SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
may be forward-looking statements. You can identify these and other
forward-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-looking
statements also include the assumptions underlying or relating to any of the
foregoing statements. Such forward-looking statements include those regarding,
among others: the future impacts of the COVID-19 pandemic; forecasts of the
future results of our operations, including profitability; orders for our
products and capital equipment generally; sales of semiconductors; the
investments by our customers in advanced technologies and new materials; growth
of revenue in the semiconductor industry, the semiconductor capital equipment
industry and our business; technological trends in the semiconductor industry;
future developments or trends in the global capital and financial markets; our
future product offerings and product features; the success and market acceptance
of new products; timing of shipment of backlog; our future product shipments and
product and service revenues; our future gross margins; our future research and
development ("R&D") expenses and selling, general and administrative ("SG&A")
expenses; international sales and operations; our ability to maintain or improve
our existing competitive position; success of our product offerings; creation
and funding of programs for R&D; results of our investment in leading edge
technologies; the effects of hedging transactions; the effect of the sale of
trade receivables and promissory notes from customers; our future effective
income tax rate; our recognition of tax benefits; the effects of any audits or
litigation; future payments of dividends to our stockholders; the completion of
any acquisitions of third parties, or the technology or assets thereof; benefits
received from any acquisitions and development of acquired technologies;
sufficiency of our existing cash balance, investments, cash generated from
operations and the unfunded portion of our Revolving Credit Facility (as defined
below) to meet our operating and working capital requirements, including debt
service and payment thereof; future dividends, and stock repurchases; our
compliance with the financial covenants under the Credit Agreement (as defined
below) for our Revolving Credit Facility; the adoption of new accounting
pronouncements; and our repayment of our outstanding indebtedness.
Our actual results may differ significantly from those projected in the
forward-looking statements in this report. Factors that might cause or
contribute 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 chain
constraints we are experiencing as a result of the pandemic;
•Economic, political and social conditions in the countries in which we, our
customers and our suppliers operate, including global trade policies;
•Disruption to our manufacturing facilities or other operations, or the
operations of our customers, due to natural catastrophic events, health
epidemics or terrorism;
•Ongoing changes in the technology industry, and the semiconductor industry in
particular, including future growth rates, pricing trends in end-markets, or
changes in customer capital spending patterns;
•Our ability to timely develop new technologies and products that successfully
anticipate or address changes in the semiconductor industry;
•Our ability to maintain our technology advantage and protect our proprietary
rights;
•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 their
ability to access critical information systems for daily business operations;
•Liability to our customers under indemnification provisions if our products
fail to operate properly or contain defects or our customers are sued by third
parties due to our products;
•Exposure to a highly concentrated customer base;
•Availability and cost of the wide range of materials used in the production of
our products;
•Our ability to operate our business in accordance with our business plan;
•Legal, regulatory and tax environments in which we perform our operations and
conduct our business and our ability to comply with relevant laws and
regulations;
•Our ability to pay interest and repay the principal of our current indebtedness
is dependent upon our ability to
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manage our business operations, our credit rating and the ongoing interest rate
environment, among other factors;
•Instability in the global credit and financial markets;
•Our exposure to currency exchange rate fluctuations, or declining economic
conditions in those countries where we conduct our business;
•Changes in our effective tax rate resulting from changes in the tax rates
imposed by jurisdictions where our profits are determined to be earned and
taxed, expiration of tax holidays in certain jurisdictions, resolution of issues
arising from tax audits with various authorities or changes in tax laws or the
interpretation of such tax laws; and
•Our ability to identify suitable acquisition targets and successfully integrate
and manage acquired businesses.
For a more detailed discussion of these and other risk factors that might cause
or 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 of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the year ended June 30, 2021 . You should carefully review these risks and
also review the risks described in other documents we file from time to time
with the Securities and Exchange Commission ("SEC"). You are cautioned not to
place undue reliance on these forward-looking statements, and we expressly
assume no obligation and do not intend to update the forward-looking statements
in this report after the date hereof.
EXECUTIVE SUMMARY
We are a leading supplier of process control and yield management solutions and
services for the semiconductor and related electronics industries. Our broad
portfolio of inspection and metrology products, and related service, software
and other offerings, support R&D and manufacturing of integrated circuits
("IC"), wafers and reticles. Our products, services and expertise are used by
our customers to measure, detect, analyze and resolve critical and nanometric
level product defects, helping them to manage manufacturing process challenges
and to obtain higher finish product yields at lower cost. We also offer advanced
technology solutions to address various manufacturing needs of Printed Circuit
Boards ("PCB"), Flat Panel Displays ("FPD"), Specialty Semiconductor Devices and
other electronic components, including advanced packaging, light-emitting
diodes, power devices, compound semiconductors, and data storage, as well as
general materials research.
