Annual Statements Open main menu

KLA CORP - Quarter Report: 2022 December (Form 10-Q)

Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 000-09992
KLA CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware 04-2564110
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
One Technology Drive,Milpitas,California95035
(Address of Principal Executive Offices)(Zip Code)
(408) 875-3000
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareKLACThe Nasdaq Stock Market, LLC
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer 
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No  
As of January 17, 2023, there were 138,479,764 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.


Table of Contents
INDEX
 
  Page
Number
PART IFINANCIAL INFORMATION
Item 1.
Condensed Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended December 31, 2022 and 2021
Condensed Consolidated Statements of Stockholders Equity for the Three Months and Six Months Ended December 31, 2022 and 2021
Item 2.
Item 3.
Item 4.
PART IIOTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


 
2

Table of Contents
PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS
KLA CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
 
(In thousands)December 31,
2022
June 30,
2022
ASSETS
Current assets:
Cash and cash equivalents$1,571,477 $1,584,908 
Marketable securities1,294,873 1,123,100 
Accounts receivable, net2,282,925 1,811,877 
Inventories2,535,375 2,146,889 
Other current assets447,932 502,137 
Total current assets8,132,582 7,168,911 
Land, property and equipment, net964,813 849,929 
Goodwill2,278,809 2,320,049 
Deferred income taxes765,046 579,173 
Purchased intangible assets, net1,065,091 1,194,414 
Other non-current assets522,733 484,612 
Total assets$13,729,074 $12,597,088 
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$530,407 $443,338 
Deferred system revenue535,556 500,969 
Deferred service revenue372,555 381,737 
Other current liabilities2,043,983 1,545,039 
Total current liabilities3,482,501 2,871,083 
Long-term debt6,113,745 6,660,718 
Deferred tax liabilities559,346 658,937 
Deferred service revenue162,768 124,618 
Other non-current liabilities807,454 882,642 
Total liabilities11,125,814 11,197,998 
Commitments and contingencies (Notes 9, 14 and 15)
Stockholders’ equity:
Common stock and capital in excess of par value1,982,360 1,061,940 
Retained earnings670,002 366,882 
Accumulated other comprehensive loss(49,102)(27,471)
Total KLA stockholders’ equity2,603,260 1,401,351 
Non-controlling interest in consolidated subsidiaries— (2,261)
Total stockholders’ equity2,603,260 1,399,090 
Total liabilities and stockholders’ equity$13,729,074 $12,597,088 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
3

Table of Contents
KLA CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended December 31,Six Months Ended December 31,
(In thousands, except per share amounts)2022202120222021
Revenues:
Product$2,463,408 $1,895,769 $4,659,017 $3,525,657 
Service520,479 456,861 1,049,294 910,811 
Total revenues2,983,887 2,352,630 5,708,311 4,436,468 
Costs and expenses:
Costs of revenues1,208,786 908,162 2,250,012 1,721,786 
Research and development332,826 265,031 651,341 523,184 
Selling, general and administrative243,096 213,479 497,076 406,740 
Interest expense74,280 37,852 148,675 76,164 
Loss on extinguishment of debt— — 13,286 — 
Other expense (income), net(18,074)1,201 (65,080)15,341 
Income before income taxes1,142,973 926,905 2,213,001 1,693,253 
Provision (benefit) for income taxes164,178 209,388 208,141 (92,749)
Net income978,795 717,517 2,004,860 1,786,002 
Less: Net income attributable to non-controlling interest— 73 74 141 
Net income attributable to KLA$978,795 $717,444 $2,004,786 $1,785,861 
Net income per share attributable to KLA
Basic$6.93 $4.74 $14.16 $11.77 
Diluted$6.89 $4.71 $14.09 $11.68 
Weighted-average number of shares:
Basic141,299 151,251 141,564 151,791 
Diluted141,966 152,331 142,268 152,886 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
4

Table of Contents
KLA CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Net income $978,795 $717,517 $2,004,860 $1,786,002 
Other comprehensive income (loss):
Currency translation adjustments:
Cumulative currency translation adjustments7,462 (1,391)(12,250)(4,146)
Income tax benefit279 78 279 395 
Net change related to currency translation adjustments7,741 (1,313)(11,971)(3,751)
Cash flow hedges:
Net unrealized gains arising during the period8,239 6,741 10,007 7,593 
Reclassification adjustments for net gains included in net income(12,961)(912)(23,136)(2,130)
Income tax (provision) benefit3,275 (963)4,463 (1,024)
Net change related to cash flow hedges(1,447)4,866 (8,666)4,439 
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans(416)580 475 1,208 
Available-for-sale securities:
Net unrealized gains (losses) arising during the period4,511 (3,273)(2,453)(3,590)
Reclassification adjustments for net losses included in net income407 581 
Income tax benefit(1,057)702 403 770 
Net change related to available-for-sale securities3,861 (2,568)(1,469)(2,818)
Other comprehensive income (loss)9,739 1,565 (21,631)(922)
Less: Comprehensive income attributable to non-controlling interest— 73 74 141 
Total comprehensive income attributable to KLA$988,534 $719,009 $1,983,155 $1,784,939 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
5

