstatements also include the assumptions underlying or relating to any of theforegoing statements. Such forward-looking statements include those regarding,among others: the future impacts of the COVID-19 pandemic; forecasts of thefuture results of our operations, including profitability; orders for ourproducts and capital equipment generally; sales of semiconductors; theinvestments by our customers in advanced technologies and new materials; growthof revenue in the semiconductor industry, the semiconductor capital equipmentindustry and our business; technological trends in the semiconductor industry;future developments or trends in the global capital and financial markets; thesuccess and market acceptance of new products; timing of shipment of orderbacklog; our future product shipments and product and service revenues; ourfuture gross margins; our future research and development ("R&D") expenses andselling, general and administrative ("SG&A") expenses; international sales andoperations; our ability to maintain or improve our existing competitiveposition; creation and funding of programs for R&D; results of our investment inleading edge technologies; the effects of hedging transactions; the effect ofthe sale of trade receivables and promissory notes from customers; the effect offuture compliance with laws and regulations; our future effective income taxrate; our recognition of tax benefits; the effects of any audits or litigation;the completion of any acquisitions of third parties, or the technology or assetsthereof; benefits received from any acquisitions and development of acquiredtechnologies; sufficiency of our existing cash balance, investments, cashgenerated from operations and the unfunded portion of our Revolving CreditFacility (as defined below) to meet our operating and working capitalrequirements, including debt service and payment thereof; future dividends, andstock repurchases; our compliance with the financial covenants under the CreditAgreement (as defined below) for our Revolving Credit Facility; the adoption ofnew accounting pronouncements; our repayment of our outstanding indebtedness;and our environmental, social and governance ("ESG") related targets, goals andcommitments.
Our actual results may differ significantly from those projected in theforward-looking statements in this report. Factors that might cause orcontribute to such differences include, but are not limited to:
•The impact of the COVID-19 pandemic on the global economy and on our business,financial condition and results of operations, including the supply chainconstraints we are experiencing as a result of the pandemic;
•Economic, political and social conditions in the countries in which we, ourcustomers and our suppliers operate, including rising inflation and interestrates,Russia's invasion ofUkraine , and global trade policies;
•Disruption to our manufacturing facilities or other operations, or theoperations of our customers, due to natural catastrophic events, healthepidemics or terrorism;
•Ongoing changes in the technology industry, and the semiconductor industry inparticular, including future growth rates, pricing trends in end-markets, orchanges in customer capital spending patterns;
•Our ability to timely develop new technologies and products that successfullyanticipate or address changes in the semiconductor industry;
•Our ability to maintain our technology advantage and protect our proprietaryrights;
•Our ability to compete with new products introduced by our competitors;
•Our ability to attract, onboard and retain key personnel;
•Cybersecurity threats, cyber incidents affecting our and our customers,suppliers and other service providers' systems and networks and our and theirability to access critical information systems for daily business operations;
•Liability to our customers under indemnification provisions if our productsfail to operate properly or contain defects or our customers are sued by thirdparties due to our products;
•Exposure to a highly concentrated customer base;
•Availability and cost of the wide range of materials used in the production ofour products;
•Our ability to operate our business in accordance with our business plan;
•Legal, regulatory and tax environments in which we perform our operations andconduct our business and our ability to comply with relevant laws andregulations;
•Increasing attention to ESG Matters and the resulting costs, risks and impacton our business;
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•Our ability to pay interest and repay the principal of our current indebtednessis dependent upon our ability to manage our business operations, our creditrating and the ongoing interest rate environment, among other factors;
•Our ability or the ability of our customers to obtain licenses for the sale ofcertain products or provision of certain services to customers inthe People'sRepublic of China ("China"), pursuant to regulations recently issued (the "BISRules") by theBureau of Industry and Security ("BIS") of theU.S. Department ofCommerce ("Commerce"), which could impact our business, financial condition andresults of operations;
•Instability in the global credit and financial markets;
•Our exposure to currency exchange rate fluctuations, or declining economicconditions in those countries where we conduct our business;
•Changes in our effective tax rate resulting from changes in the tax ratesimposed by jurisdictions where our profits are determined to be earned andtaxed, expiration of tax holidays in certain jurisdictions, resolution of issuesarising from tax audits with various authorities or changes in tax laws or theinterpretation of such tax laws;
•Our ability to identify suitable acquisition targets and successfully integrateand manage acquired businesses; and
•Unexpected delays, difficulties and expenses in executing against ourenvironmental, climate, inclusion and diversity or other ESG targets, goals andcommitments.
For a more detailed discussion of these and other risk factors that might causeor contribute to differences from the forward-looking statements in this report,see Part II, Item 1A, "Risk Factors" in this report as well as Part I, Item 1,"Business" and Part II, Item 7, "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" in our Annual Report on Form 10-Kfor the year endedJune 30, 2022 . You should carefully review these risks andalso review the risks described in other documents we file from time to timewith theSecurities and Exchange Commission ("SEC"). You are cautioned not toplace undue reliance on these forward-looking statements, and we expresslyassume no obligation and do not intend to update the forward-looking statementsin this report after the date hereof.