The pervasive and increasing needs for semiconductors in many consumer and
industrial products, the rapid proliferation of new applications for more
advanced semiconductor devices, and the increasing complexity associated with
leading edge semiconductor manufacturing drives demand for our process control
and yield management solutions, and this demand is expected to continue for the
foreseeable future. At the same time, technology is transforming how we live and
work, and the data driven economy is fundamentally changing how businesses
operate and deliver value. This digital transformation is enabling secular
demand drivers such as High-Performance Computing, Artificial Intelligence,
Machine Learning, and rapid growth in new automotive electronics and 5G
communications markets. Each trend is driving investments and innovation in
advanced Logic and Memory semiconductor devices, as well as new and increasingly
more complex advanced packaging and PCB technologies. The favorable end-market
dynamics are driving our customers to make increased investments in our process
control and yield management solutions as part of their overall capital
investment plans. These trends also drive demand for our other products such as
those used in PCB, FPD and Specialty Semiconductor manufacturing, where the
increase in technology complexity is expected to continue and further accelerate
as more devices become interconnected and dependent on other electronic devices.
As a result of these factors, we saw a general strengthening of demand for our
products throughout fiscal 2021 and in the first half of fiscal 2022. We
continue to focus on our close collaborative relationships with our customers,
which allows us improved insight into customer demand to more efficiently manage
our business, ranging from product development to balancing inventory levels, in
order to meet their needs.
We are organized into four reportable segments. We manage our Specialty
Semiconductor Process and PCB, Display and Component Inspection reporting
segments within our Electronics, Packaging and Components ("EPC") group.
•Semiconductor Process Control ("SPC"): a comprehensive portfolio of inspection,
metrology and data analytics products as well as related service offerings that
help IC manufacturers achieve target yields throughout the semiconductor
fabrication process.
•Specialty Semiconductor Process: advanced vacuum deposition and etching process
tools used by a broad range of specialty semiconductor customers.
•PCB, Display and Component Inspection: a range of inspection, testing and
measurement, and direct imaging for patterning products used by manufacturers of
PCBs, FPDs, advanced packaging, microelectromechanical systems and other
electronic components.
•Other: products that do not fall into the three segments above.
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China is emerging as a major region for manufacturing of logic and memory chips,
adding to its role as the world's largest consumer of ICs. Additionally, a
significant portion of global FPD and PCB manufacturing has migrated to China .
Government initiatives are propelling China to expand its domestic manufacturing
capacity and attracting investment from semiconductor manufacturers from Taiwan ,
Korea , Japan and the United States . Although China is currently seen as an
important long-term growth region for the semiconductor and electronics capital
equipment sector, the United States Department of Commerce ("Commerce") has
added certain China -based entities to the U.S. Entity List, restricting our
ability to provide products and services to such entities without a license. In
addition, Commerce has imposed export licensing requirements on China -based
customers engaged in military end uses, as well as requiring our customers to
obtain an export license when they use certain semiconductor capital equipment
based on U.S. technology to manufacture products connected to Huawei or its
affiliates. While these rules have not significantly impacted our operations to
date, such actions by the U.S. government or another country could impact our
ability to provide our products and services to existing and potential customers
and adversely affect our business. For additional information regarding risks
related to our international operations, see Part II, Item 1A, "Risk Factors" in
this report.
The following table sets forth some of our key quarterly unaudited financial
information:
Three Months Ended
(In thousands, except net income December 31, September 30, June 30, March 31, December 31,
per share) 2021 2021 2021 2021 2020
Total revenues $ 2,352,630 $ 2,083,838 $ 1,925,471 $ 1,803,773 $ 1,650,870
Costs of revenues $ 908,162 $ 813,624 $ 772,241 $ 709,629 $ 669,733
Gross margin 61 % 61 % 60 % 61 % 59 %
Net income attributable to
KLA(1) $ 717,444 $ 1,068,417 $ 632,978 $ 567,496 $ 457,251
Diluted net income per share
attributable to KLA(2) $ 4.71 $ 6.96 $ 4.10 $ 3.66 $ 2.94
__________________
(1)Our net income attributable to KLA increased to $717.4 million in the three
months ended December 31, 2021 compared to the three months ended December 31,
2020 primarily as a result of higher revenues partially offset by higher costs
of revenues and higher income taxes. Refer to the sections below for further
information.
(2)Diluted net income per share is computed independently for each of the
quarters presented based on the weighted-average fully diluted shares
outstanding for each quarter. Therefore, the sum of quarterly diluted net income
per share information may not equal annual (or other multiple-quarter
calculations of) diluted net income per share.
Impact of COVID-19
Events surrounding the ongoing COVID-19 pandemic had resulted in a reduction in
economic activity across the globe in calendar year 2020 and early 2021.
Vaccinations and pandemic containment measures have now created an environment
that is driving economic growth, even as the pace of economic recovery remains
uneven in various geographies. The resumption of growth has caused us to
experience new constraints in our supply chain. Supply chain lead times are
extended and shortages have sometimes required us to plan further ahead and
increase our purchase commitments to secure critical components on a timely
basis. We continue to monitor our supply chain and work with our suppliers to
identify and mitigate potential gaps to ensure continuity of supply.
