Item 1. FINANCIAL STATEMENTS

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Item 1. FINANCIAL STATEMENTS

KLA CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)


(In thousands)	March 31, 2023		June 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	1,568,513	$	1,584,908
Marketable securities	1,321,696		1,123,100
Accounts receivable, net	1,940,067		1,811,877
Inventories	2,749,743		2,146,889
Other current assets	438,731		502,137
Total current assets	8,018,750		7,168,911
Land, property and equipment, net	984,271		849,929
Goodwill	2,278,817		2,320,049
Deferred income taxes	783,843		579,173
Purchased intangible assets, net	999,958		1,194,414
Other non-current assets	617,910		484,612
Total assets	$	13,683,549	$	12,597,088
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	410,885	$	443,338
Deferred system revenue	533,791		500,969
Deferred service revenue	364,394		381,737

Other current liabilities	2,109,451		1,545,039
Total current liabilities	3,418,521		2,871,083
Long-term debt	5,889,740		6,660,718
Deferred tax liabilities	514,269		658,937
Deferred service revenue	176,260		124,618
Other non-current liabilities	1,001,978		882,642
Total liabilities	11,000,768		11,197,998
Commitments and contingencies (Notes 9, 14 and 15)
Stockholders’ equity:
Common stock and capital in excess of par value	1,996,773		1,061,940
Retained earnings	721,299		366,882
Accumulated other comprehensive loss	(35,291)		(27,471)
Total KLA stockholders’ equity	2,682,781		1,401,351
Non-controlling interest in consolidated subsidiaries	—		(2,261)
Total stockholders’ equity	2,682,781		1,399,090
Total liabilities and stockholders’ equity	$	13,683,549	$	12,597,088

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

KLA CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands, except per share amounts)	2023		2022		2023		2022
Revenues:
Product	$	1,903,484	$	1,800,659	$	6,562,501	$	5,326,316
Service	529,124		488,017		1,578,418		1,398,828
Total revenues	2,432,608		2,288,676		8,140,919		6,725,144
Costs and expenses:
Costs of revenues	1,005,346		892,091		3,255,358		2,613,877
Research and development	328,276		285,189		979,617		808,373
Selling, general and administrative	238,393		216,489		735,469		623,229

Interest expense	74,774		39,978		223,449		116,142
Loss on extinguishment of debt	—		—		13,286		—
Other expense (income), net	(14,864)		8,644		(79,944)		23,985
Income before income taxes	800,683		846,285		3,013,684		2,539,538
Provision for income taxes	102,846		115,625		310,987		22,876

Net income	697,837		730,660		2,702,697		2,516,662
Less: Net income attributable to non-controlling interest	—		88		74		229
Net income attributable to KLA	$	697,837	$	730,572	$	2,702,623	$	2,516,433
Net income per share attributable to KLA
Basic	$	5.06	$	4.87	$	19.26	$	16.64
Diluted	$	5.03	$	4.83	$	19.16	$	16.52
Weighted-average number of shares:
Basic	137,865		150,145		140,349		151,250
Diluted	138,645		151,186		141,073		152,346

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

KLA CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Net income	$	697,837	$	730,660	$	2,702,697	$	2,516,662
Other comprehensive income (loss):
Currency translation adjustments:
Cumulative currency translation adjustments	4,235		413		(8,015)		(3,733)
Income tax (provision) benefit	(15)		870		264		1,265
Net change related to currency translation adjustments	4,220		1,283		(7,751)		(2,468)
Cash flow hedges:
Net unrealized gains arising during the period	6,660		17,777		16,667		25,370
Reclassification adjustments for net gains included in net income	(2,824)		(992)		(25,960)		(3,122)
Income tax (provision) benefit	(352)		(4,023)		4,111		(5,047)
Net change related to cash flow hedges	3,484		12,762		(5,182)		17,201
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans	86		467		561		1,675
Available-for-sale securities:
Net unrealized gains (losses) arising during the period	7,422		(12,270)		4,969		(15,860)
Reclassification adjustments for net losses included in net income	250		88		831		90
Income tax (provision) benefit	(1,651)		2,616		(1,248)		3,386
Net change related to available-for-sale securities	6,021		(9,566)		4,552		(12,384)
Other comprehensive income (loss)	13,811		4,946		(7,820)		4,024
Less: Comprehensive income attributable to non-controlling interest	—		88		74		229
Total comprehensive income attributable to KLA	$	711,648	$	735,518	$	2,694,803	$	2,520,457

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

KLA CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Common Stock and Capital in Excess of Par Value			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total KLA Stockholders’ Equity		Non- Controlling Interest		Total Stockholders’ Equity
(In thousands, except per share amounts)	Shares	Amount
Balances as of June 30, 2022	141,804	$	1,061,940	$	366,882	$	(27,471)	$	1,401,351	$	(2,261)	$	1,399,090

Net income attributable to KLA	—	—		1,025,991		—		1,025,991		—		1,025,991




Net income attributable to non-controlling interest	—	—		—		—		—		74		74
Other comprehensive loss	—	—		—		(31,370)		(31,370)		—		(31,370)


Net issuance under employee stock plans	171	(54,950)		—		—		(54,950)		—		(54,950)
Repurchase of common stock	(257)	(1,926)		(87,690)		—		(89,616)		—		(89,616)
Cash dividends ($1.30 per share) and dividend equivalents declared	—	—		(186,216)		—		(186,216)		—		(186,216)

Stock-based compensation expense	—	34,982		—		—		34,982		—		34,982
Purchase of non-controlling interest	—	1,902		—		—		1,902		(6,196)		(4,294)
Disposal of non-controlling interest	—	—		—		—		—		8,383		8,383
Balances as of September 30, 2022	141,718	1,041,948		1,118,967		(58,841)		2,102,074		—		2,102,074
Net income	—	—		978,795		—		978,795		—		978,795





Other comprehensive income	—	—		—		9,739		9,739				9,739


Net issuance under employee stock plans	170	31,196		—		—		31,196		—		31,196
Repurchase of common stock	(3,429)	870,811		(1,241,793)		—		(370,982)		—		(370,982)
Cash dividends ($1.30 per share) and dividend equivalents declared	—	—		(185,967)		—		(185,967)		—		(185,967)

Stock-based compensation expense	—	38,405		—		—		38,405		—		38,405
Balances as of December 31, 2022	138,459	1,982,360		670,002		(49,102)		2,603,260		—		2,603,260
Net income	—	—		697,837		—		697,837		—		697,837





Other comprehensive income	—	—		—		13,811		13,811		—		13,811


Net issuance under employee stock plans	57	(16,154)		—		—		(16,154)		—		(16,154)
Repurchase of common stock	(1,227)	(17,563)		(465,149)		—		(482,712)		—		(482,712)
Cash dividends ($1.30 per share) and dividend equivalents declared	—	—		(181,391)		—		(181,391)		—		(181,391)

Stock-based compensation expense	—	48,130		—		—		48,130		—		48,130


Balances as of March 31, 2023	137,289	$	1,996,773	$	721,299	$	(35,291)	$	2,682,781	$	—	$	2,682,781


	Common Stock and Capital in Excess of Par Value			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total KLA Stockholders’ Equity		Non- Controlling Interest		Total Stockholders’ Equity
(In thousands, except per share amounts)	Shares	Amount
Balances as of June 30, 2021	152,776	$	2,175,988	$	1,277,123	$	(75,557)	$	3,377,554	$	(1,912)	$	3,375,642

Net income attributable to KLA	—	—		1,068,417		—		1,068,417		—		1,068,417




Net income attributable to non-controlling interest	—	—		—		—		—		68		68
Other comprehensive loss	—	—		—		(2,487)		(2,487)		—		(2,487)
Net issuance under employee stock plans	160	(46,532)		—		—		(46,532)		—		(46,532)
Repurchase of common stock	(1,190)	(16,966)		(382,711)		—		(399,677)		—		(399,677)
Cash dividends ($1.05 per share) and dividend equivalents declared	—	—		(161,561)		—		(161,561)		—		(161,561)
Stock-based compensation expense	—	25,216		—		—		25,216		—		25,216
Balances as of September 30, 2021	151,746	2,137,706		1,801,268		(78,044)		3,860,930		(1,844)		3,859,086
Net income attributable to KLA	—	—		717,444		—		717,444		—		717,444
Net income attributable to non-controlling interest	—	—		—		—		—		73		73
Other comprehensive income	—	—		—		1,565		1,565		—		1,565
Net issuance under employee stock plans	205	31,157		—		—		31,157		—		31,157
Repurchase of common stock	(1,104)	(15,604)		(414,270)		—		(429,874)		—		(429,874)
Cash dividends ($1.05 per share) and dividend equivalents declared	—	—		(160,461)		—		(160,461)		—		(160,461)
Stock-based compensation expense	—	27,766		—		—		27,766		—		27,766
Balances as of December 31, 2021	150,847	2,181,025		1,943,981		(76,479)		4,048,527		(1,771)		4,046,756
Net income attributable to KLA	—	—		730,572		—		730,572		—		730,572
Net income attributable to non-controlling interest	—	—		—		—		—		88		88
Other comprehensive income	—	—		—		4,946		4,946		—		4,946


Net issuance under employee stock plans	67	(16,661)				—		(16,661)		—		(16,661)
Repurchase of common stock	(1,539)	(22,222)		(542,444)		—		(564,666)		—		(564,666)
Cash dividends ($1.05 per share) and dividend equivalents declared				(159,498)		—		(159,498)		—		(159,498)

Stock-based compensation expense	—	37,087		—		—		37,087		—		37,087


Balances as of March 31, 2022	149,375	$	2,179,229	$	1,972,611	$	(71,533)	$	4,080,307	$	(1,683)	$	4,078,624

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

KLA CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended March 31,
(In thousands)	2023		2022
Cash flows from operating activities:
Net income	$	2,702,697	$	2,516,662
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization	310,300		262,496
Loss on extinguishment of debt	13,286		—
Unrealized foreign exchange (gain) loss and other	(35,427)		14,669
Asset impairment charges	9,905		5,962
Disposal of non-controlling interest	8,270		—
Stock-based compensation expense	121,517		90,069
Gain on sale of business	(29,687)		—

