10-QPeriod: Q3 FY2019

KLA CORP Quarterly Report for Q3 Ended Mar 31, 2019

Filed May 8, 2019For Securities:KLAC

Summary

KLA Corporation (KLAC) reported its financial results for the third quarter of fiscal year 2019, ending March 31, 2019. The company saw a year-over-year increase in total revenues, driven significantly by a substantial rise in service revenue, partly due to the adoption of ASC 606 accounting standards and the inclusion of Orbotech's results. However, product revenue experienced a slight decline, mainly attributed to lower shipments to memory customers, though this was partially offset by the contribution from the acquired Orbotech business. The company successfully completed the significant acquisition of Orbotech Ltd. on February 20, 2019, for approximately $3.26 billion. This strategic move is expected to expand KLA's portfolio into new segments of the electronics value chain. The integration of Orbotech is a key event, contributing to increased goodwill, intangible assets, and operating expenses, including amortization and acquisition-related costs. Despite these integration costs, the company maintained a strong cash position and continued its share repurchase program and quarterly dividend payments. Looking ahead, KLA expects capital equipment spending from foundry and logic customers to remain strong, while memory customer spending is anticipated to decline. The company's focus remains on innovation and R&D to address customer challenges at future technology nodes, balancing investments with disciplined cost management.

Financial Highlights

51 data points
Beta

Revenue

$1.10B

55.6% Gross Margin

Net Income

$192.73M

17.6% Net Margin

EPS (Diluted)

$0.12

Total Assets

$9.19B

Cash & Equivalents

$1.09B

Free Cash Flow

$137.64M

Financial Statements
Beta
Revenue$1.10B
Cost of Revenue$486.94M
Gross Profit$610.37M
R&D Expenses$184.89M
SG&A Expenses$182.18M
Interest Expense$31.19M
Net Income$192.73M
EPS (Basic)$0.12
EPS (Diluted)$0.12
Shares Outstanding (Basic)1.56B
Shares Outstanding (Diluted)1.57B

Key Highlights

  • 1Total revenues increased by 7% year-over-year to $1.097 billion for the nine months ended March 31, 2019, driven by a 29% increase in service revenue.
  • 2Net income attributable to KLA-Tencor decreased to $192.7 million for the three months ended March 31, 2019, compared to $306.9 million in the prior year period, largely impacted by acquisition-related costs and a shift in business mix.
  • 3Completed the acquisition of Orbotech Ltd. on February 20, 2019, for approximately $3.26 billion, significantly expanding its product and service offerings.
  • 4Goodwill increased substantially to $2.17 billion as of March 31, 2019, primarily due to the Orbotech acquisition.
  • 5Purchased intangible assets increased significantly to $1.69 billion, largely attributable to the Orbotech acquisition.
  • 6The company repurchased $206 million of its common stock during the three months ended March 31, 2019.
  • 7The effective tax rate for the nine months ended March 31, 2019, was 10.1%, a significant decrease from 56.8% in the prior year, primarily due to the Tax Cuts and Jobs Act and favorable earnings mix.

Frequently Asked Questions

The acquisition of Orbotech, completed on February 20, 2019, significantly impacted KLA's balance sheet, notably increasing goodwill by approximately $1.77 billion and purchased intangible assets by $1.45 billion (excluding in-process R&D). The consolidated financial statements include Orbotech's results from the acquisition date. The acquisition also led to increased operating expenses, including amortization of intangibles and acquisition-related costs, which affected net income.

KLA adopted ASC 606 effective July 1, 2018. This new revenue recognition standard led to a reclassification of revenue, particularly affecting service revenue. For the nine months ended March 31, 2019, service revenue increased by $108.8 million due to ASC 606, partly by recognizing standard warranty coverage as a separate performance obligation. Product revenue was impacted by changes in the timing of control transfer, resulting in a $44.2 million increase for the same period.

KLA anticipates a decline in capital equipment spending by memory customers in calendar year 2019. Conversely, spending by foundry and logic customers, particularly at the leading edge, is expected to ramp up and continue strongly. The company believes the long-term growth dynamics for the industry remain strong, driven by demand for chips in areas like AI, 5G, and IoT, despite higher design costs for advanced ICs and potential consolidation of customers.

As of March 31, 2019, KLA had $3.45 billion in aggregate principal amount of Senior Notes outstanding. The company also has a $1.0 billion revolving credit facility, with no outstanding borrowings at the end of the quarter. The company generated strong operating cash flow and had $1.90 billion in cash, cash equivalents, and marketable securities, indicating a solid liquidity position to meet its obligations, including debt service, dividends, and stock repurchases.