While all of our global sites are currently operational, any local pandemic
outbreaks or advent of new variants could require us to temporarily curtail
production levels or temporarily cease operations based on government mandates
or due to outbreaks affecting our manufacturing employees. We remain committed
to the health and safety of our employees, contractors, suppliers, customers and
communities, and are following government policies and recommendations designed
to slow the spread of COVID-19.
Our efforts to respond to the pandemic have included health screenings, social
distancing, employee separation protocols at our facilities, suspension of
non-essential business travel and work from home to the extent possible. We have
also developed augmented reality-based solutions for remote services that allow
for rapid response to customer needs. We are working with government authorities
in the jurisdictions where we operate, and continuing to monitor our operations
in an effort to ensure we follow government requirements, relevant regulations,
industry standards, and best practices to help safeguard our team members, while
safely continuing operations to the extent possible at our sites across the
globe.
We believe these actions are appropriate and prudent to safeguard our employees,
contractors, suppliers, customers, and communities, while allowing us to safely
continue operations. We will continue to actively monitor the situation and may
take
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further actions or alter our business operations that we determine are in the
best interests of our employees, customers, partners, suppliers, and
stakeholders, or as required by federal, state, or local authorities.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our Condensed Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions in applying our accounting
policies that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
these estimates and assumptions on historical experience and evaluate them on an
ongoing basis to ensure that they remain reasonable under current conditions.
Actual results could differ from those estimates. We discuss the development and
selection of the critical accounting estimates with the Audit Committee of our
Board of Directors on a quarterly basis, and the Audit Committee has reviewed
our related disclosure in this Quarterly Report on Form 10-Q.
There have been no material changes in our critical accounting estimates and
policies since our Annual Report on Form 10-K for the fiscal year ended June 30,
2021 . Refer to Note 1 "Basis of Presentation" to our Condensed Consolidated
Financial Statements for additional details. In addition, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for
our fiscal year ended June 30, 2021 for a complete description of our critical
accounting policies and estimates.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including those recently
adopted and the expected dates of adoption as well as estimated effects, if any,
on our Condensed Consolidated Financial Statements of those not yet adopted, see
Note 1 "Basis of Presentation" to our Condensed Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Revenues and Gross Margin
Revenues
Our business is affected by the concentration of our customer base and our
customers' capital equipment procurement schedules as a result of their
investment plans. Our product revenues in any particular period are
significantly impacted by the amount of new orders we receive during that period
and, depending upon the duration of manufacturing and installation cycles, in
the preceding period. Revenue is also impacted by average customer pricing,
customer revenue deferrals associated with volume purchase agreements, and the
effect of fluctuations in foreign currency exchange rates.
Service revenues are generated from product maintenance and support services, as
well as billable time and material service calls made to our customers. The
amount of our service revenues is typically a function of the number of systems
installed at our customers' sites and the utilization of those systems, but it
is also impacted by other factors, such as our rate of service contract
renewals, the types of systems being serviced and fluctuations in foreign
currency exchange rates.
Three Months Ended December 31, Q2 FY22
vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21
Revenues:
Product $ 1,895,769 $ 1,238,023 $ 657,746 53 %
Service 456,861 412,847 44,014 11 %
Total revenues $ 2,352,630 $ 1,650,870 $ 701,760 43 %
Costs of revenues $ 908,162 $ 669,733 $ 238,429 36 %
Gross margin 61.4 % 59.4 %
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Six Months Ended December 31, Q2 FY22 YTD
vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21 YTD
Revenues:
Product $ 3,525,657 $ 2,383,518 $ 1,142,139 48 %
Service 910,811 805,972 104,839 13 %
Total revenues $ 4,436,468 $ 3,189,490 $ 1,246,978 39 %
Costs of revenues $ 1,721,786 $ 1,290,295 $ 431,491 33 %
Gross margin 61.2 % 59.5 %
Product revenues during the three and six months ended December 31, 2021
increased compared to the three and six months ended December 31, 2020 ,
respectively, primarily due to strong demand for many of our products,
especially our inspection portfolio, as well as increases from continued growth
in the advanced packaging, 5G infrastructure and specialty semiconductor
markets.
Service revenues during the three and six months ended December 31, 2021
increased compared to the three and six months ended December 31, 2020 ,
primarily due to an increase in our installed base.