Deferred income taxes	(321,712)		(382,975)
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:
Accounts receivable	(153,630)		(318,271)
Inventories	(604,393)		(396,403)
Other assets	(30,427)		(23,729)
Accounts payable	(38,817)		82,376
Deferred system revenue	32,822		141,122
Deferred service revenue	35,551		81,216
Other liabilities	690,435		420,279
Net cash provided by operating activities	2,710,690		2,493,473
Cash flows from investing activities:

Net proceeds from sale of business	75,358		—
Business acquisitions, net of cash acquired	(27,144)		(470,887)
Capital expenditures	(262,908)		(234,160)
Purchases of available-for-sale securities	(960,837)		(733,386)
Proceeds from sale of available-for-sale securities	74,541		67,505
Proceeds from maturity of available-for-sale securities	699,363		524,677
Purchases of trading securities	(77,759)		(101,342)
Proceeds from sale of trading securities	70,279		95,734
Proceeds from other investments	1,020		795
Net cash used in investing activities	(408,087)		(851,064)
Cash flows from financing activities:
Payment of debt issuance costs	(6,515)		—

Proceeds from revolving credit facility	300,000		600,000
Repayment of debt	(1,087,250)		(345,000)
Common stock repurchases	(923,039)		(1,394,217)
Payment of dividends to stockholders	(553,046)		(480,926)

Issuance of common stock	33,908		36,912
Tax withholding payments related to vested and released restricted stock units	(73,704)		(68,948)
Contingent consideration payable and other, net	(5,027)		(1,100)

Purchase of non-controlling interest	(4,295)		—
Net cash used in financing activities	(2,318,968)		(1,653,279)
Effect of exchange rate changes on cash and cash equivalents	(30)		(8,568)
Net decrease in cash and cash equivalents	(16,395)		(19,438)
Cash and cash equivalents at beginning of period	1,584,908		1,434,610
Cash and cash equivalents at end of period	$	1,568,513	$	1,415,172
Supplemental cash flow disclosures:
Income taxes paid, net	$	451,243	$	355,176
Interest paid	$	198,906	$	116,791
Non-cash activities:


Contingent consideration payable - financing activities	$	(1,849)	$	15,086
Dividends payable - financing activities	$	5,856	$	5,375
Unsettled common stock repurchase - financing activities	$	15,943	$	6,000

Accrued purchases of land, property and equipment - investing activities	$	14,390	$	22,305

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

KLA CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Basis of Presentation. For purposes of this report, “KLA,” the “Company,” “we,” “our,” “us” or similar references mean KLA Corporation and its majority-owned subsidiaries unless the context requires otherwise. The Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.

The unaudited interim Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for audited financial statements. The balance sheet as of June 30, 2022 was derived from the Company’s audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 but does not include all disclosures required by GAAP for audited financial statements. The unaudited interim Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair statement of the financial position, results of operations, comprehensive income, stockholders’ equity and cash flows for the periods indicated. These Condensed Consolidated Financial Statements and notes, however, should be read in conjunction with Item 8 “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

The Condensed Consolidated Financial Statements include the accounts of KLA and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

The results of operations for the three and nine months ended March 31, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending June 30, 2023.

Management Estimates. The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets and liabilities (and related disclosure of contingent assets and liabilities) at the dates of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Significant Accounting Policies. There have been no material changes to our significant accounting policies summarized in Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

Recent Accounting Pronouncements

Recently Adopted

There have been no recently adopted updates.

Updates Not Yet Effective

In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires companies to apply revenue guidance to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination at carrying value. Under the current business combination guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. This update is effective for us in the first quarter of our fiscal year ending June 30, 2024, and should be applied on a prospective basis. Early adoption is permitted. The impact of adopting this update will depend on the magnitude of contract assets and contract liabilities acquired in future acquisitions.

NOTE 2 – REVENUE

Contract Balances

The following table represents the opening and closing balances of accounts receivable, net, contract assets and contract liabilities as of the indicated dates.


	As of		As of
(Dollar amounts in thousands)	March 31, 2023		June 30, 2022		$ Change		% Change
Accounts receivable, net	$	1,940,067	$	1,811,877	$	128,190	7	%
Contract assets	$	125,019	$	114,747	$	10,272	9	%
Contract liabilities	$	1,074,445	$	1,007,324	$	67,121	7	%

Our payment terms and conditions vary by contract type, although the terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of product shipment, with the remainder payable within 30 days of acceptance.

The change in contract assets during the nine months ended March 31, 2023 was mainly due to $96.9 million of revenue recognized for which the payment is subject to conditions other than passage of time, largely offset by $86.9 million of contract assets reclassified to net accounts receivable as our right to consideration for these contract assets became unconditional. Contract assets are included in other current assets on our Condensed Consolidated Balance Sheets.

The change in contract liabilities during the nine months ended March 31, 2023 was mainly due to an increase in the value of products and services billed to customers for which control of the products and services has not transferred to the customers, partially offset by recognition in revenue of $753.1 million that was included in contract liabilities as of June 30, 2022. The change in contract liabilities during the nine months ended March 31, 2022 was mainly due to an increase in the value of products and services billed to customers for which control of the products and services has not transferred to the customers, partially offset by the recognition in revenue of $495.8 million that was included in contract liabilities as of June 30, 2021. Contract liabilities are included in current and non-current liabilities on our Condensed Consolidated Balance Sheets.

Remaining Performance Obligations

As of March 31, 2023, we had $11.94 billion of remaining performance obligations, which represents our obligation to deliver products and services, and primarily consists of sales orders where written customer requests have been received. This amount includes customer deposits of $919.2 million and excludes contract liabilities of $1.07 billion as described above. We expect to recognize approximately 45% to 55% of these performance obligations as revenue beyond the next 12 months, but this estimate is subject to constant change depending upon supply chain constraints, customer slot change requests and potential elevated demand levels, which could require even longer lead times. In October 2022, the U.S. government issued new regulations that imposed new export licensing requirements for certain U.S. semiconductor and high-performance computing technology (including wafer fab equipment), for the use of such technology for certain end uses in the People’s Republic of China (“China”), and for the provision of support by U.S. Persons to certain advanced integrated circuit (“IC”) fabs located in China. The regulations impose export license requirements effectively on all KLA products and services to customers located in China that fabricate certain advanced logic, NAND and DRAM ICs. KLA is also restricted from providing certain U.S. origin tools, software and technology to certain wafer fab equipment manufacturers and maskshops located in China, absent an export license. We are taking appropriate measures to comply with these regulations and are applying for export licenses, when required, to avoid disruption to our customers’ operations. While some export licenses have been obtained by us or our customers, there can be no assurance that export licenses applied for by either us or our customers will be granted.

Refer to Note 18 “Segment Reporting and Geographic Information” to our Condensed Consolidated Financial Statements for information related to revenues by geographic region as well as significant product and service offerings.

NOTE 3 – FAIR VALUE MEASUREMENTS

Our financial assets and liabilities are measured and recorded at fair value, except for our debt and certain equity investments in privately held companies. Equity investments without a readily available fair value are accounted for using the measurement alternative. The measurement alternative is calculated as cost minus impairment, if any, plus or minus changes resulting from observable price changes. See Note 8 “Debt” to our Condensed Consolidated Financial Statements for disclosure of the fair value of our Senior Notes, as defined in that Note.

Our non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.

Fair Value of Financial Instruments. We have evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of our cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate their carrying amounts due to the relatively short maturity of these items.

Fair Value Hierarchy. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:


Level 1						Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2						Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3						Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There were no transfers between Level 1, Level 2 and Level 3 fair value measurements during the nine months ended March 31, 2023.

The types of instruments valued based on quoted market prices in active markets include money market funds, certain U.S. Treasury securities, U.S. Government agency securities and equity securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

The types of instruments valued based on other observable inputs include corporate debt securities, sovereign securities, municipal securities and certain U.S. Treasury securities. The market inputs used to value these instruments generally consist of market yields, reported trades and broker/dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants generally are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

The fair values of deferred payments and contingent consideration payable, the majority of which were recorded in connection with business combinations, were classified as Level 3 and estimated using significant inputs that were not observable in the market. See Note 6 “Business Combinations and Dispositions” to our Condensed Consolidated Financial Statements for additional information.

Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis, as of the date indicated below, were presented on our Condensed Consolidated Balance Sheets as follows:


			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Little or No Market Activity Inputs
As of March 31, 2023 (In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents:
Corporate debt securities	$	1,063	$	—	$	1,063	$	—
Money market funds and other	1,080,003		1,080,003		—		—






Marketable securities:
Corporate debt securities	460,142		—		460,142		—
Municipal securities	35,884		—		35,884		—
Sovereign securities	5,016		—		5,016		—
U.S. Government agency securities	117,370		117,370		—		—
U.S. Treasury securities	424,723		389,126		35,597		—

Equity securities	19,839		19,839		—		—

Total cash equivalents and marketable securities(1)	2,144,040		1,606,338		537,702		—
Other current assets:
Derivative assets	20,291		—		20,291		—
Other non-current assets:
Executive Deferred Savings Plan	245,090		192,854		52,236		—
Total financial assets(1)	$	2,409,421	$	1,799,192	$	610,229	$	—
Liabilities
Derivative liabilities	$	(13,196)	$	—	$	(13,196)	$	—

Contingent consideration payable	(19,299)		—		—		(19,299)


Total financial liabilities	$	(32,495)	$	—	$	(13,196)	$	(19,299)

(1) Excludes cash of $315.5 million held in operating accounts and time deposits of $430.7 million (of which $172.0 million were cash equivalents) as of March 31, 2023.


			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Little or No Market Activity Inputs
As of June 30, 2022 (In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents:

Corporate debt securities	$	922	$	—	$	922	$	—
Money market funds and other	948,027		948,027		—		—

U.S. Treasury securities	22,485		—		22,485		—



Marketable securities:
Corporate debt securities	472,047		—		472,047		—
Municipal securities	60,724		—		60,724		—
Sovereign securities	5,990		—		5,990		—
U.S. Government agency securities	91,116		91,116		—		—
U.S. Treasury securities	348,026		344,559		3,467		—

Equity securities	11,035		11,035		—		—

Total cash equivalents and marketable securities(1)	1,960,372		1,394,737		565,635		—
Other current assets:
Derivative assets	40,311		—		40,311		—
Other non-current assets:
Executive Deferred Savings Plan	224,188		176,928		47,260		—
Total financial assets(1)	$	2,224,871	$	1,571,665	$	653,206	$	—
Liabilities
Derivative liabilities	$	(34,315)	$	—	$	(34,315)	$	—
Deferred payments	(2,350)		—		—		(2,350)
Contingent consideration payable	(23,674)		—		—		(23,674)

Total financial liabilities	$	(60,339)	$	—	$	(34,315)	$	(26,024)

(1) Excludes cash of $472.8 million held in operating accounts and time deposits of $274.9 million (of which $140.7 million were cash equivalents) as of June 30, 2022.