Table of Contents
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)SharesAmount
Balances as of June 30, 2022141,804 $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 plans171 (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, 2022141,718 1,041,948 1,118,967 $(58,841)$2,102,074 $— $2,102,074 
Net income attributable to KLA— — 978,795 — 978,795 — 978,795 
Other comprehensive income — — — 9,739 9,739 9,739 
Net issuance under employee stock plans170 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, 2022138,459 $1,982,360 $670,002 $(49,102)$2,603,260 $— $2,603,260 

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)SharesAmount
Balances as of June 30, 2021152,776 $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 plans160 (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, 2021151,746 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 plans205 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, 2021150,847 $2,181,025 $1,943,981 $(76,479)$4,048,527 $(1,771)$4,046,756 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
6

Table of Contents

KLA CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Six Months Ended December 31,
(In thousands)20222021
Cash flows from operating activities:
Net income$2,004,860 $1,786,002 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization205,446 170,369 
Loss on extinguishment of debt13,286 — 
Unrealized foreign exchange (gain) loss and other(18,896)21,728 
Asset impairment charges9,905 5,962 
Disposal of non-controlling interest8,270 — 
Stock-based compensation expense73,387 52,982 
Gain on sale of business(29,687)— 
Deferred income taxes(255,116)(371,228)
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:
Accounts receivable(495,720)(444,685)
Inventories(393,177)(239,890)
Other assets30,546 2,243 
Accounts payable80,789 40,579 
Deferred system revenue34,587 145,856 
Deferred service revenue30,219 33,468 
Other liabilities401,136 471,209 
Net cash provided by operating activities1,699,835 1,674,595 
Cash flows from investing activities:
Net proceeds from sale of business75,358 — 
Business acquisitions, net of cash acquired(27,144)(37,986)
Capital expenditures(177,994)(133,856)
Purchases of available-for-sale securities(558,165)(525,840)
Proceeds from sale of available-for-sale securities36,755 40,792 
Proceeds from maturity of available-for-sale securities353,391 372,953 
Purchases of trading securities(37,583)(58,342)
Proceeds from sale of trading securities39,482 59,914 
Proceeds from other investments1,020 795 
Net cash used in investing activities(294,880)(281,570)
Cash flows from financing activities:
Payment of debt issuance costs(6,515)— 
Proceeds from revolving credit facility300,000 300,000 
Repayment of debt(862,250)(300,000)
Common stock repurchases(444,853)(829,551)
Payment of dividends to stockholders(372,192)(321,950)
Issuance of common stock33,908 36,912 
Tax withholding payments related to vested and released restricted stock units(57,550)(52,287)
Contingent consideration payable and other, net(2,500)— 
Purchase of non-controlling interest(4,295)— 
Net cash used in financing activities(1,416,247)(1,166,876)
Effect of exchange rate changes on cash and cash equivalents(2,139)(3,702)
Net increase (decrease) in cash and cash equivalents(13,431)222,447 
Cash and cash equivalents at beginning of period1,584,908 1,434,610 
Cash and cash equivalents at end of period$1,571,477 $1,657,057 
Supplemental cash flow disclosures:
Income taxes paid, net$394,464 $226,943 
Interest paid$73,851 $76,771 
Non-cash activities:
Contingent consideration payable - financing activities$(1,774)$14,663 
Dividends payable - financing activities$3,941 $3,737 
Unsettled common stock repurchase - financing activities$15,975 $5,999 
Accrued purchases of land, property and equipment - investing activities$30,590 $18,504 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
7

Table of Contents
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 six months ended December 31, 2022 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 date 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
None

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.
8

Table of Contents
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 ofAs of
(Dollar amounts in thousands)December 31, 2022June 30, 2022$ Change% Change
Accounts receivable, net$2,282,925 $1,811,877 $471,048 26 %
Contract assets$119,734 $114,747 $4,987 %
Contract liabilities$1,070,879 $1,007,324 $63,555 %
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 six months ended December 31, 2022 was mainly due to $84.1 million of revenue recognized for which the payment is subject to conditions other than passage of time, largely offset by $79.3 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 six months ended December 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 recognition in revenue of $656.5 million that was included in contract liabilities as of June 30, 2022. The change in contract liabilities during the six months ended December 31, 2021 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 $424.4 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 December 31, 2022, we had $12.54 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 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. These regulations are complex, and we continue to assess their potential impact. 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.
9

