KLA 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the quarterly period ended September 30, 2021

or

For the transition period from to

Commission File Number 000-09992

(408) 875-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 18, 2021, there were 151,622,165 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

INDEX

PART I. FINANCIAL INFORMATION

KLA CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

KLA CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

KLA CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

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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 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

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. 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 (“LED”), 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 (“HPC”), Artificial Intelligence, Machine Learning, and rapid growth in new automotive electronics and 5G communications markets. Each of these trends are 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 the 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 quarter of fiscal 2022.

We are organized into four reportable segments. We manage our Specialty Semiconductor Process and PCB, Display and Component Inspection reporting segments as an Electronics, Packaging and Components (“EPC”) group.

• Semiconductor Process Control: 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.

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:

(1)Our net income attributable to KLA increased to $1,068.4 million in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily as a result of higher revenues as well as a decrease in tax expense of $394.5 million relating to a non-recurring tax benefit from intra-entity transfers of certain intellectual property rights to one of our Singapore subsidiaries in order to better align the ownership of these rights with how our business operates.

(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 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 could require us to temporarily curtail production levels or temporarily cease operations based on government mandates. 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 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 further actions altering 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 that we receive during that period and, depending upon the duration of manufacturing and installation cycles, in the preceding period.

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.

Product revenues during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to strong demand for many of our products, especially our inspection and metrology portfolios, as well as an increase from continued growth in the advanced packaging, 5G infrastructure and automotive markets.

Service revenues during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to an increase in the number of systems installed at our customers**’** sites.

Revenues by segment**(1)**

(1)Segment revenues exclude corporate allocations and the effects of 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 Semiconductor Process Control segment during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to strong demand for many of our products especially from our inspection and metrology portfolios. Revenues in the Specialty Semiconductor Process and PCB, Display and Component Inspection segments during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to continued growth in advanced packaging, 5G infrastructure and automotive markets.

Revenues by region

The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods:

A significant portion of our revenues continues to be generated in Asia, 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 percentage:

Changes in gross margin percentage, which are driven by the revenue volume of products and services, reflect our ability to leverage existing infrastructure to generate higher revenues. 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. Changes in gross margin percentage 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 percentage 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 percentage 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 percentage during the comparative periods presented is primarily due to a higher revenue volume of products and services, partially offset by an increase in service and manufacturing costs.

Segment gross margin**(1)**

(1) Segment gross margin 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 foreign currency exchange rates. For additional details, refer to Note 18 “Segment Reporting and Geographic Information” to our Condensed Consolidated Financial Statements.

Gross margin in the Semiconductor Process Control segment during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to a higher revenue volume of products and services sold, partially offset by an increase in other service and manufacturing costs. Gross margin in the Specialty Semiconductor Process and PCB, Display and Component Inspection segments during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to higher revenue volume, partially offset by a less favorable mix of products and services sold.

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.

R&D expenses during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to an increase in employee-related expenses of $29.1 million as a result of additional engineering headcount, higher employee benefit costs and higher variable compensation, an in-process R&D write-off of $6.0M, and an increase in consulting costs of $5.2 million, partially offset by a decrease in engineering project material costs of $1.6 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 that 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”)

SG&A expenses during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to an increase in employee-related expenses of $14.7 million as a result of additional headcount, higher employee benefit costs and higher variable compensation, and an increase in consulting costs of $4.8 million.

Restructuring Charges

Restructuring charges were $0.5 million and $3.5 million for the three months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the accrual for restructuring charges was $3.4 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, and 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.

Interest expense during the three months ended September 30, 2021 decreased compared to the three months ended September 30, 2020, primarily due to lower interest expense on our Revolving Credit Facility.

Other expense (income), net during the three months ended September 30, 2021 increased compared to the three months ended September 30, 2020, primarily due to a fair value loss of $11.3 million from an equity security.

Provision for Income Taxes

The following table provides details of income taxes:

The effective tax rate during the three months ended September 30, 2021 was lower compared to the three months ended September 30, 2020 primarily due to the impact of the following items:

• Tax expense decreased by $394.5 million during the three months ended September 30, 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 ended September 30, 2021, we completed intra-entity transfers of IP rights to one of our Singapore 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, our Singapore subsidiary recognized deferred tax assets for the book and tax basis difference of the eligible transferred IP rights; partially offset by

• Tax expense increased by $12.8 million during the three months ended September 30, 2021 relating to a decrease in the proportion of our earnings generated in jurisdictions with tax rates lower than the U.S. statutory rate.