NOTE 4 – FINANCIAL STATEMENT COMPONENTS

Condensed Consolidated Balance Sheets


	As of		As of
(In thousands)	March 31, 2023		June 30, 2022
Accounts receivable, net:
Accounts receivable, gross	$	1,973,188	$	1,832,508
Allowance for credit losses	(33,121)		(20,631)
	$	1,940,067	$	1,811,877
Inventories:
Customer service parts	$	492,681	$	402,121
Raw materials	1,503,024		1,042,916
Work-in-process	575,084		451,782
Finished goods	178,954		250,070
	$	2,749,743	$	2,146,889
Other current assets:
Contract assets	$	125,019	$	114,747
Prepaid expenses	113,228		108,942
Deferred costs of revenues	112,074		124,487
Prepaid income and other taxes	37,834		89,713
Other current assets	50,576		64,248
	$	438,731	$	502,137
Land, property and equipment, net:
Land	$	72,286	$	67,846
Buildings and leasehold improvements	810,173		712,751
Machinery and equipment	970,525		819,191
Office furniture and fixtures	57,554		44,957
Construction-in-process	147,932		110,079
	2,058,470		1,754,824
Less: accumulated depreciation	(1,074,199)		(904,895)
	$	984,271	$	849,929
Other non-current assets:
Executive Deferred Savings Plan(1)	$	245,090	$	224,188

Operating lease right of use assets	201,014		126,444
Other non-current assets	171,806		133,980
	$	617,910	$	484,612
Other current liabilities:
Customer deposits	$	575,466	$	394,016
Compensation and benefits	445,828		351,924
Income taxes payable	313,317		126,964

Executive Deferred Savings Plan(1)	245,734		225,867
Interest payable	56,049		39,683
Operating lease liabilities	33,522		32,218
Other liabilities and accrued expenses	439,535		374,367
	$	2,109,451	$	1,545,039
Other non-current liabilities:
Customer deposits	$	343,691	$	204,914
Income taxes payable	317,263		367,052
Operating lease liabilities	137,811		81,369
Pension liabilities	75,716		78,525
Other non-current liabilities	127,497		150,782
	$	1,001,978	$	882,642

(1)We have a non-qualified deferred compensation plan (known as “Executive Deferred Savings Plan” or “EDSP”) under which certain employees and non-employee directors may defer a portion of their compensation. The expense (benefit) associated with changes in the EDSP liability included in selling, general and administrative (“SG&A”) expense was $13.1 million and $(18.8) million in the three months ended March 31, 2023 and 2022, respectively, and was $14.7 million and $(7.8) million during the nine months ended March 31, 2023 and 2022, respectively. The amount of net gains (losses) associated with changes in the EDSP assets included in SG&A expense was $13.1 million and $(18.7) million in the three months ended March 31, 2023 and 2022, respectively, and was $14.7 million and $(8.0) million during the nine months ended March 31, 2023 and 2022, respectively. For additional details, refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

Accumulated Other Comprehensive Income (Loss)

The components of Accumulated Other Comprehensive Income (Loss) (“AOCI”) as of the dates indicated below were as follows:


(In thousands)	Currency Translation Adjustments		Unrealized Gains (Losses) on Available-for-Sale Securities		Unrealized Gains (Losses) on Derivatives		Unrealized Gains (Losses) on Defined Benefit Plans		Total
Balance as of March 31, 2023	$	(51,637)	$	(10,934)	$	51,654	$	(24,374)	$	(35,291)

Balance as of June 30, 2022	$	(43,886)	$	(15,486)	$	56,836	$	(24,935)	$	(27,471)

The effects on net income of amounts reclassified from AOCI to the Condensed Consolidated Statements of Operations for the indicated periods were as follows (in thousands; amounts in parentheses indicate debits or reductions to earnings):


AOCI Components				Three Months Ended					Nine Months Ended
	Location in the Condensed Consolidated Statement of Operations		March 31,					March 31,
		2023		2022		2023			2022
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contracts		Revenues		$	1,421	$	1,600		$	31,954	$	4,868
		Costs of revenues and operating expenses		467		(329)			(8,804)		(909)
		Interest expense		936		(279)			2,810		(837)

		Net gains reclassified from AOCI		$	2,824	$	992		$	25,960	$	3,122
Unrealized gains (losses) on available-for-sale securities		Other expense (income), net		$	(250)	$	(88)		$	(831)	$	(90)

The amount reclassified out of AOCI related to our defined benefit pension plans that was recognized as a component of net periodic cost for the three months ended March 31, 2023 and 2022 was $0.4 million in both periods, and for the nine months ended March 31, 2023 and 2022 was $1.2 million and $1.1 million, respectively. For additional details, refer to Note 13 “Employee Benefit Plans” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

NOTE 5 – MARKETABLE SECURITIES

The amortized cost and fair value of marketable securities as of the dates indicated below were as follows:


As of March 31, 2023 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	466,754	$	473	$	(6,022)	$	461,205
Money market funds and other	1,080,003		—		—		1,080,003

Municipal securities	36,660		—		(776)		35,884
Sovereign securities	5,021		—		(5)		5,016
U.S. Government agency securities	118,073		127		(830)		117,370
U.S. Treasury securities	431,619		466		(7,362)		424,723
Equity securities(1)	3,211		16,628		—		19,839

Subtotal	2,141,341		17,694		(14,995)		2,144,040
Add: Time deposits(2)	430,719		—		—		430,719
Less: Cash equivalents	1,253,063		—		—		1,253,063
Marketable securities	$	1,318,997	$	17,694	$	(14,995)	$	1,321,696


As of June 30, 2022 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	481,881	$	3	$	(8,915)	$	472,969
Money market funds and other	948,027		—		—		948,027
Municipal securities	61,973		—		(1,249)		60,724
Sovereign securities	6,041		2		(53)		5,990
U.S. Government agency securities	92,273		26		(1,183)		91,116
U.S. Treasury securities	378,871		18		(8,378)		370,511
Equity securities(1)	3,211		7,824		—		11,035

Subtotal	1,972,277		7,873		(19,778)		1,960,372
Add: Time deposits(2)	274,873		—		—		274,873
Less: Cash equivalents	1,112,146		—		(1)		1,112,145
Marketable securities	$	1,135,004	$	7,873	$	(19,777)	$	1,123,100

(1) Unrealized gains on equity securities included in our portfolio include the initial fair value adjustment recorded upon a security becoming marketable.

(2) Time deposits excluded from fair value measurements.

Our investment portfolio includes both corporate and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. Most of our unrealized losses are due to changes in market interest rates and bond yields. We believe that we have the ability to realize the full value of all these investments upon maturity. As of March 31, 2023, we had 440 investments in a gross unrealized loss position. The following table summarizes the fair value and gross unrealized losses of our investments that were in an unrealized loss position as of the dates indicated below.


As of March 31, 2023	Less than 12 Months				12 Months or Greater				Total
(In thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt securities	$	163,334	$	(1,687)	$	221,831	$	(4,335)	$	385,165	$	(6,022)
Municipal securities	8,711		(69)		27,173		(707)		35,884		(776)
Sovereign securities	3,019		—		1,997		(5)		5,016		(5)
U.S. Government agency securities	38,897		(125)		34,650		(705)		73,547		(830)
U.S. Treasury securities	137,766		(1,945)		206,896		(5,417)		344,662		(7,362)
Total	$	351,727	$	(3,826)	$	492,547	$	(11,169)	$	844,274	$	(14,995)


As of June 30, 2022 (In thousands)	Fair Value(1)		Gross Unrealized Losses(1)
Corporate debt securities	$	458,699	$	(8,915)
Municipal securities	58,722		(1,249)
Sovereign securities	2,963		(53)
U.S. Government agency securities	60,285		(1,183)
U.S. Treasury securities	336,819		(8,378)
Total	$	917,488	$	(19,778)

(1) As of June 30, 2022, our investments that were in a continuous loss position of 12 months or more, as well as the unrealized losses on those investments, were immaterial.

The contractual maturities of securities classified as available-for-sale, regardless of their classification on our Condensed Consolidated Balance Sheets, as of the date indicated below were as follows:


As of March 31, 2023 (In thousands)	Amortized Cost		Fair Value
Due within one year	$	836,765	$	845,394
Due after one year through three years	482,232		476,302
Total	$	1,318,997	$	1,321,696

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Realized gains and losses on available-for-sale securities for the three and nine months ended March 31, 2023 and 2022 were immaterial.

NOTE 6 - BUSINESS COMBINATIONS AND DISPOSITIONS

Business Combinations

On August 9, 2022, we acquired a privately held company, primarily to secure the supply of materials for existing products, for aggregate purchase consideration of $32.7 million, payable in cash. We allocated the purchase consideration as follows: $30.0 million to identifiable intangible assets, $2.3 million to net tangible assets, $6.5 million to deferred tax liabilities and $6.8 million to goodwill. The purchase consideration allocation is preliminary, and as additional information becomes available, we may further revise it during the remainder of the measurement period, which will not exceed 12 months from the closing of the acquisition. The goodwill was assigned to the Wafer Inspection and Patterning reporting unit.

On May 1, 2022, we acquired the outstanding shares of a privately held company for total purchase consideration of $8.6 million, paid in cash. We allocated the purchase consideration to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values, and residual goodwill was allocated to the Wafer Inspection and Patterning reporting unit.