EXECUTIVE SUMMARY
We are a leading supplier of process control and yield management solutions andservices for the semiconductor and related electronics industries. Our broadportfolio of inspection and metrology products, and related service, softwareand other offerings, support R&D and manufacturing of integrated circuits("IC"), wafers and reticles. Our products, services and expertise are used byour customers to measure, detect, analyze and resolve critical and nanometriclevel product defects, helping them to manage manufacturing process challengesand to obtain higher finish product yields at lower cost. We also offer advancedtechnology solutions to address various manufacturing needs of printed circuitboards ("PCB"), flat panel displays ("FPD"), specialty semiconductor devices andother electronic components, including advanced packaging, light-emitting diodes("LED"), power devices, compound semiconductor, and data storage industries, aswell as general materials research.Our semiconductor customers generally operate in one or both of the majorsemiconductor device manufacturing markets: memory and foundry/logic. Thepervasive and increasing needs for semiconductors in many consumer andindustrial products, the rapid proliferation of new applications for moreadvanced semiconductor devices, and the increasing complexity associated withleading edge semiconductor manufacturing drives demand for our process controland yield management solutions. Continuing advancement of technology spurred bythe economic, power and performance benefits of being at the leading edge,increasing involvement in legacy nodes as semiconductor content increases, andinnovation and growth of new enabling technologies are fueling long-term growthfor the semiconductor equipment industry. As we get further into 2023, themacro-driven slowdown continues to have an impact on semiconductor device demandas the semiconductor industry rebalances its supply chain and inventory levels.As a result, memory device manufacturers and foundry/logic customers arereducing their capacity expansion-focused capital expenditure plans for calendar2023. While we continue to invest in technological innovation, we are focusingon moderating our spending levels to reflect the changing environment. Push outor cancellation of deliveries to our customers could cause earnings volatility,due to the timing of revenue recognition as well as increased risk ofinventory-related charges.We are organized into three reportable segments. Prior to
•Semiconductor Process Control: a comprehensive portfolio of inspection,metrology and data analytics products as well as related service offerings thathelp IC manufacturers achieve target yields throughout the semiconductorfabrication process, from R&D to final volume production.
See Also
FY23 ANTICIPATED BILLINGUAL PRE K DL Special Education Teacher - Chicago, IL, US job with Chicago Public Schools - CPS | 1996098Los Angeles Community College District hiring Adjunct - FY23 Vocational Education Instructor - Entertainment Business, Contracts/Negotiation, LAVC in Los Angeles, CA | LinkedInLos Angeles Community College District hiring Adjunct - FY23 Vocational Education - Entertainment Business in Los Angeles, CA | LinkedInDillistone : Annual Report (17 May 2024)•Specialty Semiconductor Process: advanced vacuum deposition and etching processtools used by a broad range of specialty semiconductor customers.
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•PCB, Display and Component Inspection: a range of inspection, testing andmeasurement, and direct imaging for patterning products used by manufacturers ofPCBs, FPDs, advanced packaging, microelectromechanical systems ("MEMS") andother electronic components.A majority of our revenues are derived from outside the U.S. , and includegeographic regions such as China , Taiwan , Korea , Japan , Europe and Israel , andRest of Asia . China is emerging as a major region for manufacturing of logic andmemory chips, adding to its role as the world's largest consumer of ICs.Additionally, a significant portion of global FPD and PCB manufacturing hasmigrated to China . Chinese government initiatives are propelling China to expandits domestic manufacturing capacity and attracting investment from semiconductormanufacturers from Taiwan , Korea , Japan and the U.S. Although China is currentlyseen as an important long-term growth region for the semiconductor andelectronics capital equipment sector, Commerce has adopted regulations and addedcertain China -based entities to the U.S. Entity List (a list of parties that aregenerally ineligible to receive U.S. -regulated items without prior licensingfrom BIS), restricting our ability to provide products and services to suchentities without a license. In addition, Commerce has imposed export licensingrequirements on China -based customers that are military end users or engaged inmilitary end uses, as well as requiring our customers to obtain an exportlicense when they use certain semiconductor capital equipment based on U.S. technology to manufacture products connected to certain entities on the U.S. Entity List.In addition, in October 2022 , the BIS Rules imposed export licensingrequirements for certain U.S. semiconductor and high-performance computingtechnology (including wafer fab equipment), for the use of such technology forcertain end uses in China , and for the provision of support by U.S. Persons tocertain advanced IC fabs located in China . In particular, the BIS Rules imposeexport license requirements effectively on all KLA products and services tocustomers located in China that fabricate:a.Non-planar ICs (e.g., FinFet or GaaFeT) or 14/16nm and below logic ICs;
b.NAND ICs at 128 layers and above; and
c.DRAM ICs using a "production" technology node of 18 nanometer half-pitch orless.