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, research and development 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.

In the normal course of business, we are subject to examination by tax authorities throughout the world. We are subject to U.S. federal income tax examinations for all years beginning from the fiscal year ended June 30, 2018 and are under U.S. federal income tax examination for the fiscal year ended June 30, 2018. We are subject to U.S. state income tax examinations for all years beginning from the fiscal year ended June 30, 2017. We are also subject to examinations in other major foreign jurisdictions, including Singapore and Israel, for all years beginning from the calendar year ended December 31, 2012. We are under audit in Germany related to Orbotech Ltd (“Orbotech”) for the calendar years ended December 31, 2013 to December 31, 2015. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on our results of operations or cash flows in the period or periods for which that determination is made.

In May 2017, Orbotech received an assessment from the Israel Tax Authority (“ITA”) with respect to its fiscal years 2012 through 2014 (the “Assessment”) for an aggregate amount of tax, after offsetting all net operating losses (“NOL”) available through the end of 2014, of approximately NIS 229 million (equivalent to approximately $66 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Tax Decrees, as defined below).

On August 31, 2018, Orbotech filed an objection in respect of the Assessment (the “Objection”). The ITA completed the second stage of the audit, in which the claims Orbotech raised in the Objection were examined by different personnel at the ITA. In addition, the ITA examined additional items during this second stage of the audit. As Orbotech and the ITA did not reach an agreement during the second stage, the ITA issued Tax Decrees to Orbotech on August 28, 2019 (“Tax Decrees”) for an aggregate amount of tax, after offsetting all NOLs available through the end of 2014, of approximately NIS 257 million (equivalent to approximately $73 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Tax Decrees). These Tax Decrees replaced the Assessment. We believe that our recorded unrecognized tax benefits are sufficient to cover the resolution of these Tax Decrees.

Orbotech filed a notice of appeal with respect to the above Tax Decrees with the District Court of Tel Aviv on September 26, 2019. On February 27, 2020, the ITA filed its arguments in support of the Tax Decrees. Orbotech filed the grounds of appeal with respect to the above Tax Decrees on July 30, 2020. We are currently in the pre-trial hearing stage of the process. The ITA and Orbotech are continuing discussions in an effort to resolve this matter in a mutually agreeable manner.

In connection with the above, there is an ongoing criminal investigation in Israel against Orbotech, certain of its employees and its tax consultant. On April 11, 2018, Orbotech received a “suspect notification letter” (dated March 28, 2018) from the Tel Aviv District Attorney’s Office (Fiscal and Financial). In the letter, it was noted that the investigation file was transferred from the Assessment Investigation Officer to the District Attorney’s Office. The letter further states that the District Attorney’s Office has not yet made a decision regarding submission of an indictment against Orbotech; and that if after studying the case, a decision is made to consider prosecuting Orbotech, Orbotech will receive an additional letter and, within 30 days, Orbotech may present its arguments to the District Attorney’s Office as to why it should not be indicted. On October 27, 2019, we received a request for additional information from the District Attorney**’**s Office. We will continue to monitor the progress of the District Attorney’s Office investigation; however, we cannot anticipate when the review of the case will be completed and what will be the results thereof. We intend to cooperate with the District Attorney’s Office to enable them to conclude their investigation.

In December 2020, Orbotech received an assessment from the ITA with respect to its fiscal years 2015 through 2018 (the “Second Assessment”), for an aggregate amount of tax, after offsetting all NOLs available through the end of 2018, of approximately NIS 227 million (equivalent to approximately $68 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Second Assessment). We filed an objection to the Second Assessment with the ITA in March 2021. The objection moved the 2015-2018 audit to the second stage, in which the ITA will review the objections. We believe that our recorded unrecognized tax benefits are sufficient to cover the resolution of the Second Assessment.

Liquidity and Capital Resources

Cash and Cash Equivalents and Marketable Securities:

As of September 30, 2021, our cash, cash equivalents and marketable securities totaled $2.62 billion, which represents a increase of $130.3 million from June 30, 2021. The increase is due to net cash provided by operating activities of $863.8 million, partially offset by stock repurchases of $399.7 million, cash used for payment of dividends and dividend equivalents of $162.8 million, capital expenditures of $69.0 million, a net cash usage of $68.4 million related to purchases, sales and maturities of available-for-sale and trading securities, and $38.0 million in net cash paid for an acquisition.