On February 28, 2022, we completed the acquisition of 100% of the outstanding shares of ECI Technology, Inc. (“ECI”), a privately held company, for aggregate purchase consideration of $431.5 million, paid in cash, including a post-closing adjustment in the quarter ended September 30, 2022. KLA acquired ECI to extend and enhance our portfolio of products and services. We allocated the purchase consideration as follows: $208.4 million to identifiable intangible assets, $2.9 million to net

tangible liabilities, $40.5 million to deferred tax liabilities and $266.4 million to goodwill. The goodwill was assigned to the Wafer Inspection and Patterning reporting unit.

We have included the financial results of the acquisitions in our Condensed Consolidated Financial Statements from their respective acquisition dates, and these results were not material to our Condensed Consolidated Financial Statements. The goodwill recorded as a result of the above acquisitions was not deductible for tax purposes.

As of March 31, 2023, we had $19.3 million of contingent consideration recorded for the acquisitions completed during fiscal years ended June 30, 2022 and 2019, all of which is classified as a current liability on the Condensed Consolidated Balance Sheet.

Business Dispositions

As of June 30, 2022, we owned approximately 94% of the outstanding equity interest in Orbograph Ltd. (“Orbograph”), a non-core business engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers. On August 9, 2022, we acquired the non-controlling interest in Orbograph. On August 11, 2022, we sold our entire interest in Orbograph to a portfolio company of a private equity firm for total consideration of $110.0 million and net cash proceeds from the transaction of $75.4 million. We recognized a pre-tax gain from the sale of $29.7 million, which was recorded as part of other expense (income), net. Included in the sale were $26.5 million in tangible assets, $30.5 million in liabilities and $61.2 million in goodwill and intangible assets.

For additional details of business combinations and assets held for sale, refer to Note 6 “Business Combinations and Dispositions” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

NOTE 7 – GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in business combinations. We have three reportable segments and five operating segments. The operating segments are determined to be the same as reporting units. For additional details, refer to Note 18 “Segment Reporting and Geographic Information” to our Condensed Consolidated Financial Statements. The following table presents changes in goodwill carrying value during the nine months ended March 31, 2023:


(In thousands)	Wafer Inspection and Patterning		Global Service and Support (“GSS”)		Specialty Semiconductor Process		Printed Circuit Board (“PCB”) and Display		Component Inspection		Total
Balance as of June 30, 2022	$	725,737	$	25,908	$	681,858	$	872,971	$	13,575	$	2,320,049
Acquired goodwill	6,776		—		—		—		—		6,776
Goodwill disposal from sale of business (1)	—		—		—		(42,622)		—		(42,622)
Goodwill adjustments	(5,337)		—		—		—		—		(5,337)

Foreign currency adjustments	(49)		—		—		—		—		(49)
Balance as of March 31, 2023	$	727,127	$	25,908	$	681,858	$	830,349	$	13,575	$	2,278,817

(1) Refer to the “Business Dispositions” section of Note 6 “Business Combinations and Dispositions” for more information on the sale of Orbograph.

Goodwill is not subject to amortization but is tested for impairment annually during the third fiscal quarter, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In testing goodwill for impairment, we utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. When performing the qualitative assessment, we consider the following factors: stock price or market capitalization, changes in the industry and competitive environment, budget-to-actual revenue and profitability performance from the prior year and projected revenue and profitability trends for future years at our reporting units. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a quantitative assessment by comparing the carrying value to the fair value of the reporting units. If the fair value is determined to be less than the carrying value, the amount of impairment is computed as the excess of the carrying value over the estimated fair value, not to exceed the carrying value of goodwill. Any impairment charges could have a material adverse effect on our operating results and net asset value in the quarter in which we recognize the impairment charge.

We performed the required annual goodwill impairment testing for all reporting units as of February 28, 2023, and concluded that goodwill was not impaired. As a result of our qualitative assessment, we determined that it was not necessary to perform the quantitative assessment. The next annual goodwill impairment assessment by reporting unit is scheduled to be performed in the third quarter of the fiscal year ending June 30, 2024.

Purchased Intangible Assets

The components of purchased intangible assets as of the dates indicated below were as follows:


(In thousands)		As of March 31, 2023						As of June 30, 2022
Category	Range of Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization and Impairment		Net Amount		Gross Carrying Amount		Accumulated Amortization and Impairment		Net Amount
Existing technology	4-8	$	1,536,826	$	796,369	$	740,457	$	1,523,691	$	668,175	$	855,516
Customer relationships	4-9	358,567		195,461		163,106		366,567		167,819		198,748
Trade name / Trademark	4-7	116,583		75,043		41,540		121,083		68,194		52,889
Order backlog and other	<1-7	85,836		76,337		9,499		87,836		58,970		28,866
Intangible assets subject to amortization(1)		2,097,812		1,143,210		954,602		2,099,177		963,158		1,136,019
In-process research and development		61,322		15,966		45,356		64,457		6,062		58,395
Total		$	2,159,134	$	1,159,176	$	999,958	$	2,163,634	$	969,220	$	1,194,414

(1) The disposition of Orbograph during the three months ended September 30, 2022 resulted in a decrease in the gross amount of intangible assets subject to amortization of $34.5 million, a decrease in accumulated amortization of $15.9 million, and a decrease in the net amount of intangible assets of $18.6 million. Refer to the “Business Dispositions” section of Note 6 “Business Combinations and Dispositions” for more information on the sale of Orbograph.

Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable. Impairment indicators primarily include declines in our operating cash flows from the use of these assets. If impairment indicators are present, we are required to perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to these long-lived assets to their carrying value.

As of March 31, 2023, there were no impairment indicators for purchased intangible assets.

Amortization expense for purchased intangible assets for the periods indicated below was as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Amortization expense - Costs of revenues	$	45,446	$	42,586	$	135,958	$	124,834
Amortization expense - SG&A	19,656		15,102		59,912		39,880
Amortization expense - Research and development	31		31		93		93
Total	$	65,133	$	57,719	$	195,963	$	164,807

Based on the purchased intangible assets gross carrying amount recorded as of March 31, 2023, the remaining estimated annual amortization expense is expected to be as follows:


Fiscal year ending June 30:	Amortization (In thousands)
2023 (remaining three months)	$	64,655
2024	238,575
2025	222,123
2026	206,211
2027	129,630
2028 and thereafter	93,408
Total	$	954,602

NOTE 8 – DEBT

The following table summarizes our debt as of March 31, 2023 and June 30, 2022:


	As of March 31, 2023				As of June 30, 2022
	Amount (In thousands)		Effective Interest Rate		Amount (In thousands)		Effective Interest Rate
Fixed-rate 4.650% Senior Notes due on November 1, 2024	$	750,000	4.682	%	$	1,250,000	4.682	%
Fixed-rate 5.650% Senior Notes due on November 1, 2034	250,000		5.670	%	250,000		5.670	%
Fixed-rate 4.100% Senior Notes due on March 15, 2029	800,000		4.159	%	800,000		4.159	%
Fixed-rate 5.000% Senior Notes due on March 15, 2049	400,000		5.047	%	400,000		5.047	%
Fixed-rate 3.300% Senior Notes due on March 1, 2050	750,000		3.302	%	750,000		3.302	%
Fixed-rate 4.650% Senior Notes due on July 15, 2032	1,000,000		4.657	%	1,000,000		4.657	%
Fixed-rate 4.950% Senior Notes due on July 15, 2052	1,200,000		5.009	%	1,200,000		5.009	%
Fixed-rate 5.250% Senior Notes due on July 15, 2062	800,000		5.259	%	800,000		5.259	%
Revolving Credit Facility	—		—	%	275,000		2.258	%

Total	5,950,000				6,725,000
Unamortized discount/premium, net	(18,139)				(19,304)
Unamortized debt issuance costs	(42,121)				(44,978)
Total	$	5,889,740			$	6,660,718
Reported as:

Long-term debt	$	5,889,740			$	6,660,718
Total	$	5,889,740			$	6,660,718

Senior Notes and Debt Redemption

In June 2022, we issued $3.00 billion aggregate principal amount of senior, unsecured notes (the “2022 Senior Notes”) as follows: $1.00 billion of 4.650% senior, unsecured notes due July 15, 2032; $1.20 billion of 4.950% senior, unsecured notes due July 15, 2052; and $800.0 million of 5.250% senior, unsecured notes due July 15, 2062. A portion of the net proceeds of the 2022 Senior Notes was used to complete a tender offer in July 2022 for $500.0 million of our Senior Notes due November 1, 2024 including associated redemption premiums, accrued interest and other fees and expenses. The transaction resulted in pre-tax net loss on extinguishment of debt of $13.3 million for the three months ended September 30, 2022. The remainder of the net proceeds were used for share repurchases and for general corporate purposes.

Prior to June 2022, the following aggregate principal amounts of senior, unsecured long-term notes were issued in the following periods: $750.0 million in February 2020 (the “2020 Senior Notes”), $1.20 billion in March 2019 (the “2019 Senior Notes”) and $2.50 billion in November 2014 (the “2014 Senior Notes”). These, along with the 2022 Senior Notes, are collectively referred to as the “Senior Notes.”

The original discounts on the Senior Notes are being amortized over the life of the debt. Interest is payable as follows: semi-annually on January 15 and July 15 of each year for the 2022 Senior Notes; 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 relevant indentures for the Senior Notes (collectively, the “Indenture”) include covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions.

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 Investors Service, S&P Global Ratings 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.

Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as of March 31, 2023 and June 30, 2022 was $5.79 billion and $6.39 billion, respectively. While the Senior Notes are recorded at cost, the fair value of the long-term debt was determined based on quoted prices in markets that are not active; accordingly, the long-term debt is categorized as Level 2 for purposes of the fair value measurement hierarchy.

As of March 31, 2023, we were in compliance with all of our covenants under the Indenture associated with the Senior Notes.

Revolving Credit Facility

As of March 31, 2023, we have in place a renegotiated Credit Agreement dated June 8, 2022 (“Credit Agreement”) for an unsecured Revolving Credit Facility (“Revolving Credit Facility”) having a maturity date of June 8, 2027 that allows us to borrow up to $1.50 billion. Subject to the terms of the Credit Agreement, the Revolving Credit Facility may be increased by an amount up to $250.0 million in the aggregate. During the nine months ended March 31, 2023, we borrowed $300.0 million from the Revolving Credit Facility and repaid $575.0 million. As of March 31, 2023, 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 we may exercise two one-year extension options with the consent of the lenders. We may prepay outstanding borrowings under the Revolving Credit Facility at any time without a prepayment penalty.