KLA is also restricted from providing certainU.S. origin tools, software andtechnology to certain wafer fab equipment manufacturers and maskshops located inChina , absent an export license. We are taking appropriate measures to complywith them and are applying for export licenses, when required, to avoiddisruption to our customers' operations. While some export licenses have beenobtained by us or our customers, there can be no assurance that export licensesapplied for by either us or our customers will be granted.The BIS Rules are complex, and we are working on assessing their full impact onKLA. The rules have not significantly impacted our operations to date, but thepossible negative effects on our future business of export licenses not beinggranted could be material and could result in a substantial reduction to ourremaining performance obligations ("RPO") or require us to return substantialdeposits received from customers inChina for future purchase orders. We arestill assessing the aggregate potential impact of the existing regulations andBIS Rules on our financial results and operations. There is a likelihood ofsystem reallocation of products to other customers where supply is meaningfullybelow demand for those products. See Part II, Item 1A, "Risk Factors" in thisreport for more information regarding how such actions by theU.S. government oranother country could significantly impact our ability to provide our productsand services to existing and potential customers, especially inChina , andadversely affect our business, financial condition and results of operations.The following table sets forth some of our key quarterly unaudited financialinformation: Three Months Ended(In thousands, except net income March 31, December 31, September 30, June 30, March 31,per share) 2023 2022 2022 2022 2022Total revenues$ 2,432,608 $ 2,983,887 $ 2,724,424 $ 2,486,739 $ 2,288,676 Costs of revenues$ 1,005,346 $ 1,208,786 $ 1,041,226 $ 978,564 $ 892,091 Gross margin 58.7 % 59.5 % 61.8 % 60.6 % 61.0 %Net income attributable toKLA(1)$ 697,837 $ 978,795 $ 1,025,991 $ 805,374 $ 730,572 Diluted net income per shareattributable to KLA(2)$ 5.03 $ 6.89 $ 7.20 $ 5.40 $ 4.83 __________________(1)For the explanation why our net income attributable to KLA decreasedto$697.8 million in the three months endedMarch 31, 2023 compared to the threemonths endedMarch 31, 2022 , refer to the "Results of Operations" section below,as the change is a result of movements in various income statement line items. 40
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(2)Diluted net income per share is computed independently for each of thequarters presented based on the weighted-average fully diluted sharesoutstanding for each quarter. Therefore, the sum of quarterly diluted net incomeper share information may not equal annual (or other multiple-quartercalculations of) diluted net income per share.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our Condensed Consolidated Financial Statements in conformitywith accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions in applying our accountingpolicies that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. We basethese estimates and assumptions on historical experience and evaluate them on anongoing basis to ensure that they remain reasonable under current conditions.Actual results could differ from those estimates. We discuss the development andselection of the critical accounting estimates with the Audit Committee of ourBoard of Directors on a quarterly basis, and the Audit Committee has reviewedour related disclosure in this Quarterly Report on Form 10-Q.There have been no material changes in our critical accounting estimates andpolicies since our Annual Report on Form 10-K for the fiscal year endedJune 30,2022 . Refer to Note 1 "Description of Business and Summary of SignificantAccounting Policies" to our Consolidated Financial Statements included in ourAnnual Report on Form 10-K for our fiscal year endedJune 30, 2022 foradditional details on significant accounting policies. In addition, refer to"Management's Discussion and Analysis of Financial Condition and Results ofOperations" contained in Part II, Item 7 of our Annual Report on Form 10-K forour fiscal year endedJune 30, 2022 for a complete description of our criticalaccounting estimates.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including those recentlyadopted and the expected dates of adoption as well as estimated effects, if any,on our Condensed Consolidated Financial Statements of those not yet adopted, seeNote 1 "Basis of Presentation" to our Condensed Consolidated FinancialStatements.RESULTS OF OPERATIONSRevenues and Gross MarginRevenuesOur business is affected by the concentration of our customer base and ourcustomers' capital equipment procurement schedules as a result of theirinvestment plans. Our product revenues in any particular period are impacted bythe amount of new orders we receive during that period and, depending upon theduration of manufacturing and installation cycles, in the preceding periods.Revenue is also impacted by average customer pricing, customer revenue deferralsassociated with volume purchase agreements, the effect of fluctuations inforeign currency exchange rates and increased trade restrictions as discussed inthe "Executive Summary" section above.Service revenues are generated from product maintenance and support services, aswell as billable time and material service calls made to our customers. Theamount of our service revenues is typically a function of the number of systemsinstalled at our customers' sites and the utilization of those systems, but itis also impacted by other factors, such as our rate of service contractrenewals, the types of systems being serviced and fluctuations in foreigncurrency exchange rates. Three Months Ended March 31, Q3 FY23 vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22Revenues:Product$ 1,903,484 $ 1,800,659 $ 102,825 6 %Service 529,124 488,017 41,107 8 %Total revenues$ 2,432,608 $ 2,288,676 $ 143,932 6 %Costs of revenues$ 1,005,346 $ 892,091 $ 113,255 13 %Gross margin 58.7 % 61.0 % 41
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Table of Contents Nine Months Ended March 31, Q3 FY23 YTD vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22 YTDRevenues:Product$ 6,562,501 $ 5,326,316 $ 1,236,185 23 %Service 1,578,418 1,398,828 179,590 13 %Total revenues$ 8,140,919 $ 6,725,144 $ 1,415,775 21 %Costs of revenues$ 3,255,358 $ 2,613,877 $ 641,481 25 %Gross margin 60.0 % 61.1 %Product revenues during the three and nine months endedMarch 31, 2023 increasedcompared to the three and nine months endedMarch 31, 2022 primarily due tostrong demand for many of our products, especially our inspection and metrologyportfolios, as well as increases from continued growth in the specialtysemiconductor markets.Service revenues during the three and nine months endedMarch 31, 2023 increasedcompared to the three and nine months endedMarch 31, 2022 primarily due to anincrease in our installed base.Revenues by segment(1) Three Months Ended March 31, Q3 FY23 vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22Revenues:Semiconductor Process Control$ 2,171,557 $ 1,979,295 $ 192,262 10 %Specialty Semiconductor Process 128,438 117,253 11,185 10 %PCB, Display and Component Inspection 131,923 192,533 (60,610) (31) %Total revenues for reportable segments$ 2,431,918 $ 2,289,081 $ 142,837 6 % Nine Months Ended March 31, Q3 FY23 YTD vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22 YTD