As of September 30, 2021, $1.07 billion of our $2.62 billion of cash, cash equivalents and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to indefinitely reinvest $715.8 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 to the 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 $357.8 million of the $1.07 billion held by our foreign subsidiaries and branch offices. As such, these funds can be returned to the U.S. without accruing any additional U.S. tax expense.

Cash Dividends:

During the three months ended September 30, 2021, our Board of Directors declared a regular quarterly cash dividend of $1.05 per share on our outstanding common stock, which was paid on September 1, 2021 to our stockholders of record as of the close of business on August 16, 2021. During the same period in fiscal year ended June 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 ended September 30, 2021 and 2020 was $162.8 million and $141.2 million, respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of September 30, 2021 and June 30, 2021 was $9.1 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 three months ended September 30, 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, and the issuance of shares in the acquisition of Orbotech, as well as to return excess cash to our shareholders.

Cash Flows from Operating Activities:

We have historically financed our liquidity requirements through cash generated from our operations. Net cash provided by operating activities during the three months ended September 30, 2021 was $863.8 million compared to $512.2 million during the three months ended September 30, 2020. This increase of $351.6 million resulted primarily from the following:

• An increase in collections of approximately $575 million mainly driven by higher shipments and prepayments during the three months ended September 30, 2021;

• A decrease in other tax payments of approximately $10 million during the three months ended September 30, 2021; partially offset by

• An increase in accounts payable payments of approximately $183 million during the three months ended September 30, 2021; and

• An increase in employee related payments of approximately $45 million during the three months ended September 30, 2021.

Cash Flows used in Investing Activities:

Net cash used in investing activities during the three months ended September 30, 2021 was $175.3 million compared to $134.3 million during the three months ended September 30, 2020. This increase in cash used was mainly due to an increase in cash paid for business acquisition of $38.0 million and an increase in cash paid to purchase fixed assets of $13.0 million, partially offset be a decrease in net purchases of available for sale and trading securities of $11.8 million.

Cash Flows used in Financing Activities:

Net cash used in financing activities during the three months ended September 30, 2021 was $609.0 million compared to cash used in financing activities of $404.2 million during the three months ended September 30, 2020. This increase was mainly due to a increase in cash used for common stock repurchases of $211.8 million and an increase in cash paid for dividends and dividend equivalents of $43.0 million, partially offset by a decrease in net debt repayments of $50.0 million.

Senior Notes:

We have senior unsecured notes in the aggregate principal amount of $3.45 billion outstanding as of September 30, 2021. In February 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. In March 2019 and November 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 on March 1 and September 1 of each year for the 2020 Senior Notes; semi-annually on March 15 and September 15 of each year for the 2019 Senior Notes; and semi-annually on May 1 and November 1 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 of Moody’s, S&P and Fitch Inc., 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 of September 30, 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 of November 30, 2023. During the first quarter of the fiscal year ending June 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 ending June 30, 2022, we borrowed $300.0 million from the Revolving Credit Facility, which was paid in full in the same quarter. As of September 30, 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 of September 30, 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 of September 30, 2021, our maximum allowed leverage ratio was 3.00 to 1.00.

We were in compliance with all covenants under the Credit Agreement as of September 30, 2021 (the interest expense coverage ratio was 20.75 to 1.00 and the leverage ratio was 1.07 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 ending June 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 ended June 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 ended June 30, 2021.

Working Capital:

Working capital was $3.62 billion as of September 30, 2021, which represents an increase of $28.6 million compared to

our working capital of $3.59 billion as of June 30, 2021. As of September 30, 2021, our principal sources of liquidity consisted of $2.62 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.

In June 2021, Moody**’**s upgraded our senior unsecured credit rating from Baa1 to A2. Our credit ratings as of September 30, 2021 are summarized below:

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 of September 30, 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.

We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity security prices. To mitigate these risks, we utilize derivative financial instruments such as foreign currency hedges. All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of September 30, 2021. Actual results may differ materially.

As of September 30, 2021, we had an investment portfolio of fixed income securities of $925.2 million. These securities, as with all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 bps from levels as of September 30, 2021, the fair value of the portfolio would have declined by $9.6 million.