Borrowings under the Revolving Credit Facility can be made as Term Secured Overnight Financing Rate (“SOFR”) Loans or Alternate Base Rate (“ABR”) Loans, at the Company’s option. In the event that Term SOFR is unavailable, any Term SOFR elections will be converted to Daily Simple SOFR, if available. Each Term SOFR Loan will bear interest at a rate per annum equal to the applicable Adjusted Term SOFR rate, which is equal to the applicable Term SOFR rate plus 10 bps that shall not be less than zero, plus a spread ranging from 75 bps to 125 bps, as determined by the Company’s credit ratings at the time. Each ABR Loan will bear interest at a rate per annum equal to the ABR plus a spread ranging from 0 bps to 25 bps, as determined by the Company’s credit ratings at the time. We are also obligated to pay an annual commitment fee on the daily undrawn balance of the Revolving Credit Facility, which ranges from 4.5 bps to 12.5 bps, subject to an adjustment in conjunction with changes to our credit rating. The applicable interest rates and commitment fees are also subject to adjustment based on the Company’s performance against certain environmental sustainability key performance indicators related to greenhouse gas emissions and renewable electricity usage. As of March 31, 2023, we elected to pay interest on borrowings under the Revolving Credit Facility at the applicable Adjusted Term SOFR rate plus a spread of 100 bps and the applicable commitment fee on the daily undrawn balance of the Revolving Credit Facility was 9 bps.

Under the Credit Agreement, the maximum leverage ratio on a quarterly basis is 3.50 to 1.00, covering the trailing four consecutive fiscal quarters for each fiscal quarter, which can be increased to 4.00 to 1.00 for a period of time in connection with a material acquisition or a series of material acquisitions. As of March 31, 2023, our maximum allowed leverage ratio was 3.50 to 1.00.

We were in compliance with all covenants under the Credit Agreement as of March 31, 2023.

For additional details, refer to Note 8 “Debt” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

NOTE 9 – LEASES

We have operating leases for facilities, vehicles and other equipment. Our facility leases are primarily used for administrative functions, research and development (“R&D”), manufacturing, and storage and distribution. Our finance leases are not material.

Our existing leases do not contain significant restrictive provisions or residual value guarantees; however, certain leases contain provisions for the payment of maintenance, real estate taxes or insurance costs by us. Our leases have remaining lease terms ranging from less than one year to 29 years, including periods covered by options to extend the lease when it is reasonably certain that the option will be exercised.

Lease expense was $10.1 million and $29.2 million for the three and nine months ended March 31, 2023, respectively, and $9.2 million and $27.5 million for the three and nine months ended March 31, 2022, respectively. Expense related to short-term leases, which are not recorded on the Condensed Consolidated Balance Sheets, was not material for the three and nine months ended March 31, 2023 and 2022. As of March 31, 2023 and June 30, 2022, the weighted-average remaining lease term was 6.5 and 4.8 years, respectively, and the weighted-average discount rate for operating leases was 3.26% and 2.18%, respectively.

Supplemental cash flow information related to leases was as follows:


	Nine Months Ended March 31,
In thousands	2023		2022
Operating cash outflows from operating leases	$	29,630	$	28,680
Right of use assets obtained in exchange for new operating lease liabilities	$	85,911	$	20,698

Maturities of lease liabilities as of March 31, 2023 were as follows:


Fiscal Year Ending June 30:	(In thousands)
2023 (remaining three months)	$	10,503
2024	33,605
2025	32,942
2026	26,363
2027	21,511
2028 and thereafter	72,457
Total lease payments	197,381
Less imputed interest	(26,048)
Total	$	171,333

As of March 31, 2023, we did not have material leases that had not yet commenced.

NOTE 10 – EQUITY, LONG-TERM INCENTIVE COMPENSATION PLANS AND NON-CONTROLLING INTEREST

Equity Incentive Program

As of March 31, 2023, 8.3 million shares remained available for issuance under our 2004 Equity Incentive Plan (the “2004 Plan”). For details of the 2004 Plan refer to Note 10 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

Assumed Equity Plans

As part of the acquisition of Orbotech Ltd. (“Orbotech”) in February 2019, we assumed outstanding equity incentive awards under the following Orbotech equity incentive plans: (i) Equity Remuneration Plan for Key Employees of Orbotech and its Affiliates and Subsidiaries (as Amended and Restated in 2005), (ii) 2010 Equity-Based Incentive Plan, and (iii) 2015 Equity-Based Incentive Plan (collectively, the “Assumed Equity Plans”).

As of March 31, 2023, there were no assumed awards outstanding, including options and restricted stock units (“RSUs”), under the Assumed Equity Plans. For details on the Assumed Equity Plans, refer to Note 10 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

Equity Incentive Plans - General Information

The following table summarizes the combined activity under our equity incentive plans:


(In thousands)			Available For Grant(1) (2)
Balance as of June 30, 2022			9,242

RSUs granted(3)			(1,012)

RSUs canceled			88

Balance as of March 31, 2023			8,318

(1)The number of RSUs reflects the application of the award multiplier of 2.0x to calculate the impact of the award on the shares reserved under the 2004 Plan.

(2)No additional stock options, RSUs or other awards will be granted under the Assumed Equity Plans.

(3)Includes RSUs granted to senior management during the nine months ended March 31, 2023 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such RSUs that are deemed to have been earned) (“performance-based RSUs”). This line item includes all such performance-based RSUs granted during the nine months ended March 31, 2023 reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (0.6 million shares for the nine months ended March 31, 2023 reflects the application of the multiplier described above).

The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For RSUs granted without “dividend equivalent” rights, fair value is calculated using the closing price of our common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on those RSUs. The fair value for RSUs granted with “dividend equivalent” rights is determined using the closing price of our common stock on the grant date.

The following table shows stock-based compensation expense for the indicated periods:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Stock-based compensation expense by:
Costs of revenues	$	8,596	$	6,543	$	20,189	$	14,475
R&D	13,289		8,482		30,437		18,077
SG&A	26,245		22,062		70,891		57,517
Total stock-based compensation expense	$	48,130	$	37,087	$	121,517	$	90,069

Stock-based compensation capitalized as inventory as of March 31, 2023 and June 30, 2022 was $15.9 million and $8.6 million, respectively.

Restricted Stock Units

The following table shows the activity and weighted-average grant date fair values for RSUs during the nine months ended March 31, 2023:


	Shares(1) (In thousands)	Weighted-Average Grant Date Fair Value
Outstanding RSUs as of June 30, 2022(2)	1,593	$	218.03
Granted(3)	506	$	390.53



Vested and released	(264)	$	147.65
Withheld for taxes	(190)	$	147.65
Forfeited	(45)	$	179.82
Outstanding RSUs as of March 31, 2023(2)	1,600	$	293.58

(1)Share numbers reflect actual shares subject to awarded RSUs.

(2)Includes performance-based RSUs.

(3)This line item includes performance-based RSUs granted during the nine months ended March 31, 2023 reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (0.3 million shares for the nine months ended March 31, 2023).

The RSUs granted by us generally vest as follows: (i) with respect to awards with only service-based vesting criteria, over periods ranging from two to four years; (ii) with respect to awards with both performance-based and service-based vesting criteria, over periods ranging from three to four years; and (iii) with respect to awards with both market-based and service-based vesting criteria, in three equal installments on the third, fourth and fifth anniversaries of the grant date, in each case subject to the recipient remaining employed by us as of the applicable vesting date. The RSUs granted to the independent members of the Board of Directors vest annually.

The following table shows the weighted-average grant date fair value per unit for the RSUs granted, aggregate grant date fair value of RSUs vested, and tax benefits realized by us in connection with vested and released RSUs for the indicated periods:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands, except for weighted-average grant date fair value)	2023		2022		2023		2022
Weighted-average grant date fair value per unit	$	409.77	$	388.03	$	390.53	$	358.38

Grant date fair value of vested RSUs	$	9,217	$	10,150	$	67,152	$	57,453
Tax benefits realized by us in connection with vested and released RSUs	$	4,517	$	3,993	$	17,368	$	17,914

As of March 31, 2023, the unrecognized stock-based compensation expense balance related to RSUs was $294.4 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of 1.4 years. The intrinsic value of outstanding RSUs as of March 31, 2023 was $638.5 million.

Cash-Based Long-Term Incentive Compensation

We have adopted a cash-based long-term incentive (“Cash LTI”) program (“Cash LTI Plan”) for many of our employees as part of our employee compensation program. Executives and non-employee members of the Board of Directors do not participate in the Cash LTI Plan. During the nine months ended March 31, 2023 and 2022, we approved Cash LTI awards of $0.2 million and $15.7 million, respectively. Cash LTI awards issued to employees under the Cash LTI Plan will vest in three or four equal installments, with one-third or one-fourth of the aggregate amount of the Cash LTI award vesting on each anniversary of the grant date over a three- or four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by us as of the applicable award vesting date. During the three months ended March 31, 2023 and 2022, we recognized $19.5 million and $21.6 million, respectively, in compensation expense under the Cash LTI Plan. During the nine months ended March 31, 2023 and 2022, we recognized $58.5 million and $65.6 million, respectively, in compensation expense under the Cash LTI Plan. As of March 31, 2023, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $110.1 million. For details, refer to Note 10 “Equity, Long-

Term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 15% of their eligible earnings toward the semi-annual purchase of our common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).

The offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period, until otherwise amended, is equal to 85% of the lesser of (i) the fair market value of our common stock at the commencement of the applicable six months offering period or (ii) the fair market value of our common stock on the purchase date. We estimate the fair value of purchase rights under the ESPP using a Black-Scholes model.