Table of Contents
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 1Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2Valuations 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 3Valuations 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 six months ended December 31, 2022.
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.
10

Table of Contents
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 AssetsSignificant Other Observable InputsLittle or No Market Activity Inputs
As of December 31, 2022 (In thousands)Total (Level 1) (Level 2) (Level 3)
Assets
Cash equivalents:
Money market funds and other$839,867 $839,867 $— $— 
Marketable securities:
Corporate debt securities484,293 — 484,293 — 
Municipal securities37,793 — 37,793 — 
Sovereign securities6,004 — 6,004 — 
U.S. Government agency securities87,522 87,522 — — 
U.S. Treasury securities440,403 410,713 29,690 — 
Equity securities19,324 19,324 — — 
Total cash equivalents and marketable securities(1)
1,915,206 1,357,426 557,780 — 
Other current assets:
Derivative assets19,474 — 19,474 — 
Other non-current assets:
Executive Deferred Savings Plan223,235 176,792 46,443 — 
Total financial assets(1)
$2,157,915 $1,534,218 $623,697 $— 
Liabilities
Derivative liabilities$(26,912)$— $(26,912)$— 
Contingent consideration payable(21,900)— — (21,900)
Total financial liabilities$(48,812)$— $(26,912)$(21,900)
________________
(1) Excludes cash of $610.1 million held in operating accounts and time deposits of $341.0 million (of which $121.5 million were cash equivalents) as of December 31, 2022.
11

Table of Contents
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 AssetsSignificant Other Observable InputsLittle 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 other948,027 948,027 — — 
U.S. Treasury securities22,485 — 22,485 — 
Marketable securities:
Corporate debt securities472,047 — 472,047 — 
Municipal securities60,724 — 60,724 — 
Sovereign securities5,990 — 5,990 — 
U.S. Government agency securities91,116 91,116 — — 
U.S. Treasury securities348,026 344,559 3,467 — 
Equity securities11,035 11,035 — — 
Total cash equivalents and marketable securities(1)
1,960,372 1,394,737 565,635 — 
Other current assets:
Derivative assets40,311 — 40,311 — 
Other non-current assets:
Executive Deferred Savings Plan224,188 176,928 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.

12

Table of Contents
NOTE 4 – FINANCIAL STATEMENT COMPONENTS
Condensed Consolidated Balance Sheets
As ofAs of
(In thousands)December 31, 2022June 30, 2022
Accounts receivable, net:
Accounts receivable, gross$2,317,402 $1,832,508 
Allowance for credit losses(34,477)(20,631)
$2,282,925 $1,811,877 
Inventories:
Customer service parts$453,124 $402,121 
Raw materials1,418,136 1,042,916 
Work-in-process477,588 451,782 
Finished goods186,527 250,070 
$2,535,375 $2,146,889 
Other current assets:
Prepaid expenses$130,624 $108,942 
Contract assets119,734 114,747 
Deferred costs of revenues112,026 124,487 
Prepaid income and other taxes32,555 89,713 
Other current assets52,993 64,248 
$447,932 $502,137 
Land, property and equipment, net:
Land$72,285 $67,846 
Buildings and leasehold improvements774,698 712,751 
Machinery and equipment944,703 819,191 
Office furniture and fixtures53,429 44,957 
Construction-in-process159,551 110,079 
2,004,666 1,754,824 
Less: accumulated depreciation(1,039,853)(904,895)
$964,813 $849,929 
Other non-current assets:
Executive Deferred Savings Plan(1)
$223,235 $224,188 
Operating lease right of use assets131,920 126,444 
Other non-current assets167,578 133,980 
$522,733 $484,612 
Other current liabilities:
Customer credits and advances$628,522 $515,118 
Compensation and benefits501,894 351,924 
Other accrued expenses322,187 253,265 
Executive Deferred Savings Plan(1)
225,254 225,867 
Income taxes payable225,011 126,964 
Interest payable109,524 39,683 
Operating lease liabilities31,591 32,218 
$2,043,983 $1,545,039 
Other non-current liabilities:
Income taxes payable$309,293 $367,052 
Customer credits and advances216,000 204,914 
Operating lease liabilities81,020 81,369 
Pension liabilities76,542 78,525 
Other non-current liabilities124,599 150,782 
$807,454 $882,642 
13