The fair market value of our long-term fixed interest rate Senior Notes is subject to interest rate risk. Generally, the fair market value of fixed interest rate notes will increase as market interest rates fall and decrease as market interest rates rise. As of September 30, 2021, our fixed rate Senior Notes had a principal amount, fair value and book value of $3.45 billion, $3.95 billion and $3.42 billion, respectively, due in various fiscal years ranging from 2024 to 2050.

As of September 30, 2021, we do not have any outstanding floating rate debts that are subject to an increase in interest rates. As of September 30, 2021, if our credit ratings were downgraded to be below investment grade, the maximum potential increase to our annual commitment fee for the Revolving Credit Facility is estimated to be approximately $1 million.

Our equity investment in a publicly traded company is subject to market price risk, which we typically do not attempt to reduce or eliminate through hedging activities. As of September 30, 2021, the fair value of our investment in the marketable equity security, which begun publicly trading on the Tokyo Stock Exchange on April 5, 2021, was $18.7 million. Assuming a decline of 50% in market prices, the aggregate value of our investment in the marketable equity security could decrease by approximately $9 million, based on the value as of September 30, 2021.

See Note 5 “Marketable Securities” to our Condensed Consolidated Financial Statements in Part I, Item 1 and “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for additional details and risks that may affect the value of the investments in our portfolio as of September 30, 2021.

As of September 30, 2021, we had net forward and option contracts to sell $159.5 million in foreign currency in order to hedge certain currency exposures (see Note 16 “Derivative Instruments and Hedging Activities” to our Condensed Consolidated Financial Statements for additional details). If we had entered into these contracts on September 30, 2021, the U.S. dollar equivalent would have been $153.7 million. A 10% adverse move in all currency exchange rates affecting the contracts would decrease the fair value of the contracts by $47.4 million. However, if this occurred, the fair value of the underlying exposures hedged by the contracts would increase by a similar amount. Accordingly, we believe that, as a result of the hedging of certain of our foreign currency exposure, changes in most relevant foreign currency exchange rates should have no material impact on our results of operations or cash flows.

Evaluation of Disclosure Controls and Procedures and Related CEO and CFO Certifications

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (“Disclosure Controls”) as of the end of the period covered by this Quarterly Report on Form 10-Q (this “Report”) required by Exchange Act Rules 13a-15(b) or 15d-15(b). The Disclosure Controls evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based on this evaluation, the CEO and CFO have concluded that as of the end of the period covered by this Report our Disclosure Controls were effective at a reasonable assurance level.

Attached as exhibits to this Report are certifications of the CEO and CFO, that are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Definition of Disclosure Controls

Disclosure Controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States. To the extent that components of our internal control over financial reporting are included within our Disclosure Controls, they are included in the scope of our annual controls evaluation.

Limitations on the Effectiveness of Disclosure Controls

Our management, including our CEO and CFO, does not expect that our Disclosure Controls or internal control over financial reporting will prevent all error and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the most recent fiscal quarter covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth above under Note 14 “Litigation and Other Legal Matters” to our Condensed Consolidated Financial Statements in Item 1 of Part 1 is incorporated herein by reference.

A description of factors that could materially affect our business, financial condition or operating results is provided below.

Risk Factors Summary

The following summarizes the most material risks that make an investment in our securities risky or speculative. If any of the following risks occur or persist, our business, financial condition and results of operations could be materially harmed and the price of our common stock could significantly decline.

COVID-19 Pandemic Risks

• shortages or disruption in the supply chain could affect our ability to timely process components for our products;

• travel bans or quarantine requirements could delay our ability to install or service our products;

• governmental orders or employee exposure could cause manufacturing stoppages for us or our customers or suppliers;

• reduced demand for our products, delivery pushouts or cancellations of orders by our customers;

• increased costs or inability to acquire components necessary for the manufacture of our products;

• absence of liquidity at customers and suppliers; and

• loss of efficiencies due to remote working requirements for our employees.