Revenues:
Semiconductor Process Control$ 7,226,711 $ 5,810,580 $ 1,416,131 24 %Specialty Semiconductor Process 414,390 332,020 82,370 25 %PCB, Display and Component Inspection 502,627 583,318 (80,691) (14) %Total revenues for reportable segments$ 8,143,728 $ 6,725,918 $ 1,417,810 21 %__________(1)Segment revenues exclude corporate allocations and the effects of changes inforeign currency exchange rates. For additional details, refer to Note 18"Segment Reporting and Geographic Information" to our Condensed ConsolidatedFinancial Statements.Revenues from our Semiconductor Process Control segment during the three andnine months endedMarch 31, 2023 increased compared to the three and nine monthsendedMarch 31, 2022 primarily due to strong demand for many of our products,especially those in our inspection and metrology portfolios. Revenues in theSpecialty Semiconductor Process segment during the three and nine months endedMarch 31, 2023 increased compared to the three and nine months endedMarch 31,2022 primarily due to continued growth in the specialty semiconductor market.Revenues in the PCB, Display and Component Inspection segment during the threeand nine months endedMarch 31, 2023 decreased compared to the three and ninemonths endedMarch 31, 2022 primarily due to market softening. 42
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The following is a summary of revenues by geographic region, based on ship-tolocation, for the indicated periods:
Three Months Ended March 31, Nine Months Ended March 31,(Dollar amounts inthousands) 2023 2022 2023 2022China$ 635,018 26 %$ 709,502 31 %$ 2,156,380 26 %$ 1,939,195 29 %Taiwan 478,855 20 % 515,097 22 % 1,996,188 24 % 1,918,623 29 %Korea 468,226 19 % 474,019 21 % 1,466,624 18 % 1,036,297 16 %North America 341,376 14 % 219,267 10 % 941,771 12 % 668,601 10 %Japan 215,531 9 % 132,829 6 % 702,986 9 % 504,278 7 %Europe and Israel 209,136 9 % 164,246 7 % 542,823 7 % 426,881 6 %Rest of Asia 84,466 3 % 73,716 3 % 334,147 4 % 231,269 3 %Total$ 2,432,608 100 %$ 2,288,676 100 %$ 8,140,919 100 %$ 6,725,144 100 %
A significant portion of our revenues continues to be generated in
Gross margin
Our gross margin fluctuates with revenue levels and product mix and is affectedby variations in costs related to manufacturing and servicing our products,including our ability to scale our operations efficiently and effectively inresponse to prevailing business conditions.The following table summarizes the major factors that contributed to the changesin gross margin: Gross Margin Three Months Ended Nine Months EndedMarch 31, 2022 61.0% 61.1%Revenue volume of products and services 0.4% 1.4%Mix of products and services sold (0.3)% 0.1%Manufacturing labor, overhead and efficiencies (0.1)% -%Other service and manufacturing costs (2.3)% (2.6)%March 31, 2023 58.7% 60.0%Changes in gross margin, which are driven by the revenue volume of products andservices, reflect our ability to leverage existing infrastructure to generatehigher revenues. Changes in gross margin from the mix of products and servicessold reflect the impact of changes within the composition of product and serviceofferings. Changes in gross margin from manufacturing labor, overhead andefficiencies reflect our ability to manage costs and drive productivity as wescale our manufacturing activity to respond to customer requirements, andamortization of intangible assets. Changes in gross margin from other serviceand manufacturing costs include the impact of customer support costs, includingthe efficiencies with which we deliver services to our customers, and theeffectiveness with which we manage our production plans and inventory risk.The decrease in our gross margin during the three and nine months endedMarch 31, 2023 compared to the three and nine months endedMarch 31, 2022 isprimarily due to increases in other service and manufacturing costs, partiallyoffset by a higher revenue volume of products and services sold.Segment gross profit(1) Three Months Ended March 31, Q3 FY23 vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22Segment gross profit:Semiconductor Process Control$ 1,367,886 $ 1,284,450 $ 83,436 6 %Specialty Semiconductor Process 65,328 61,521 3,807 6 %PCB, Display and Component Inspection 43,361 93,298 (49,937) (54) %$ 1,476,575 $ 1,439,269 $ 37,306 3 % 43
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Table of Contents Nine Months Ended March 31, Q3 FY23 YTD vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22 YTDSegment gross profit:Semiconductor Process Control$ 4,622,905 $ 3,789,316 $ 833,589 22 %Specialty Semiconductor Process 216,408 176,516 39,892 23 %PCB, Display and Component Inspection 182,899 270,096 (87,197) (32) %Total revenues for reportable segments$ 5,022,212 $ 4,235,928 $ 786,284 19 %________________(1) Segment gross profit is calculated as segment revenues less segment costsof revenues and excludes corporate allocations, amortization of intangibleassets, inventory fair value adjustments, acquisition related costs and theeffects of changes in foreign currency exchange rates. For additional details,refer to Note 18 "Segment Reporting and Geographic Information" to our CondensedConsolidated Financial Statements.Gross profit in the Semiconductor Process Control segment during the three andnine months endedMarch 31, 2023 increased compared to the three and nine monthsendedMarch 31, 2022 primarily due to a higher revenue volume of products andservices sold, partially offset by an increase in other service andmanufacturing costs. Gross profit in the Specialty Semiconductor Process segmentduring the three and nine months endedMarch 31, 2023 increased compared to thethree and nine months endedMarch 31, 2022 primarily due to a higher revenuevolume, partially offset by a less favorable mix of products and services soldas well as an increase in other service and manufacturing costs. Gross profit inthe PCB, Display and Component Inspection segment during the three and ninemonths endedMarch 31, 2023 decreased compared to the three and nine monthsendedMarch 31, 2022 primarily due to a lower revenue volume of products andservices sold and an increase in other service and manufacturing costs,partially offset by a more favorable mix of products and services sold.