Revenues by segment(1)
Three Months Ended December 31, Q2 FY22
vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21
Revenues:
SPC $ 2,052,202 $ 1,380,184 $ 672,018 49 %
Specialty Semiconductor Process 112,738 90,587 22,151 24 %
PCB, Display and Component Inspection 187,977 179,267 8,710 5 %
Other - 449 (449) (100) %
Total revenues for reportable segments $ 2,352,917 $ 1,650,487 $ 702,430 43 %
Six Months Ended December 31, Q2 FY22 YTD
vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21 YTD
Income:
SPC$ 3,831,285 $ 2,648,138 $ 1,183,147 45 % Specialty Semiconductor Process 214,767 179,540 35,227 20 % PCB, Display and Component Inspection 390,785 360,444 30,341 8 % Other - 590 (590) (100) %
Total revenue for reportable segments
39 %
__________
(1)Segment revenues exclude corporate allocations and the effects of changes in foreign currency exchange rates. For additional details, refer to Note 18 "Segment Reporting and Geographic Information" to our Condensed Consolidated Financial Statements. Revenues from our SPC segment during the three and six months endedDecember 31, 2021 increased compared to the three and six months endedDecember 31, 2020 , respectively, primarily due to strong demand for many of our products especially from our inspection portfolio. Revenues in the EPC group during the three and six months endedDecember 31, 2021 increased compared to the three and six months endedDecember 31, 2020 , respectively, primarily due to continued growth in advanced packaging, 5G infrastructure and specialty semiconductor markets. 40 -------------------------------------------------------------------------------- Table of Contents Revenues by region The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods: Three Months Ended December 31, Six Months Ended December 31, (Dollar amounts in thousands) 2021 2020 2021 2020 Taiwan$ 776,442 33 %$ 380,785 23 %$ 1,403,526 31 %$ 749,886 24 % China 544,537 23 % 382,157 23 % 1,229,693 28 % 868,246 27 % Korea 323,095 14 % 347,947 21 % 562,278 13 % 537,465 17 % North America 271,594 12 % 214,808 13 % 449,334 10 % 384,984 12 % Japan 196,282 8 % 156,721 10 % 371,449 8 % 321,140 10 % Europe and Israel 175,195 7 % 100,201 6 % 262,635 6 % 183,318 6 % Rest of Asia 65,485 3 % 68,251 4 % 157,553 4 % 144,451 4 % Total$ 2,352,630 100 %$ 1,650,870 100 %$ 4,436,468 100 %$ 3,189,490 100 % A significant portion of our revenues continues to be generated inAsia , where a substantial portion of the world's semiconductor manufacturing capacity is located, and we expect that trend to continue. Gross margin Our gross margin fluctuates with revenue levels and product mix and is affected by variations in costs related to manufacturing and servicing our products, including our ability to scale our operations efficiently and effectively in response to prevailing business conditions. The following table summarizes the major factors that contributed to the changes in gross margin: Gross Margin Three Months Ended Six Months Ended December 31, 2020 59.4% 59.5% Revenue volume of products and services 2.9% 2.8% Mix of products and services sold 0.2% -% Manufacturing labor, overhead and efficiencies (0.1)% (0.2)% Other service and manufacturing costs (1.0)% (0.9)% December 31, 2021 61.4% 61.2% Changes in gross margin, which are driven by the revenue volume of products and services, reflect our ability to leverage existing infrastructure to generate higher revenues. Changes in gross margin from the mix of products and services sold reflect the impact of changes within the composition of product and service offerings. Changes in gross margin from manufacturing labor, overhead and efficiencies reflect our ability to manage costs and drive productivity as we scale our manufacturing activity to respond to customer requirements, and amortization of intangible assets. Changes in gross margin from other service and manufacturing costs include the impact of customer support costs, including the efficiencies with which we deliver services to our customers, and the effectiveness with which we manage our production plans and inventory risk. The increase in our gross margin during the comparative periods presented is primarily due to a higher revenue volume of products and services sold, partially offset by an increase in service and manufacturing costs. 41 --------------------------------------------------------------------------------
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Segment gross profit(1)
Three Months Ended Q2 FY22
December 31, vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21
Segment gross profit:
SPC $ 1,342,937 $ 884,090 $ 458,847 52 %
Specialty Semiconductor Process 60,274 51,171 9,103 18 %
PCB, Display and Component Inspection 82,322 84,584 (2,262) (3) %
Other - (121) 121 (100) %
$ 1,485,533 $ 1,019,724 $ 465,809 46 %
Six Months Ended December 31, Q2 FY22 YTD
vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21 YTD
Segment gross profit:
SPC $ 2,504,866 $ 1,698,900 $ 805,966 47 %
Specialty Semiconductor Process 114,995 101,099 13,896 14 %
PCB, Display and Component Inspection 176,798 174,753 2,045 1 %
Other - (108) 108 (100) %
$ 2,796,659 $ 1,974,644 $ 822,015 42 %
________________
(1) Segment gross profit is calculated as segment revenues less segment costs
of revenues and excludes corporate allocations, amortization of intangible
assets, inventory fair value adjustments, acquisition related costs, and the
effects of changes in foreign currency exchange rates. For additional details,
refer to Note 18 "Segment Reporting and Geographic Information" to our Condensed
Consolidated Financial Statements.
Gross profit in the SPC segment during the three and six months ended
December 31, 2021 increased compared to the three and six months ended
December 31, 2020 , respectively, primarily due to a higher revenue volume of
products and services sold, partially offset by an increase in other service and
manufacturing costs. Gross profit in the Specialty Semiconductor Process segment
during the three and six months ended December 31, 2021 increased compared to
the three and six months ended December 31, 2020 , respectively, primarily due to
higher revenue volume, partially offset by a less favorable mix of products and
services sold. Gross profit in the PCB, Display and Component Inspection segment
during the three months ended December 31, 2021 decreased compared to the three
months ended December 31, 2020 primarily due to a less favorable mix of products
and services sold as well as an increase in other service and manufacturing
costs. Gross profit in the PCB, Display and Component Inspection segment for the
six months ended December 31, 2021 remained relatively unchanged from the six
months ended December 31, 2020 .