The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes model and the straight-line attribution approach with the following weighted-average assumptions:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
Stock purchase plan:
Expected stock price volatility	43.8	%	41.5	%	42.7	%	38.2	%
Risk-free interest rate	3.9	%	0.1	%	2.5	%	0.1	%
Dividend yield	1.4	%	1.0	%	1.6	%	1.2	%
Expected life (in years)	0.5		0.5		0.5		0.5

The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, the tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods:


(In thousands, except for weighted-average fair value per share)	Three Months Ended March 31,						Nine Months Ended March 31,
2023			2022			2023			2022
Total cash received from employees for the issuance of shares under the ESPP	$	—		$	—		$	33,793		$	36,912
Number of shares purchased by employees through the ESPP	—			—			134			139
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP	$	616		$	488		$	1,540		$	1,686
Weighted-average fair value per share based on Black-Scholes model	$	97.32		$	107.45		$	89.81		$	94.91

The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which we estimate will be required to be issued under the ESPP during the forthcoming fiscal year. As of March 31, 2023, a total of 2.5 million shares were reserved and available for issuance under the ESPP.

Quarterly Cash Dividends

On March 1, 2023, we paid a quarterly cash dividend of $1.30 per share to stockholders of record as of the close of business on February 13, 2023. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months ended March 31, 2023 and 2022 was $180.9 million and $159.0 million, respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid during the nine months ended March 31, 2023 and 2022 was $553.0 million and $480.9 million, respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of March 31, 2023 and June 30, 2022 was $11.7 million and $11.2 million, respectively. These amounts will be paid upon vesting of the underlying RSUs.

Non-Controlling Interest

As of June 30, 2022, we owned approximately 94% of the outstanding equity interest in Orbograph, a non-core business engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers. On August 11, 2022, we sold our interest in Orbograph; for further details, refer to Note 6 “Business Combinations and Dispositions” to our Condensed Consolidated Financial Statements.

NOTE 11 – STOCK REPURCHASE PROGRAM

Our Board of Directors has authorized a program that permits us to repurchase our common stock, including increases in the authorized repurchase amount of $2.00 billion in the first quarter of fiscal 2022 and $6.00 billion in the fourth quarter of fiscal 2022. The stock repurchase program has no expiration date and may be suspended at any time. The intent of the program is, in part, to mitigate the potential dilutive impact related to our equity incentive plans and shares issued in connection with our ESPP as well as to return excess cash to our stockholders. Any and all share repurchase transactions are subject to market conditions and applicable legal requirements.

On June 23, 2022, the Company executed accelerated share repurchase agreements (“ASR Agreements”) with two financial institutions to repurchase shares of our common stock in exchange for an upfront payment of $3.00 billion. The Company received initial deliveries totaling approximately 6.5 million shares of common stock in the fourth quarter of fiscal 2022, which represented 70% of the prepayment amount at the then-prevailing market price of the Company’s shares of common stock. The value of the shares to be delivered to the Company for the remainder of the upfront payment of $0.90 billion was recorded at that time as an unsettled forward contract, classified within stockholders’ equity. The total number of shares received under the ASR Agreements was based upon the volume weighted-average price of our common stock during the repurchase period, less an agreed-upon discount. Final settlement of the ASR Agreements occurred during the three months ended December 31, 2022, resulting in the delivery of 2.4 million additional shares, which yielded an average share price of $333.88 for the entire transaction.

Under the authoritative guidance, share repurchases are recognized as a reduction to retained earnings to the extent available, with any excess recognized as a reduction of capital in excess of par value. In addition, as explained further in Note 13 “Income Taxes,” the Inflation Reduction Act of 2022 (“IRA”) introduced a 1% excise tax imposed on certain stock repurchases by publicly traded companies made after December 31, 2022. The excise tax is recorded as part of the cost basis of treasury stock repurchased after December 31, 2022 and, as such, is included in stockholders’ equity.

As of March 31, 2023, an aggregate of $2.29 billion was available for repurchase under the stock repurchase program.

Share repurchases for the indicated periods (based on the trade date of the applicable repurchase) were as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Number of shares of common stock repurchased	1,227		1,539		4,913		3,833
Total cost of repurchases	$	482,712	$	564,666	$	943,310	$	1,394,217

NOTE 12 – NET INCOME PER SHARE

Basic net income per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying our outstanding dilutive RSUs had been issued. The dilutive effect of outstanding RSUs is reflected in diluted net income per share by application of the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share attributable to KLA:


(In thousands, except per share amounts)	Three Months Ended March 31,						Nine Months Ended March 31,
2023			2022			2023			2022
Numerator:
Net income attributable to KLA	$	697,837		$	730,572		$	2,702,623		$	2,516,433
Denominator:
Weighted-average shares - basic, excluding unvested RSUs	137,865			150,145			140,349			151,250
Effect of dilutive RSUs and options	780			1,041			724			1,096
Weighted-average shares - diluted	138,645			151,186			141,073			152,346
Basic net income per share attributable to KLA	$	5.06		$	4.87		$	19.26		$	16.64
Diluted net income per share attributable to KLA	$	5.03		$	4.83		$	19.16		$	16.52
Anti-dilutive securities excluded from the computation of diluted net income per share	12			10			226			9

NOTE 13 – INCOME TAXES

The following table provides details of income taxes:


	Three Months Ended March 31,						Nine Months Ended March 31,
(Dollar amounts in thousands)	2023			2022			2023			2022
Income before income taxes	$	800,683		$	846,285		$	3,013,684		$	2,539,538
Provision for income taxes	$	102,846		$	115,625		$	310,987		$	22,876
Effective tax rate	12.8		%	13.7		%	10.3		%	0.9		%

Our effective tax rate is lower than the U.S. federal statutory rate during the three months ended March 31, 2023 primarily due to the proportion of earnings generated in jurisdictions with tax rates lower than the U.S. statutory rate and the proportion of U.S. earnings eligible for the Foreign Derived Intangible Income deduction.

Our effective tax rate is lower than the U.S. federal statutory rate during the nine months ended March 31, 2023 primarily due to a non-recurring tax benefit resulting from a decrease in our unrecognized tax benefits from the settlement of income tax examinations and a decrease in our deferred tax liabilities on unremitted earnings and unrealized gains.

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 United States income tax examination for the fiscal years ended June 30, 2018, June 30, 2019 and June 30, 2020. We are subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2018. 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, 2017.

It is possible that certain examinations may be concluded in the next 12 months. The timing and resolution of income tax examinations are uncertain. Given the uncertainty around the timing of the resolution of these ongoing examinations, we are unable to estimate the full range of possible adjustments to our unrecognized tax benefits within the next 12 months.

In August 2022, Orbotech executed a settlement agreement with the Israel Tax Authority (“ITA”) in resolution of tax examinations for fiscal years 2012 through 2014 and 2015 through 2018. The settlement agreement included a payment of approximately $25.7 million, including interest, to the ITA. Approximately $5.7 million of this payment may be refunded if and when the Israel Innovation Authority agrees to the amount of R&D expenses eligible for deduction during the above referenced years. In addition, Orbotech agreed to make an election in the current year to pay $16.2 million to the ITA related to previous “tax exempt” earnings under the historical Approved or Beneficial Enterprises regimes. The current year election to pay tax on the previous exempt earnings was made under the Temporary Order issued in the Israel Budget, which allows for a reduced tax rate on such earnings. Orbotech currently has no ongoing ITA examinations. Orbotech is subject to income tax examination in Israel for all years beginning from the calendar year ended December 31, 2019.

Legislative Developments

President Biden signed into law the CHIPS and Science Act of 2022 (“CHIPS Act,” where “CHIPS” stands for Creating Helpful Incentives to Produce Semiconductors) on August 9, 2022. The CHIPS Act provides for various incentives and tax credits among other items, including the Advanced Manufacturing Investment Credit (“AMIC”) which equals 25% of qualified investments in an advanced manufacturing facility that is placed in service after December 31, 2022.

President Biden also signed into law the IRA on August 16, 2022. The IRA has several new provisions including a 15% corporate alternative minimum tax (“CAMT”) for certain large corporations that have at least an average of $1.0 billion of adjusted financial statement income over a consecutive three-tax-year period. The CAMT will be effective for us in the first quarter of our fiscal year ending June 30, 2024.

The IRA also introduced a 1% excise tax imposed on certain stock repurchases by publicly traded companies made after December 31, 2022. We began recording the excise tax as part of the cost basis of treasury stock repurchased after December 31, 2022.

Other than the excise tax imposed on certain stock repurchases as mentioned above, we are currently evaluating the applicability and impact of the other provisions in the IRA and the CHIPS Act on our Condensed Consolidated Financial Statements including our future cash flows.

NOTE 14 – LITIGATION AND OTHER LEGAL MATTERS

We are named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of our business. Actions filed against us include commercial, intellectual property (“IP”), customer, and labor and employment related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws. In general, legal proceedings and claims, regardless of their merit, and associated internal investigations (especially those relating to IP or confidential information disputes) are often expensive to prosecute, defend or conduct, and may divert management’s attention and other Company resources. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome. We believe the amounts provided in our Condensed Consolidated Financial Statements are adequate in light of the probable and estimated liabilities. However, because such matters are subject to many uncertainties and the ultimate outcomes are not predictable, there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in our Condensed Consolidated Financial Statements or will not have a material adverse effect on our results of operations, financial condition or cash flows.

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Factoring. We have factoring agreements with financial institutions to sell certain of our trade receivables and promissory notes from customers without recourse. We do not believe we are at risk for any material losses as a result of these agreements. In addition, we periodically sell certain letters of credit (“LC”), without recourse, received from customers in payment for goods and services.

The following table shows total receivables sold under factoring agreements and proceeds from sales of LC for the indicated periods:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Receivables sold under factoring agreements	$	107,140	$	63,094	$	288,599	$	210,130
Proceeds from sales of LC	$	—	$	74,267	$	69,247	$	115,433

Factoring and LC fees for the sale of certain trade receivables were recorded in other expense (income), net and were not material for the periods presented.

Purchase Commitments. We maintain commitments to purchase inventory from our suppliers as well as goods, services and other assets in the ordinary course of business. Our liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed between the parties. This forecasted time-horizon can vary among different suppliers. Our estimate of our significant purchase commitments primarily for material, services, supplies and asset purchases is approximately $2.9 billion as of March 31, 2023, a majority of which are due within the next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid

under these arrangements may be less in the event that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.

Cash LTI Plan. As of March 31, 2023, we have committed $183.7 million for future payment obligations under our Cash LTI Plan. The calculation of compensation expense related to the Cash LTI Plan includes estimated forfeiture rate assumptions. Cash LTI awards issued to employees under the Cash LTI Plan vest in three or four equal installments, with one-third or one-fourth of the aggregate amount of the Cash LTI award vesting on each anniversary of the grant date over a three- or four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by us as of the applicable award vesting date.