Research and Development
R&D expenses may fluctuate with product development phases and project timing aswell as our R&D efforts. As technological innovation is essential to oursuccess, we may incur significant costs associated with R&D projects, includingcompensation for engineering talent, engineering material costs and otherexpenses. Three Months Ended March 31, Q3 FY23 vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22R&D expenses$ 328,276 $ 285,189 $ 43,087 15 %R&D expenses as a percentage of totalrevenues 13 %
12 %
R&D expenses during the three months endedMarch 31, 2023 increased compared tothe three months endedMarch 31, 2022 primarily due to an increase inemployee-related expenses of$25.1 million as a result of additional engineeringheadcount contributing to higher employee compensation and benefit costs,restructuring expense of$6.6 million , an increase in engineering projectmaterial costs of$4.4 million and an increase in depreciation expense of$4.4million . Nine Months Ended March 31, Q3 FY23 YTD vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22 YTDR&D expenses$ 979,617 $ 808,373 $ 171,244 21 %R&D expenses as a percentage of totalrevenues 12 %
12 %
R&D expenses during the nine months endedMarch 31, 2023 increased compared tothe nine months endedMarch 31, 2022 primarily due to an increase inemployee-related expenses of$75.9 million as a result of additional engineeringheadcount contributing to higher employee compensation and benefit costs, anincrease in engineering project material costs of$63.8 million , an increase indepreciation expense of$15.3 million and restructuring expense of$6.6 million .Our future operating results will depend significantly on our ability to produceproducts and provide services that have a competitive advantage in ourmarketplace. To do this, we believe we must continue to make substantial andfocused investments in our R&D. We remain committed to product development innew and emerging technologies. 44
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See Also
Rebecca Fushimi on LinkedIn: Funding Selections: FY23 Industrial Efficiency and Decarbonization…Selling, General and Administrative
Three Months Ended March 31, Q3 FY23 vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22SG&A expenses$ 238,393 $ 216,489 $ 21,904 10 %SG&A expenses as a percentage of totalrevenues 10 %
9 %
SG&A expenses during the three months ended
Nine Months Ended March 31, Q3 FY23 YTD vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22 YTDSG&A expenses$ 735,469 $ 623,229 $ 112,240 18 %SG&A expenses as a percentage of totalrevenues 9 %
9 %
SG&A expenses during the nine months endedMarch 31, 2023 increased compared tothe nine months endedMarch 31, 2022 primarily due to$16.8 million ofcompensation-related expense from the sale ofOrbograph Ltd. ("Orbograph") and$6.4 million of restructuring expense along with increases in the following:depreciation expense of$27.3 million , facilities-related expense of$24.8million , employee travel expenses of$19.0 million , and allowances for creditlosses of$13.3 million .Restructuring ChargesRestructuring charges were$19.1 million and zero for the three months endedMarch 31, 2023 and 2022, respectively. Restructuring charges were$35.9 million and$0.9 million for the nine months endedMarch 31, 2023 and 2022,respectively. As ofMarch 31, 2023 , the accrual for restructuring charges was$20.2 million .
For additional information refer to Note 19 "Restructuring Charges" to ourCondensed Consolidated Financial Statements.
Interest Expense and Other Expense (Income), Net
Other expense (income), net is comprised primarily of realized gains or losseson sales of marketable securities, gains or losses from revaluations of certainforeign currency denominated assets and liabilities as well as foreign currencycontracts, interest-related accruals (such as interest and penalty accrualsrelated to our tax obligations) and interest income earned on our invested cash,cash equivalents and marketable securities. Three Months Ended March 31, Q3 FY23 vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22Interest expense$ 74,774 $ 39,978 $ 34,796 87 %Other expense (income), net$ (14,864) $ 8,644 $ (23,508) (272) %Interest expense as a percentage of totalrevenues 3 % 2 %Other expense (income), net as a percentageof total revenues < 1%
< 1%
Interest expense during the three months endedMarch 31, 2023 increased comparedto the three months endedMarch 31, 2022 primarily due to additional interestexpense on our$3.0 billion Senior Notes issued inJune 2022 .The change in other expense (income), net during the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 was primarilydue to an increase of$19.2 million of interest income due to higher interestrates. Nine Months Ended March 31, Q3 FY23 YTD vs.(Dollar amounts in thousands) 2023 2022 Q3 FY22 YTDInterest expense$ 223,449 $ 116,142 $ 107,307 92 %Other expense (income), net$ (79,944) $ 23,985 $ (103,929) (433) %Interest expense as a percentage of totalrevenues 3 % 2 %Other expense (income), net as a percentageof total revenues < 1% < 1% 45
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Interest expense during the nine months endedMarch 31, 2023 increased comparedto the nine months endedMarch 31, 2022 primarily due to additional interestexpense on our$3.0 billion Senior Notes issued inJune 2022 .The change in other expense (income), net during the nine months endedMarch 31,2023 compared to the nine months endedMarch 31, 2022 was primarily due to thefollowing: a gain of$29.7 million from the sale of our interest in Orbograph toa private equity firm in the current fiscal year, higher interest income of$41.0 million compared to the prior fiscal year due to higher interest rates, ahigher fair value net gain of$22.9 million from an equity security compared tothe prior fiscal year, and decreases in accruals related to uncertain taxpositions of$12.5 million in the current fiscal year.