Research and Development ("R&D")
R&D expenses may fluctuate with product development phases and project timing as
well as our R&D efforts. As technological innovation is essential to our
success, we may incur significant costs associated with R&D projects, including
compensation for engineering talent, engineering material costs and other
expenses.
Three Months Ended December 31, Q2 FY22
vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21
R&D expenses $ 265,031 $ 229,064 $ 35,967 16 %
R&D expenses as a percentage of total
revenues 11 %
14%
R&D expenses during the three months endedDecember 31, 2021 increased compared to the three months endedDecember 31, 2020 , primarily due to an increase in employee-related expenses of$43.5 million as a result of additional engineering headcount as well as higher employee compensation and benefit costs, partially offset by a decrease in engineering project material costs of$9.0 million . 42
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Six Months Ended December 31, Q2 FY22 YTD
vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21 YTD
R&D expenses $ 523,184 $ 448,102 $ 75,082 17 %
R&D expenses as a percentage of total
revenues 12 %
14%
R&D expenses during the six months endedDecember 31, 2021 increased compared to the six months endedDecember 31, 2020 , primarily due to an increase in employee-related expenses of$71.2 million as a result of additional engineering headcount as well as higher employee compensation and benefit costs, an in-process R&D write-off of$6.0 million , and an increase in consulting costs of$5.6 million , partially offset by a decrease in engineering project material costs of$10.5 million . Our future operating results will depend significantly on our ability to produce products and provide services that have a competitive advantage in our marketplace. To do this, we believe we must continue to make substantial and focused investments in our R&D. We remain committed to product development in new and emerging technologies. Selling, General and Administrative ("SG&A") Three Months Ended December 31, Q2 FY22 vs. (Dollar amounts in thousands) 2021 2020 Q2 FY21 SG&A expenses$ 213,479 $ 181,909 $ 31,570 17 % SG&A expenses as a percentage of total revenues 9 %
11%
SG&A expenses during the three months endedDecember 31, 2021 increased compared to the three months endedDecember 31, 2020 , primarily due to increases in the following: employee-related expenses of$22.6 million as a result of additional headcount as well as higher employee compensation and benefit costs, facilities-related expense of$2.4 million , depreciation expense of$1.9 million and consulting costs of$1.4 million . Six Months Ended December 31, Q2 FY22 YTD vs. (Dollar amounts in thousands) 2021 2020 Q2 FY21 YTD SG&A expenses$ 406,740 $ 354,540 $ 52,200 15 % SG&A expenses as a percentage of total revenues 9 %
11%
SG&A expenses during the six months endedDecember 31, 2021 increased compared to the six months endedDecember 31, 2020 , primarily due to increases in the following: employee-related expenses of$34.1 million as a result of additional headcount as well as higher employee compensation and benefit costs, consulting costs of$6.2 million , facilities-related expense of$3.7 million , depreciation expense of$2.6 million and travel-related expense of$2.2 million . Restructuring Charges Restructuring charges were$0.5 million and$4.6 million for the three months endedDecember 31, 2021 and 2020, respectively. Restructuring charges were$0.9 million and$8.1 million for the six months endedDecember 31, 2021 and 2020, respectively. Restructuring charges for the three and six months endedDecember 31, 2020 , included$1.0 million and$2.0 million , respectively, of non-cash charges for accelerated depreciation related to certain right-of-use assets and fixed assets to be abandoned. As ofDecember 31, 2021 , the accrual for restructuring charges was$2.9 million . For additional information refer to Note 19 "Restructuring Charges" to our Condensed Consolidated Financial Statements. Interest Expense and Other Expense (Income), Net Other expense (income), net is comprised primarily of realized gains or losses on sales of marketable securities, gains or losses from revaluations of certain foreign currency denominated assets and liabilities as well as foreign currency contracts, interest-related accruals (such as interest and penalty accruals related to our tax obligations) and interest income earned on our invested cash, cash equivalents and marketable securities. 43
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Three Months Ended December 31, Q2 FY22
vs.