Guarantees and Contingencies. We maintain guarantee arrangements available through various financial institutions for up to $77.5 million, of which $43.7 million had been issued as of March 31, 2023, primarily to fund guarantees to customs authorities for value-added tax and other operating requirements of our consolidated subsidiaries in Europe, Israel and Asia.

Indemnification Obligations. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to us. These obligations arise under the terms of our certificate of incorporation, our bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that we are required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred by several of our current and former directors, officers and employees in connection with these matters. For example, we have paid or reimbursed legal expenses incurred in connection with the investigation of our historical stock option practices and the related litigation and government inquiries. Although the maximum potential amount of future payments we could be required to make under the indemnification obligations generally described in this paragraph is theoretically unlimited, we believe the fair value of this liability, to the extent estimable, is appropriately considered within the reserve we have established for currently pending legal proceedings.

We are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which we customarily agree to hold the other party harmless against losses arising therefrom, or provide customers with other remedies to protect against, bodily injury or damage to personal property caused by our products, non-compliance with our product performance specifications, infringement by our products of third-party IP rights and a breach of warranties, representations and covenants related to matters such as title to assets sold, validity of certain IP rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by us is typically subject to the other party making a claim to and cooperating with us pursuant to the procedures specified in the particular contract. This usually allows us to challenge the other party’s claims or, in case of breach of IP representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, our obligations under these agreements may be limited in terms of amounts, activity (typically at our option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, we may have recourse against third parties and/or insurance covering certain payments made by us.

In addition, we may, in limited circumstances, enter into agreements that contain customer-specific commitments on pricing, tool reliability, spare parts stocking levels, response time and other commitments. Furthermore, we may give these customers limited audit or inspection rights to enable them to confirm that we are complying with these commitments. If a customer elects to exercise its audit or inspection rights, we may be required to expend significant resources to support the audit or inspection, as well as to defend or settle any dispute with a customer that could potentially arise out of such audit or inspection. To date, we have made no significant accruals in our Condensed Consolidated Financial Statements for this contingency. While we have not in the past incurred significant expenses for resolving disputes regarding these types of commitments, we cannot make any assurance that we will not incur any such liabilities in the future.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material effect on our business, financial condition, results of operations or cash flows.

NOTE 16 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The authoritative guidance requires companies to recognize all derivative instruments, including foreign exchange contracts and rate lock agreements (collectively “derivatives”), as either assets or liabilities at fair value on the Condensed Consolidated Balance Sheets. In accordance with the accounting guidance, we designate foreign currency forward transactions and options contracts and interest rate forward transactions as cash flow hedges. In accordance with the accounting guidance, we also designate certain foreign currency exchange contracts as net investment hedge transactions intended to mitigate the

variability of the value of certain investments in foreign subsidiaries.

Our foreign subsidiaries operate and sell our products in various global markets. As a result, we are exposed to risks relating to changes in foreign currency exchange rates. We utilize foreign exchange contracts to hedge against future movements in foreign currency exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro and the pound sterling. We routinely hedge our exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These foreign exchange contracts, designated as cash flow hedges, generally have maturities of less than 18 months. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material losses.

Since fiscal 2015, we have entered into four sets of forward contracts to hedge the benchmark interest rate on portions of our Senior Notes prior to issuance (“Rate Lock Agreements”). Upon issuance of the associated debt, the Rate Lock Agreements were settled and their fair values were recorded within AOCI. The resulting gains and losses from these transactions are amortized to interest expense over the lives of the associated debt. We recognized net gains of $0.9 million and $2.8 million in the three and nine months ended March 31, 2023, respectively, for the amortization of the net of the Rate Lock Agreements that had been recognized in AOCI, which decreased the interest expense on a net basis. We recognized net expenses of $0.3 million and $0.8 million in the three and nine months ended March 31, 2022, respectively, for the amortization of the net of the Rate Lock Agreements that had been recognized in AOCI, which increased the interest expense on a net basis. As of March 31, 2023, the aggregate unamortized portion of the fair value of the forward contracts for the Rate Lock Agreements was a $52.0 million net gain.

For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gains or losses is reported in AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For derivative contracts executed after adopting the new accounting guidance in fiscal 2019, the election to include time value for the assessment of effectiveness is made on all forward contracts designated as cash flow hedges. The change in fair value of the derivative is recorded in AOCI until the hedged item is recognized in earnings. The assessment of effectiveness of options contracts designated as cash flow hedges exclude time value. The initial value of the component excluded from the assessment of effectiveness is recognized in earnings over the life of the derivative contract. Any differences between changes in the fair value of the excluded components and the amounts recognized in earnings are recorded in AOCI.

For derivatives that are designated and qualify as a net investment hedge in a foreign operation and that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within AOCI. The remainder of the change in value of such instruments is recorded in earnings using the mark-to-market approach. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation or sale of the net investment in the hedged foreign operations.

For derivatives that are not designated as hedges, gains and losses are recognized in other expense (income), net. We use foreign exchange contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivative instruments are largely offset by the changes in the fair value of the assets or liabilities being hedged.

Derivatives in Hedging Relationships: Foreign Exchange Contracts and Rate Lock Agreements

The gains (losses) on derivatives in cash flow and net investment hedging relationships recognized in other comprehensive income for the indicated periods were as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Derivatives Designated as Cash Flow Hedging Instruments:
Rate lock agreements:
Amounts included in the assessment of effectiveness	$	—	$	10,069	$	—	$	10,069
Foreign exchange contracts:
Amounts included in the assessment of effectiveness	$	6,008	$	7,733	$	16,720	$	15,335
Amounts excluded from the assessment of effectiveness	$	652	$	(25)	$	(53)	$	(34)
Derivatives Designated as Net Investment Hedging Instruments:
Foreign exchange contracts(1):	$	154	$	1,850	$	1,986	$	1,386

(1)No amounts were reclassified from AOCI into earnings related to the sale of a subsidiary, as there were no such sales during the periods presented.

The locations and amounts of designated and non-designated derivatives’ gains and losses reported in the Condensed Consolidated Statements of Operations for the indicated periods were as follows:


	Three Months Ended March 31,								Three Months Ended March 31,
	2023								2022
(In thousands)	Revenues		Costs of Revenues and Operating Expenses		Interest Expense		Other Expense (Income), Net		Revenues		Costs of Revenues and Operating Expenses		Interest Expense		Other Expense (Income), Net
Total amounts presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded	$	2,432,608	$	1,572,015	$	74,774	$	(14,864)	$	2,288,676	$	1,393,769	$	39,978	$	8,644
Gains (Losses) on Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amount of gains (losses) reclassified from AOCI to earnings	$	—	$	—	$	936	$	—	$	—	$	—	$	(279)	$	—

Foreign exchange contracts:
Amount of gains (losses) reclassified from AOCI to earnings	$	1,748	$	467	$	—	$	—	$	1,711	$	(329)	$	—	$	—
Amount excluded from the assessment of effectiveness recognized in earnings	$	(327)	$	—	$	—	$	765	$	(111)	$	—	$	—	$	568

Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Amount of gains (losses) recognized in earnings	$	—	$	—	$	—	$	(9,066)	$	—	$	—	$	—	$	(2,802)


	Nine Months Ended March 31,								Nine Months Ended March 31,
	2023								2022
(In thousands)	Revenues		Costs of Revenues and Operating Expenses		Interest Expense		Other Expense (Income), Net		Revenues		Costs of Revenues and Operating Expenses		Interest Expense		Other Expense (Income), Net
Total amounts presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded	$	8,140,919	$	4,970,444	$	223,449	$	(79,944)	$	6,725,144	$	4,045,479	$	116,142	$	23,985
Gains (Losses) on Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amount of gains (losses) reclassified from AOCI to earnings	$	—	$	—	$	2,810	$	—	$	—	$	—	$	(837)	$	—

Foreign exchange contracts:
Amount of gains (losses) reclassified from AOCI to earnings	$	33,024	$	(8,804)	$	—	$	—	$	5,197	$	(909)	$	—	$	—
Amount excluded from the assessment of effectiveness recognized in earnings	$	(1,070)	$	—	$	—	$	1,675	$	(329)	$	—	$	—	$	1,883

Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Amount of gains (losses) recognized in earnings	$	—	$	—	$	—	$	(2,773)	$	—	$	—	$	—	$	4,261

The U.S. dollar equivalent of all outstanding notional amounts of foreign currency hedge contracts with maximum remaining maturities of approximately 14 months as of the dates indicated below, were as follows:


	As of		As of
(In thousands)	March 31, 2023		June 30, 2022
Cash flow hedge contracts - foreign currency
Purchase	$	192,875	$	124,641
Sell	$	146,207	$	176,259
Net investment hedge contracts - foreign currency

Sell	$	87,157	$	66,436
Other foreign currency hedge contracts
Purchase	$	572,609	$	565,586
Sell	$	296,379	$	389,368

The locations and fair value of our derivatives reported in our Condensed Consolidated Balance Sheets as of the dates indicated below were as follows:


	Asset Derivatives						Liability Derivatives
	Balance Sheet		As of		As of		Balance Sheet	As of		As of
	Location		March 31, 2023		June 30, 2022		Location	March 31, 2023		June 30, 2022
(In thousands)		Fair Value					Fair Value
Derivatives designated as hedging instruments

Foreign exchange contracts	Other current assets		$	15,192	$	20,595	Other current liabilities	$	(1,504)	$	8,406
Total derivatives designated as hedging instruments			15,192		20,595			(1,504)		8,406
Derivatives not designated as hedging instruments
Foreign exchange contracts	Other current assets		5,099		19,716		Other current liabilities	(11,692)		25,909
Total derivatives not designated as hedging instruments			5,099		19,716			(11,692)		25,909
Total derivatives			$	20,291	$	40,311		$	(13,196)	$	34,315

The changes in AOCI, before taxes, related to derivatives for the indicated periods were as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Beginning AOCI	$	65,721	$	(20,831)	$	77,018	$	(25,830)
Amount reclassified to earnings as net (gains) losses	(2,824)		(992)		(25,960)		(3,122)
Net change in unrealized gains (losses)	6,814		19,627		18,653		26,756
Ending AOCI	$	69,711	$	(2,196)	$	69,711	$	(2,196)