Loss on Extinguishment of Debt
For the three months endedMarch 31, 2023 , we had no loss on extinguishment ofdebt. For the nine months endedMarch 31, 2023 , loss on extinguishment of debtreflected a pre-tax net loss of$13.3 million associated with the redemption of$500.0 million of the Senior Notes due 2024, including associated redemptionpremiums, accrued interest and other fees and expenses. We had no loss onextinguishment of debt in the three and nine months endedMarch 31, 2022 .
Provision for Income Taxes
The following table provides details of income taxes:
Three Months Ended March 31, Nine Months Ended March 31,(Dollar amounts in thousands) 2023 2022 2023 2022Income before income taxes$ 800,683 $
846,285
$ 102,846 $ 115,625 $ 310,987 22,876Effective tax rate 12.8 % 13.7 % 10.3 % 0.9 %The effective tax rate during the three months endedMarch 31, 2023 was lowercompared to the three months endedMarch 31, 2022 primarily due a decrease of$6.8 million during the three months endedMarch 31, 2023 relating to anon-deductible increase in the value of the assets held within our ExecutiveDeferred Savings Plan ("EDSP").The effective tax rate during the nine months endedMarch 31, 2023 was highercompared to the nine months endedMarch 31, 2022 primarily due to the impact ofthe following items that occurred during the nine months endedMarch 31, 2022 :•Tax expense decreased by$394.5 million relating to a non-recurring tax benefitresulting from the intra-entity transfers of certain intellectual property("IP") rights. During the nine months endedMarch 31, 2022 , we completedintra-entity transfers of IP rights to one of ourSingapore subsidiaries inorder to better align the ownership of these rights with how our businessoperates. The transfers did not result in taxable gains; however, ourSingapore subsidiary recognized deferred tax assets for the book and tax basis differenceof the eligible transferred IP rights; and
•Tax expense decreased by
•Tax expense increased by$163.7 million relating to a non-recurring tax expenseresulting from a newIsrael tax law enacted onNovember 15, 2021 . The newIsrael tax law limits our ability to maintain our previous representation that thehistorical earnings were permanently reinvested inIsrael . We recorded deferredtax liability and related tax expense of$163.7 million in accordance with thenewIsrael tax law.Our future effective income tax rate depends on various factors, such as taxlegislation, the geographic composition of our pre-tax income, the amount of ourpre-tax income as business activities fluctuate, non-deductible expensesincurred in connection with acquisitions, R&D credits as a percentage ofa*ggregate pre-tax income, non-taxable or non-deductible increases or decreasesin the assets held within our EDSP, the tax effects of employee stock activityand the effectiveness of our tax planning strategies.
For discussions on tax examinations, assessments and certain relatedproceedings, see Note 13 "Income Taxes" to our Condensed Consolidated FinancialStatements.
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Liquidity and Capital Resources
As of As of(Dollar amounts in thousands) March 31, 2023 June 30, 2022Cash and cash equivalents$ 1,568,513 $ 1,584,908 Marketable securities 1,321,696 1,123,100Total cash, cash equivalents and marketable securities$ 2,890,209 $ 2,708,008 Percentage of total assets 21 % 21 % Nine Months Ended March 31,(In thousands) 2023 2022Cash flows:Net cash provided by operating activities$ 2,710,690 $ 2,493,473 Net cash used in investing activities (408,087) (851,064)Net cash used in financing activities (2,318,968) (1,653,279)Effect of exchange rate changes on cash and cash equivalents (30) (8,568)Net decrease in cash and cash equivalents $
(16,395)
Cash,
As ofMarch 31, 2023 , our cash, cash equivalents and marketable securitiestotaled$2.89 billion , which represents an increase of$182.2 million fromJune 30, 2022 . The increase is due to net cash provided by operating activitiesof$2.71 billion and net proceeds from the sale of a business of$75.4 million ,partially offset by stock repurchases of$923.0 million , net repayments of debtof$787.3 million , cash used for payment of dividends and dividend equivalentsof$553.0 million , capital expenditures of$262.9 million and$73.7 million oftax withholding payments related to vested and released restricted stock units("RSU").As ofMarch 31, 2023 ,$1.02 billion of our$2.89 billion of cash, cashequivalents and marketable securities were held by our foreign subsidiaries andbranch offices. We currently intend to indefinitely reinvest$89.8 million ofthe cash, cash equivalents and marketable securities held by our foreignsubsidiaries for which we assert that earnings are permanently reinvested. If,however, a portion of these funds were to be repatriated tothe United States ,we would be required to accrue and pay state and foreign taxes of approximately1% - 22% of the funds repatriated. The amount of taxes due will depend on theamount and manner of the repatriation, as well as the location from which thefunds are repatriated. We have accrued state and foreign tax on the remainingcash of$0.93 billion of the$1.02 billion held by our foreign subsidiaries andbranch offices. As such, these funds can be returned to theU.S. withoutaccruing any additionalU.S. tax expense.