Commercial, Operational, Financial and Regulatory Risks

• laws, regulations or other orders may limit our ability to sell our products to certain customers or to provide service on products previously sold to those customers;

• we may be exposed to tariffs or similar trade impairments;

• international sales may expose us to longer payment cycles or collection difficulties;

• intellectual property disputes can be expensive and could result in an inability to sell our products in certain jurisdictions;

• we may be unable to attract or retain key personnel;

• reliance on third-party service providers could result in disruptions if such third parties cannot perform services for us in a timely manner;

• cybersecurity incidents could result in the loss of valuable information or assets or subject us to costly disruption, remediation, regulatory investigations, litigation and reputational damage;

• we may face disruptions if we cannot access critical information in a timely manner due to system failures;

• we may not find suitable acquisition candidates or fail to successfully integrate our acquisitions;

• natural disasters, health epidemics, acts of terrorism or war or other catastrophic events could significantly disrupt our operations for lengthy periods of time;

• we are exposed to fluctuations in foreign currency exchange rates, interest rates and the market values of our portfolio investments;

• we are subject to tax and regulatory compliance audits;

• economic, political or other conditions in the jurisdictions where we earn profits can impact the tax laws and taxes we pay in those jurisdictions, subsequently impacting our effective tax rate, cash flows and results of operations; and

• changes in accounting pronouncements and laws could have unforeseen effects.

Industry Risks

• we may not be able to keep pace with technological changes in the industries in which we operate;

• we have a highly concentrated customer base; and

• prevailing local and global economic conditions may negatively affect the purchasing decisions of our customers or the value of our investment portfolio.

Business Model and Capital Structure Risks

• we may not be able to maintain our technology advantage or protect our proprietary rights;

• we may not be able to compete with new products introduced by our competitors;

• we may not receive components necessary to build our products in a timely manner;

• we may fail to operate our business in a manner consistent with our business plan;

• we may not have sufficient financial resources to repay our indebtedness when it becomes due;

• we may fail to comply with the covenants in our Revolving Credit Facility, which could impair our ability to borrow needed funds under the facility, or require us to repay it sooner than we planned;

• if our products fail to operate properly or contain defects or our customers are sued by third parties due to our products, we may be liable under indemnification provisions with our customers;

• we may incur significant restructuring charges or other asset impairment charges or inventory write-offs; and

• we are subject to risks related to receivables factoring arrangements, and compliance risk of certain settlement agreements with the government.

For a more complete discussion of the material risks facing our business, see below.

Risks Related to the COVID-19 Pandemic

The current COVID-19 pandemic and the potential aftereffects from it could materially harm our business, financial condition and results of operations.

The COVID-19 pandemic has caused substantial global disruptions, including in the jurisdictions where we conduct business and may cause additional disruptions in the future, which are impossible to predict. Local, regional and national authorities in numerous jurisdictions have implemented a variety of measures designed to slow the spread of the virus, including social distancing guidelines, quarantines, banning of non-essential travel and requiring the cessation of non-essential activities on the premises of businesses. While all of our global sites are currently operational, any local pandemic outbreaks could require us to temporarily curtail production levels or temporarily cease operations based on government mandates.

COVID-19 vaccines have been approved and become available for use in the United States and certain other countries. However, given our global operations, we are unable to predict how widely utilized the vaccines ultimately will be and whether they will be effective in preventing the spread of COVID-19 (including its variant strains). In addition, although economic activity has begun to improve in recent months from the global reduction in economic activity in calendar year 2020 caused by the COVID-19 pandemic, the pace of economic recovery remains uneven in various geographies, and the resumption of growth has caused us to experience new constraints in our supply chain as discussed below.

Some of the risks associated with the pandemic or a worsening of the pandemic in the future include:

• cancellation or reduction of routes available from common carriers, which may cause delays in our ability to deliver or service our products or receive components from suppliers necessary to manufacture or service our products;

• shortages or disruption in the supply chain could affect our ability to procure components for our products on a timely basis or at all, or could require us to commit to increased purchases and provide longer lead times to secure critical components, which could increase inventory obsolescence risk (refer to the Executive Summary in Part I, Item 2 “Management**’**s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on supply constraints related to the COVID-19 pandemic);

• travel bans or the requirement to quarantine for a lengthy period after entering a jurisdiction, which may delay our ability to install the products we sell or service those products following installation;

• governmental orders or employee exposure requiring us, our customers or our suppliers to discontinue manufacturing products at our respective facilities for a period of time;

• reduced demand for our products, delivery pushouts or cancellation of orders by our customers caused by a global recession resulting from the pandemic and the measures implemented by authorities to slow the spread of COVID-19;

• increased costs or inability to acquire components necessary for the manufacture of our products due to reduced availability;

• absence of liquidity at customers and suppliers caused by disruptions from the pandemic, which may hamper the ability of customers to pay for the products they purchase on time or at all, or hamper the abili

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None.

^ Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.