Offsetting of Derivative Assets and Liabilities

We present derivatives at gross fair values in the Condensed Consolidated Balance Sheets. We have entered into arrangements with each of our counterparties, which reduce credit risk by permitting net settlement of transactions with the same counterparty under certain conditions. The information related to the offsetting arrangements for the periods indicated was as follows:


As of March 31, 2023							Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
(In thousands)	Gross Amounts of Derivatives		Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets		Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
Derivatives - assets	$	20,291	$	—	$	20,291	$	(10,113)	$	—	$	10,178
Derivatives - liabilities	$	(13,196)	$	—	$	(13,196)	$	10,113	$	—	$	(3,083)


As of June 30, 2022							Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
(In thousands)	Gross Amounts of Derivatives		Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets		Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
Derivatives - assets	$	40,311	$	—	$	40,311	$	(12,291)	$	—	$	28,020
Derivatives - liabilities	$	(34,315)	$	—	$	(34,315)	$	12,291	$	—	$	(22,024)

NOTE 17 – RELATED PARTY TRANSACTIONS

During the three and nine months ended March 31, 2023 and 2022, we purchased from, or sold to, several entities where one or more of our executive officers or members of our Board of Directors or their immediate family members were, during the periods presented, an executive officer or a board member of a subsidiary, including Citrix Systems, Inc., HP Inc., Keysight Technologies, Inc., Advanced Micro Devices, Inc., Microchip Technology Incorporated, Splunk Inc. and Ansys, Inc. The following table provides the transactions with these parties for the indicated periods (for the portion of such period that they were considered related):


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Total revenues	$	6,251	$	4,485	$	18,050	$	5,108
Total purchases	$	462	$	562	$	3,742	$	834

Our receivable balances from these parties were $8.4 million and $1.1 million as of March 31, 2023 and June 30, 2022, respectively. Our payable balances to these parties were immaterial as of March 31, 2023 and June 30, 2022.

NOTE 18 – SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

Accounting Standards Codification 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer.

We have three reportable segments: Semiconductor Process Control; Specialty Semiconductor Process; and PCB, Display and Component Inspection. The reportable segments are determined based on several factors including, but not limited to, customer base, homogeneity of products, technology, delivery channels and similar economic characteristics. Prior to July 1, 2022, we had a fourth segment, Other, but core assets were sold and there are no longer operations.

Semiconductor Process Control

The Semiconductor Process Control segment offers a comprehensive portfolio of inspection, metrology and data analytics products, and related services, which helps IC manufacturers achieve target yield throughout the entire semiconductor fabrication process, from R&D to final volume production. Our differentiated products and services are designed to provide comprehensive solutions that help our customers accelerate development and production ramp cycles, achieve higher and more stable semiconductor die yields and improve their overall profitability. This reportable segment is composed of two operating segments, Wafer Inspection and Patterning and GSS.

Specialty Semiconductor Process

The Specialty Semiconductor Manufacturing segment develops and sells advanced vacuum deposition and etching process tools, which are used by a broad range of specialty semiconductor customers, including manufacturers of microelectromechanical systems (“MEMS”), radio frequency (“RF”) communication chips and power semiconductors for automotive and industrial applications. This reportable segment is composed of one operating segment.

PCB, Display and Component Inspection

The PCB, Display and Component Inspection segment enables electronic device manufacturers to inspect, test and measure PCBs, flat panel displays and ICs to verify their quality, pattern the desired electronic circuitry on the relevant substrate and perform three-dimensional shaping of metalized circuits on multiple surfaces. This reportable segment is composed of two operating segments, PCB and Display and Component Inspection.

The CODM assesses the performance of each operating segment and allocates resources to those segments based on total revenues and segment gross profit and does not evaluate the segments using discrete asset information. Segment gross profit excludes corporate allocations and effects of changes in foreign currency exchange rates, amortization of intangible assets, amortization of inventory fair value adjustments, and transaction costs associated with our acquisitions related to costs of revenues.

The following is a summary of results for each of our three reportable segments for the indicated periods:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Semiconductor Process Control:
Revenues	$	2,171,557	$	1,979,295	$	7,226,711	$	5,810,580
Segment gross profit	1,367,886		1,284,450		4,622,905		3,789,316
Specialty Semiconductor Process:
Revenues	128,438		117,253		414,390		332,020
Segment gross profit	65,328		61,521		216,408		176,516
PCB, Display and Component Inspection:
Revenues	131,923		192,533		502,627		583,318
Segment gross profit	43,361		93,298		182,899		270,096



Totals:
Revenues for reportable segments	$	2,431,918	$	2,289,081	$	8,143,728	$	6,725,918
Segment gross profit	$	1,476,575	$	1,439,269	$	5,022,212	$	4,235,928

The following table reconciles total revenues for reportable segments to total revenues for the indicated periods:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Total revenues for reportable segments	$	2,431,918	$	2,289,081	$	8,143,728	$	6,725,918
Corporate allocations and effects of changes in foreign currency exchange rates	690		(405)		(2,809)		(774)
Total revenues	$	2,432,608	$	2,288,676	$	8,140,919	$	6,725,144

The following table reconciles total segment gross profit to income before income taxes for the indicated periods:


	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2023		2022		2023		2022
Total segment gross profit	$	1,476,575	$	1,439,269	$	5,022,212	$	4,235,928
Acquisition-related charges, corporate allocations, and effects of changes in foreign currency exchange rates(1)	49,313		42,684		136,651		124,661
R&D	328,276		285,189		979,617		808,373
SG&A	238,393		216,489		735,469		623,229

Interest expense	74,774		39,978		223,449		116,142
Loss on extinguishment of debt	—		—		13,286		—
Other expense (income), net	(14,864)		8,644		(79,944)		23,985
Income before income taxes	$	800,683	$	846,285	$	3,013,684	$	2,539,538

(1)Acquisition-related charges primarily include amortization of intangible assets, amortization of inventory fair value adjustments and other acquisition-related costs classified or presented as part of costs of revenues.

Our significant operations outside the United States include manufacturing facilities in China, Germany, Israel and Singapore and sales, marketing and service offices in Japan, the rest of the Asia Pacific region and Europe. For geographical revenue reporting, revenues are attributed to the geographic location in which the customer is located. Long-lived assets consist of land, property and equipment, net, and are attributed to the geographic region in which they are located.

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


(Dollar amounts in thousands)	Three Months Ended March 31,										Nine Months Ended March 31,
2023					2022					2023					2022
Revenues:
China	$	635,018	26	%		$	709,502	31	%		$	2,156,380	26	%		$	1,939,195	29	%
Taiwan	478,855		20	%		515,097		22	%		1,996,188		24	%		1,918,623		29	%
Korea	468,226		19	%		474,019		21	%		1,466,624		18	%		1,036,297		16	%
North America	341,376		14	%		219,267		10	%		941,771		12	%		668,601		10	%
Japan	215,531		9	%		132,829		6	%		702,986		9	%		504,278		7	%
Europe and Israel	209,136		9	%		164,246		7	%		542,823		7	%		426,881		6	%
Rest of Asia	84,466		3	%		73,716		3	%		334,147		4	%		231,269		3	%
Total	$	2,432,608	100	%		$	2,288,676	100	%		$	8,140,919	100	%		$	6,725,144	100	%

The following is a summary of revenues by major product categories for the indicated periods:


(Dollar amounts in thousands)	Three Months Ended March 31,										Nine Months Ended March 31,
2023					2022					2023					2022
Revenues:
Wafer Inspection	$	1,027,191	42	%		$	919,072	40	%		$	3,386,273	42	%		$	2,910,616	43	%
Patterning	611,631		25	%		610,821		27	%		2,206,263		27	%		1,559,197		23	%
Specialty Semiconductor Process	114,896		5	%		105,832		5	%		374,882		5	%		303,884		5	%
PCB, Display and Component Inspection	69,495		3	%		123,384		5	%		312,582		4	%		383,021		6	%
Services	529,124		22	%		488,017		21	%		1,578,418		19	%		1,398,828		21	%
Other	80,271		3	%		41,550		2	%		282,501		3	%		169,598		2	%
Total	$	2,432,608	100	%		$	2,288,676	100	%		$	8,140,919	100	%		$	6,725,144	100	%

Wafer Inspection and Patterning products are offered in the Semiconductor Process Control segment. Services are offered in multiple segments. Other includes primarily refurbished systems, remanufactured legacy systems, and enhancements and upgrades for previous-generation products that are part of the Semiconductor Process Control segment.

In the three months ended March 31, 2023, two customers accounted for approximately 18% and 16% of total revenues, respectively. In the three months ended March 31, 2022, two customers accounted for approximately 17% and 16% of total revenues, respectively. In the nine months ended March 31, 2023, two customers accounted for approximately 20% and 15% of total revenues, respectively. In the nine months ended March 31, 2022, two customers accounted for approximately 22% and 12% of total revenues. Two customers and one customer on an individual basis accounted for greater than 10% of net accounts receivable at March 31, 2023 and at June 30, 2022, respectively.

Land, property and equipment, net by geographic region as of the dates indicated below were as follows:


	As of		As of
(In thousands)	March 31, 2023		June 30, 2022
Land, property and equipment, net:
United States	$	644,799	$	547,454
Singapore	152,275		146,057
Israel	88,277		72,791
Europe	60,827		55,370
Rest of Asia	38,093		28,257
Total	$	984,271	$	849,929

NOTE 19 – RESTRUCTURING CHARGES

From time to time, management approves restructuring plans including workforce reductions, one of which was announced and substantially completed in the three months ended March 31, 2023, in an effort to streamline operations.

Restructuring charges were $19.1 million and zero for the three months ended March 31, 2023 and 2022, respectively. Restructuring charges were $35.9 million and $0.9 million for the nine months ended March 31, 2023 and 2022, respectively. The fiscal year 2023 charges include one-time transaction bonuses triggered by the sale of Orbograph as well as severance and associated acceleration of certain stock-based compensation expenses resulting from a workforce reduction. As of March 31, 2023 and June 30, 2022, the accrual for restructuring charges was $20.2 million and $2.1 million, respectively.

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