(Dollar amounts in thousands) 2021 2020 Q2 FY21
Interest expense $ 37,852 $ 38,880 $ (1,028) (3) %
Other expense (income), net 1,201 3,882 (2,681) (69) %
Interest expense as a percentage of total
revenues 2 % 2 %
Other expense (income), net as a percentage of
total revenues < 1%
Interest expense during the three months endedDecember 31, 2021 decreased compared to the three months endedDecember 31, 2020 , primarily due to lower interest expense on our Revolving Credit Facility. Other expense (income), net during the three months endedDecember 31, 2021 decreased compared to the three months endedDecember 31, 2020 , primarily due to more favorable exchange rates. Six Months Ended December 31, Q2 FY22 YTD vs. (Dollar amounts in thousands) 2021 2020 Q2 FY21 YTD Interest expense$ 76,164 $ 78,266 $ (2,102) (3) % Other expense (income), net$ 15,341 $ 7,079 8,262 117 % Interest expense as a percentage of total revenues 2 % 2 % Other expense (income), net as a percentage of total revenues < 1%
Interest expense during the six months endedDecember 31, 2021 decreased compared to the six months endedDecember 31, 2020 , primarily due to lower interest expense on our Revolving Credit Facility. Other expense (income), net during the six months endedDecember 31, 2021 increased compared to the six months endedDecember 31, 2020 , primarily due to a fair value loss of$8.9 million from an equity security in the six months endedDecember 31, 2021 .. Provision for Income Taxes The following table provides details of income taxes: Three Months Ended December 31, Six Months Ended December 31, (Dollar amounts in thousands) 2021 2020 2021 2020 Income before income taxes$ 926,905 $ 527,402 $ 1,693,253 $ 1,011,208 Provision (benefit) for income taxes 209,388 70,419 (92,749) 134,083 Effective tax rate 22.6 % 13.4 % (5.5) % 13.3 % The effective tax rate during the three months endedDecember 31, 2021 was higher compared to the three months endedDecember 31, 2020 primarily due to the impact of the following items: •Tax expense increased by$163.7 million during the three months endedDecember 31, 2021 relating to a non-recurring tax expense resulting from a newIsrael tax law enacted onNovember 15, 2021 . The newIsrael tax law limits our ability to maintain our previous representation that the historical earnings were permanently reinvested inIsrael . We recorded deferred tax liability and related tax expense of$163.7 million in accordance with the newIsrael tax law; partially offset by •Tax expense decreased by$69.1 million during the three months endedDecember 31, 2021 relating to an internal restructuring reducing the deferred tax liability on unremitted earnings. The effective tax rate during the six months endedDecember 31, 2021 was lower compared to the six months endedDecember 31, 2020 primarily due to the impact of the following items: •Tax expense decreased by$394.5 million during the six months endedDecember 31, 2021 relating to a non-recurring tax benefit resulting from the intra-entity transfers of certain intellectual property rights ("IP rights"). During the three months endedSeptember 30, 2021 , we completed intra-entity transfers of IP rights to one of ourSingapore subsidiaries in order to better align the ownership of these rights with how our business operates. The transfers did not result in taxable gains; however, ourSingapore subsidiary recognized deferred tax assets for the book and tax basis 44 -------------------------------------------------------------------------------- Table of Contents difference of the eligible transferred IP rights; and •Tax expense decreased by$69.1 million during the six months endedDecember 31,2021 relating to an internal restructuring reducing the deferred tax liability on unremitted earnings; partially offset by •Tax expense increased by$163.7 million during the six months endedDecember 31, 2021 relating to a non-recurring tax expense resulting from a newIsrael tax law enacted onNovember 15, 2021 . The newIsrael tax law limits our ability to maintain our previous assertion that certain historical earnings of our subsidiaries were permanently reinvested inIsrael . Given this, we recorded a deferred tax liability and related tax expense of$163.7 million during the three months endedDecember 31, 2021 for the futureIsrael income tax due upon repatriation of these historical earnings in accordance with the newIsrael tax law. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with acquisitions, R&D credits as a percentage of aggregate pre-tax income, non-taxable or non-deductible increases or decreases in the assets held within our Executive Deferred Savings Plan, the tax effects of employee stock activity and the effectiveness of our tax planning strategies. For discussions on tax examinations, assessments and certain related proceedings, see Note 13 "Income Taxes" to our Condensed Consolidated Financial Statements. Liquidity and Capital Resources As of As of (Dollar amounts in thousands) December 31, 2021 June 30, 2021 Cash and cash equivalents$ 1,657,057 $ 1,434,610 Marketable securities 1,153,404 1,059,912 Total cash, cash equivalents and marketable securities$ 2,810,461 $ 2,494,522 Percentage of total assets 24 % 24 % Six Months Ended December 31, (In thousands) 2021 2020 Cash flows: Net cash provided by operating activities$ 1,674,595 $ 1,073,252 Net cash used in investing activities (281,570) (230,212) Net cash used in financing activities (1,166,876) (665,583) Effect of exchange rate changes on cash and cash equivalents (3,702) 19,600 Net (decrease) increase in cash and cash equivalents $
222,447