Cash Dividends
During the three months endedMarch 31, 2023 , our Board of Directors declared aregular quarterly cash dividend of$1.30 per share on our outstanding commonstock, which was paid onMarch 1, 2023 to our stockholders of record as of theclose of business onFebruary 13, 2023 . During the same period in fiscal yearendedJune 30, 2022 , our Board of Directors declared and paid a regularquarterly cash dividend of$1.05 per share on our outstanding common stock. Thetotal amount of regular quarterly cash dividends and dividend equivalents paidduring the three months endedMarch 31, 2023 and 2022 was$180.9 million and$159.0 million , respectively. The total amount of regular quarterly cashdividends and dividend equivalents paid during the nine months endedMarch 31,2023 and 2022 was$553.0 million and$480.9 million , respectively. The amount ofaccrued dividend equivalents payable for regular quarterly cash dividends onunvested RSUs with dividend equivalent rights as ofMarch 31, 2023 andJune 30,2022 was$11.7 million and$11.2 million , respectively. These amounts will bepaid upon vesting of the underlying unvested RSUs as described in Note 10"Equity, Long-term Incentive Compensation Plans and Non-Controlling Interest" toour Condensed Consolidated Financial Statements.
Stock Repurchases
The shares of common stock repurchased under our stock repurchase program havereduced our basic and diluted weighted-average shares outstanding for the ninemonths endedMarch 31, 2023 and 2022. The stock repurchase program is intended,in part, to mitigate the potential dilutive impact related to our equityincentive plans and shares issued in connection with our Employee Stock PurchaseProgram as well as to return excess cash to our stockholders. 47
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Cash Flows Provided by Operating Activities
Historically, we have financed our liquidity requirements through cash generatedfrom our operations. Net cash provided by operating activities during the ninemonths endedMarch 31, 2023 was$2.71 billion compared to$2.49 billion duringthe nine months endedMarch 31, 2022 . This increase of$217.2 million resultedprimarily from the following:
•An increase in collections of approximately
•An increase in interest income of approximately
•An increase in accounts payable payments of approximately
•An increase in employee-related payments of approximately
•An increase in income tax payments of approximately
•An increase in debt interest payment of approximately
•An increase in other tax payments of approximately
Cash Flows Used in Investing Activities
Net cash used in investing activities during the nine months endedMarch 31,2023 was$408.1 million compared to$851.1 million during the nine months endedMarch 31, 2022 . This decrease in cash used was mainly due to a decrease in cashused in business acquisitions of$443.7 million and an increase in proceeds fromthe sale of a business of$75.4 million , partially offset by an increase in netpurchases of available-for-sale and trading securities of$47.6 million and anincrease in capital expenditures of$28.7 million .
Cash Flows Used in Financing Activities
Net cash used in financing activities during the nine months endedMarch 31,2023 was$2.32 billion compared to net cash used in financing activities of$1.65 billion during the nine months endedMarch 31, 2022 . This increase wasmainly due to increases in repayment of debt of$742.3 million , a decrease inproceeds from revolving credit facility of$300.0 million and cash paid fordividends and dividend equivalents of$72.1 million , partially offset by adecrease in cash used for common stock repurchases of$471.2 million .
Senior Notes
InJune 2022 , we issued$3.00 billion aggregate principal amount of senior,unsecured notes (the "2022 Senior Notes") as follows:$1.00 billion of 4.650%senior, unsecured notes dueJuly 15, 2032 ;$1.20 billion of 4.950% senior,unsecured notes dueJuly 15, 2052 ; and$800.0 million of 5.250% senior,unsecured notes dueJuly 15, 2062 . A portion of the net proceeds of the 2022Senior Notes was used to complete a tender offer inJuly 2022 for$500.0 million of our 2014 Senior Notes, as defined below, including associated redemptionpremiums, accrued interest and other fees and expenses. The transaction resultedin pre-tax net loss on extinguishment of debt of$13.3 million for the threemonths endedSeptember 30, 2022 . The remainder of the net proceeds were used forshare repurchases and for general corporate purposes.Prior toJune 2022 , the following aggregate principal amounts of senior,unsecured long-term notes were issued in the following periods:$750.0 million inFebruary 2020 (the "2020 Senior Notes"),$1.20 billion inMarch 2019 (the"2019 Senior Notes") and$2.50 billion inNovember 2014 (the "2014 SeniorNotes"). These, along with the 2022 Senior Notes, are collectively referred toas the "Senior Notes."The original discounts on the Senior Notes are being amortized over the life ofthe debt. Interest is payable as follows: semi-annually onJanuary 15 andJuly15 of each year for the 2022 Senior Notes; semi-annually onMarch 1 andSeptember 1 of each year for the 2020 Senior Notes; semi-annually onMarch 15 andSeptember 15 of each year for the 2019 Senior Notes; and semi-annually onMay 1 andNovember 1 of each year for the 2014 Senior Notes. The relevantindentures for the Senior Notes (collectively, the "Indenture") includecovenants that limit our ability to grant liens on our facilities and enter intosale and leaseback transactions.In certain circ*mstances involving a change of control followed by a downgradeof the rating of a series of Senior Notes by at least two ofMoody's InvestorsService ("Moody's"),S&P Global Ratings ("S&P") andFitch Inc. ("Fitch"), unlesswe have exercised our rights to redeem the Senior Notes of such series, we willbe required to make an offer to repurchase all or, at the holder's option, anypart of each holder's Senior Notes of that series pursuant to the offer (the"Change of Control Offer"). In the Change of Control Offer, we will be requiredto offer payment in cash equal to 101% of the aggregate principal amount ofSenior Notes repurchased plus accrued and unpaid interest, if any, on the SeniorNotes repurchased, up to, but not including, the date of repurchase. 48