Cash,Cash Equivalents and Marketable Securities As ofDecember 31, 2021 , our cash, cash equivalents and marketable securities totaled$2.81 billion , which represents an increase of$315.9 million fromJune 30, 2021 . The increase is due to net cash provided by operating activities of$1.67 billion , partially offset by stock repurchases of$829.6 million , cash used for payment of dividends and dividend equivalents of$322.0 million , capital expenditures of$133.9 million and$38.0 million in net cash paid for an acquisition. As ofDecember 31, 2021 ,$1.22 billion of our$2.81 billion of cash, cash equivalents and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to indefinitely reinvest$702.2 million of the cash, cash equivalents and marketable securities held by our foreign subsidiaries 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 approximately 1% - 22% of the funds repatriated. The amount of taxes due will depend on the amount and manner of the repatriation, as well as the location from which the funds are repatriated. We have accrued state and foreign tax on the remaining cash of$519.8 million of the$1.22 billion held by our foreign subsidiaries and branch offices. As such, these funds can be returned to theU.S. without accruing any additionalU.S. tax expense. Cash Dividends During the three months endedDecember 31, 2021 , our Board of Directors declared a regular quarterly cash dividend of$1.05 per share on our outstanding common stock, which was paid onDecember 1, 2021 to our stockholders of record as of the 45 -------------------------------------------------------------------------------- Table of Contents close of business onNovember 15, 2021 . During the same period in fiscal year endedJune 30, 2021 , our Board of Directors declared and paid a regular quarterly cash dividend of$0.90 per share on our outstanding common stock. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months endedDecember 31, 2021 and 2020 was$159.1 million and$139.6 million , respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid during the six months endedDecember 31, 2021 and 2020 was$322.0 million and$280.7 million , respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as ofDecember 31, 2021 andJune 30, 2021 was$10.4 million and$10.3 million , respectively. These amounts will be paid upon vesting of the underlying unvested RSUs as described in Note 10 "Equity, Long-term Incentive Compensation Plans and Non-Controlling Interest" to our Condensed Consolidated Financial Statements. Stock Repurchases The shares repurchased under our stock repurchase program have reduced our basic and diluted weighted-average shares outstanding for the six months endedDecember 31, 2021 and 2020. The stock repurchase program is intended, in part, to offset the dilution from our equity incentive plans, shares issued in connection with purchases under our ESPP as well as to return excess cash to our shareholders. Cash Flows from Operating Activities Historically, we have financed our liquidity requirements through cash generated from our operations. Net cash provided by operating activities during the six months endedDecember 31, 2021 was$1.67 billion compared to$1.07 billion during the six months endedDecember 31, 2020 . This increase of$601.3 million resulted primarily from the following: •An increase in collections of approximately$1.25 billion mainly driven by higher shipments and prepayments during the six months endedDecember 31, 2021 ; •A decrease in other tax payments of approximately$17 million during the six months endedDecember 31, 2021 ; partially offset by •An increase in accounts payable payments of approximately$475 million during the six months endedDecember 31, 2021 ; and •An increase in employee related payments of approximately$87 million during the six months endedDecember 31, 2021 ; and •An increase in income tax payments of approximately$113 million during the six months endedDecember 31, 2021 . Cash Flows used in Investing Activities Net cash used in investing activities during the six months endedDecember 31, 2021 was$281.6 million compared to$230.2 million during the six months endedDecember 31, 2020 . This increase in cash used was mainly due to increases in cash paid for business acquisition of$38.0 million and cash paid to purchase fixed assets of$17.9 million , partially offset by a decrease in net purchases of available for sale and trading securities of$7.1 million . Cash Flows used in Financing Activities Net cash used in financing activities during the six months endedDecember 31, 2021 was$1.17 billion compared to cash used in financing activities of$665.6 million during the six months endedDecember 31, 2020 . This increase was mainly due to increases in cash used for common stock repurchases of$464.2 million and cash paid for dividends and dividend equivalents of$41.2 million , partially offset by a decrease in net debt repayments of$9.7 million . Senior Notes We have senior unsecured notes in the aggregate principal amount of$3.45 billion outstanding as ofDecember 31, 2021 . InFebruary 2020 , we issued$750.0 million ("2020 Senior Notes") aggregate principal amount of senior, unsecured long-term notes under which the proceeds were used to redeem$500.0 million of Senior Notes due 2021, including associated redemption premiums, accrued interest and other fees and expenses, to repay borrowings of$200.0 million under the Revolving Credit Facility, and for other general corporate purposes. InMarch 2019 andNovember 2014 , we issued$1.20 billion (the "2019 Senior Notes") and$2.50 billion (the "2014 Senior Notes" and together with the 2019 Senior Notes and the 2020 Senior Notes, the "Senior Notes"), respectively, aggregate principal amount of senior, unsecured long-term notes. See Note 8 "Debt" to our Condensed Consolidated Financial Statements for additional discussion of existing debt. We may seek to refinance our existing debt and may incur additional indebtedness depending on our capital requirements and the availability of financing. Interest is payable as follows: 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 46 -------------------------------------------------------------------------------- Table of Contents of each year for the 2014 Senior Notes. The Indenture for the Senior Notes includes covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are not restricted. In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two ofMoody's Investors Service ("Moody's"),S&P Global Ratings ("S&P") andFitch Inc. ("Fitch"), unless we have exercised our rights to redeem the Senior Notes of such series, we will be required