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As of
Revolving Credit Facility
We have in place a Credit Agreement ("Credit Agreement") for an unsecuredRevolving Credit Facility ("Revolving Credit Facility") with a maturity date ofJune 8, 2027 that allows us to borrow up to $1.50 billion . Subject to the termsof the Credit Agreement, the Revolving Credit Facility may be increased by anamount up to $250.0 million in the aggregate. During the nine months endedMarch 31, 2023 , we borrowed $300.0 million and repaid $575.0 million . As ofMarch 31, 2023 , we had no outstanding borrowings under the Revolving CreditFacility.We may borrow, repay and reborrow funds under the Revolving Credit Facilityuntil the maturity date, at which time we may exercise two one-year extensionoptions with the consent of the lenders. We may prepay outstanding borrowingsunder the Revolving Credit Facility at any time without a prepayment penalty.Borrowings under the Revolving Credit Facility can be made as Term SecuredOvernight Financing Rate ("SOFR") Loans or Alternate Base Rate ("ABR") Loans, atthe Company's option. In the event that Term SOFR is unavailable, any Term SOFRelections will be converted to Daily Simple SOFR, if available. Each Term SOFRLoan will bear interest at a rate per annum equal to the applicable AdjustedTerm SOFR rate, which is equal to the applicable Term SOFR rate plus 10 bps thatshall not be less than zero, plus a spread ranging from 75 bps to 125 bps, asdetermined by the Company's credit ratings at the time. Each ABR Loan will bearinterest at a rate per annum equal to the ABR plus a spread ranging from 0 bpsto 25 bps, as determined by the Company's credit ratings at the time. We arealso obligated to pay an annual commitment fee on the daily undrawn balance ofthe Revolving Credit Facility, which ranges from 4.5 bps to 12.5 bps, subject toan adjustment in conjunction with changes to our credit rating. The applicableinterest rates and commitment fees are also subject to adjustment based on theCompany's performance against certain environmental sustainability keyperformance indicators related to greenhouse gas ("GHG") emissions and renewableelectricity usage. As of March 31, 2023 , we elected to pay interest onborrowings under the Revolving Credit Facility at the applicable Adjusted TermSOFR plus a spread of 100 bps and the applicable commitment fee on the dailyundrawn balance of the Revolving Credit Facility was 9 bps.Under the Credit Agreement, the maximum leverage ratio, on a quarterly basis, is3.50 to 1.00, covering the trailing four consecutive fiscal quarters for eachfiscal quarter, which can be increased to 4.00 to 1.00 for a period of time inconnection with a material acquisition or a series of material acquisitions. Asof March 31, 2023 , our maximum allowed leverage ratio was 3.50 to 1.00.We were in compliance with all covenants under the Credit Agreement as ofMarch 31, 2023 (the leverage ratio was 1.23 to 1.00). Considering our currentliquidity position, short-term financial forecasts and ability to prepay theRevolving Credit Facility, if necessary, we expect to continue to be incompliance with our financial covenants at the end of our fiscal year endingJune 30, 2023 .Material Cash RequirementsWhile demand for our products remains strong and we continue to invest intechnological innovation, the recent slowdown in consumer demand andexpectations of a slowing global economy are having an impact on semiconductordemand. As a result, customers are postponing capacity expansion plans andsetting lower capital expenditure budgets for 2023. Accordingly, we have seen adecrease in our estimate of our significant purchase commitments. For additionaldetails regarding our debt and other material cash commitments, refer to Note 8"Debt" and Note 15 "Commitments and Contingencies," respectively, to ourCondensed Consolidated Financial Statements. For additional details regardingour material cash requirements, refer to "Material Cash Requirements" in Item 7"Management's Discussion and Analysis of Financial Condition and Results ofOperations" in our Annual Report Form on 10-K for the fiscal year ended June 30,2022 .Working CapitalWorking capital was $4.60 billion as of March 31, 2023 , which represents anincrease of $302.4 million compared to our working capital of $4.30 billion asof June 30, 2022 . As of March 31, 2023 , our principal sources of liquidityconsisted of $2.89 billion of cash, cash equivalents and marketable securities.Our liquidity may be affected by many factors, some of which are based on thenormal ongoing operations of the business, spending for business acquisitions,and other factors such as uncertainty in the global and regional economies andthe semiconductor, semiconductor-related and electronic device industries.Although cash requirements will fluctuate based on the timing and extent ofthese factors, we believe that cash generated from operations, together with theliquidity provided by existing cash and cash equivalents balances and our $1.50billion Revolving Credit Facility, will be sufficient to satisfy our liquidityrequirements associated with working capital needs, capital expenditures, cashdividends, stock repurchases and other contractual obligations, includingrepayment of outstanding 49--------------------------------------------------------------------------------
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debt, for at least the next 12 months.
Our credit ratings as of
Rating Agency RatingFitch A-Moody's A2S&P A-
In
Off-Balance Sheet Arrangements
As ofMarch 31, 2023 , we did not have any off-balance sheet arrangements, asdefined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonablylikely to have a current or future effect on our financial position, changes infinancial condition, revenues and expenses, results of operations, liquidity,capital expenditures or capital resources that are material to investors. Referto Note 15 "Commitments and Contingencies" to our Condensed ConsolidatedFinancial Statements for information related to indemnification obligations. 50
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