to make an offer to repurchase all or, at the holder's option, any part, of each holder's Senior Notes of that series pursuant to the offer described below (the "Change of Control Offer"). In the Change of Control Offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of Senior Notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, up to, but not including, the date of repurchase. As ofDecember 31, 2021 , we were in compliance with all of our covenants under the Indenture associated with the Senior Notes. Revolving Credit Facility We have a Credit Agreement (the "Credit Agreement") providing for a$1.00 billion unsecured Revolving Credit Facility (the "Revolving Credit Facility"), with a maturity date ofNovember 30, 2023 . During the first quarter of the fiscal year endingJune 30, 2021 , we made a principal payment of$50.0 million on the Revolving Credit Facility which brought the balance under the Revolving Credit Facility to zero. During the first quarter of the fiscal year endingJune 30, 2022 , we borrowed$300.0 million from the Revolving Credit Facility, which was paid in full in the same quarter. As ofDecember 31, 2021 , we had no outstanding borrowings under the Revolving Credit Facility. We may borrow, repay and reborrow funds under the Revolving Credit Facility until the maturity date, at which time such Revolving Credit Facility will terminate, and all outstanding loans under such facility, together with all accrued and unpaid interest, must be repaid. We may prepay outstanding borrowings under the Revolving Credit Facility at any time without a prepayment penalty. Borrowings under the Revolving Credit Facility will bear interest, at our option, at either: (i) the Alternative Base Rate ("ABR") plus a spread, which ranges from 0 bps to 75 bps, or (ii) the London Interbank Offered Rate ("LIBOR") plus a spread, which ranges from 100 bps to 175 bps. The spreads under ABR and LIBOR are subject to adjustment in conjunction with credit rating downgrades or upgrades. We are also obligated to pay an annual commitment fee on the daily undrawn balance of the Revolving Credit Facility, which ranges from 10 bps to 25 bps, subject to an adjustment in conjunction with changes to our credit rating. As ofDecember 31, 2021 , we elected to pay interest on the borrowed amount under the Revolving Credit Facility at LIBOR plus a spread of 100 bps, and we pay an annual commitment fee of 10 bps on the daily undrawn balance of the Revolving Credit Facility. The Revolving Credit Facility requires us to maintain an interest expense coverage ratio as described in the Credit Agreement, on a quarterly basis, covering the trailing four consecutive fiscal quarters of no less than 3.50 to 1.00. In addition, we are required to maintain the maximum leverage ratio as described in the Credit Agreement, on a quarterly basis of 3.00 to 1.00, covering the trailing four consecutive fiscal quarters for each fiscal quarter, which can be increased to a maximum of 4.00 to 1.00 for a period of time in connection with a material acquisition or a series of material acquisitions. As ofDecember 31, 2021 , our maximum allowed leverage ratio was 3.00 to 1.00. We were in compliance with all covenants under the Credit Agreement as ofDecember 31, 2021 (the interest expense coverage ratio was 23.43 to 1.00 and the leverage ratio was 0.95 to 1.00). Considering our current liquidity position, short-term financial forecasts and ability to prepay the Revolving Credit Facility, if necessary, we expect to continue to be in compliance with our financial covenants at the end of our fiscal year endingJune 30, 2022 . Contractual Obligations There have been no material changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 , except for an increase in purchase obligations for inventory. For additional details regarding our debt and commitments, refer to Note 8 "Debt" and Note 15 "Commitments and Contingencies," respectively, to our Condensed Consolidated Financial Statements. For additional details regarding our contractual obligations, refer to our Annual Report Form on 10-K for the fiscal year endedJune 30, 2021 . Working Capital Working capital was$3.93 billion as ofDecember 31, 2021 , which represents an increase of$332.4 million compared to our working capital of$3.59 billion as ofJune 30, 2021 . As ofDecember 31, 2021 , our principal sources of liquidity consisted 47 -------------------------------------------------------------------------------- Table of Contents of$2.81 billion of cash, cash equivalents and marketable securities. Our liquidity may be affected by many factors, some of which are based on the normal ongoing operations of the business, spending for business acquisitions and other factors such as uncertainty in the global and regional economies and the semiconductor, semiconductor-related and electronic device industries. Although cash requirements will fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with the liquidity provided by existing cash and cash equivalents balances and availability under our Revolving Credit Facility, will be sufficient to satisfy our liquidity requirements associated with working capital needs, capital expenditures, cash dividends, stock repurchases and other contractual obligations, including repayment of outstanding debt, for at least the next 12 months. InJune 2021 , Moody's upgraded our senior unsecured credit rating from Baa1 to A2. Our credit ratings as ofDecember 31, 2021 are summarized below: Rating Agency Rating Fitch BBB+ Moody's A2Standard & Poor's BBB+ Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the semiconductor and semiconductor equipment industries, our financial position, material acquisitions and changes in our business strategy. Off-Balance Sheet Arrangements As ofDecember 31, 2021 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial position, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 15 "Commitments and Contingencies" to our Condensed Consolidated Financial Statements for information related to indemnification obligations. 48
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