Table of Contents
________________
(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 associated with changes in the EDSP liability included in selling, general and administrative (“SG&A”) expense was $11.9 million and $12.0 million in the three months ended December 31, 2022 and 2021, respectively, and was $1.6 million and $11.0 million during the six months ended December 31, 2022 and 2021, respectively. The amount of net gains associated with changes in the EDSP assets included in SG&A expense was $11.9 million and $11.8 million in the three months ended December 31, 2022 and 2021, respectively, and was $1.6 million and $10.7 million during the six months ended December 31, 2022 and 2021, respectively. For additional details, refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) (“AOCI”) as of the dates indicated below were as follows:
(In thousands)Currency Translation AdjustmentsUnrealized Gains (Losses) on Available-for-Sale SecuritiesUnrealized Gains (Losses) on DerivativesUnrealized Gains (Losses) on Defined Benefit PlansTotal
Balance as of December 31, 2022$(55,857)$(16,955)$48,170 $(24,460)$(49,102)
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 ComponentsThree Months EndedSix Months Ended
Location in the Condensed Consolidated Statement of OperationsDecember 31,December 31,
2022202120222021
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contractsRevenues$15,928 $1,539 $30,533 $3,268 
Costs of revenues and operating expenses(3,904)(348)(9,271)(580)
Interest expense937 (279)1,874 (558)
Net gains reclassified from AOCI$12,961 $912 $23,136 $2,130 
Unrealized gains (losses) on available-for-sale securitiesOther expense (income), net$(407)$(3)$(581)$(2)

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 December 31, 2022 and 2021 was $0.4 million in both periods, and for the six months ended December 31, 2022 and 2021 was $0.8 million and $0.7 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.
14

Table of Contents
NOTE 5 – MARKETABLE SECURITIES
The amortized cost and fair value of marketable securities as of the dates indicated below were as follows:
As of December 31, 2022 (In thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Corporate debt securities$492,548 $133 $(8,388)$484,293 
Money market funds and other839,867 — — 839,867 
Municipal securities38,909 — (1,116)37,793 
Sovereign securities6,034 — (30)6,004 
U.S. Government agency securities88,752 (1,238)87,522 
U.S. Treasury securities451,374 43 (11,014)440,403 
Equity securities(1)
3,211 16,113 — 19,324 
Subtotal1,920,695 16,297 (21,786)1,915,206 
Add: Time deposits(2)
341,003 — — 341,003 
Less: Cash equivalents961,336 — — 961,336 
Marketable securities$1,300,362 $16,297 $(21,786)$1,294,873 
As of June 30, 2022 (In thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Corporate debt securities$481,881 $$(8,915)$472,969 
Money market funds and other948,027 — — 948,027 
Municipal securities61,973 — (1,249)60,724 
Sovereign securities6,041 (53)5,990 
U.S. Government agency securities92,273 26 (1,183)91,116 
U.S. Treasury securities378,871 18 (8,378)370,511 
Equity securities(1)
3,211 7,824 — 11,035 
Subtotal1,972,277 7,873 (19,778)1,960,372 
Add: Time deposits(2)
274,873 — — 274,873 
Less: Cash equivalents1,112,146 — (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 December 31, 2022, we had 509 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.
15

Table of Contents
As of December 31, 2022Less than 12 Months12 Months or GreaterTotal
(In thousands)Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Corporate debt securities$226,806 $(3,852)$216,074 $(4,536)$442,880 $(8,388)
Municipal securities6,879 (183)30,914 (933)37,793 (1,116)
Sovereign securities1,006 (3)1,974 (27)2,980 (30)
U.S. Government agency securities30,398 (140)36,268 (1,098)66,666 (1,238)
U.S. Treasury securities216,402 (5,024)197,099 (5,990)413,501 (11,014)
Total$481,491 $(9,202)$482,329 $(12,584)$963,820 $(21,786)

As of June 30, 2022 (In thousands)
Fair Value(1)
Gross
Unrealized
Losses(1)
Corporate debt securities$458,699 $(8,915)
Municipal securities58,722 (1,249)
Sovereign securities2,963 (53)
U.S. Government agency securities60,285 (1,183)
U.S. Treasury securities336,819 (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 December 31, 2022 (In thousands)Amortized CostFair Value
Due within one year$810,100 $816,047 
Due after one year through three years490,262 478,826 
Total$1,300,362 $1,294,873 
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 six months ended December 31, 2022 and 2021 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. The purchase consideration was allocated 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 price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated 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. The purchase consideration was allocated as follows: $208.4 million to identifiable intangible assets, $2.9 million to
16

Table of Contents
net tangible liabilities, $40.5 million to deferred tax liabilities and $266.4 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.
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 December 31, 2022, we had $21.9 million of contingent consideration recorded for the acquisitions completed during fiscal years ended June 30, 2022 and 2019, of which $18.0 million is classified as a current liability and $3.9 million as a non-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 six months ended December 31, 2022:
(In thousands)Wafer Inspection and Patterning
Global Service and Support (GSS)
Specialty Semiconductor ProcessPrinted Circuit Board (“PCB”) and DisplayComponent InspectionTotal
Balance as of June 30, 2022$725,737 $25,908 $681,858 $872,971 $13,575 $2,320,049 
Acquired goodwill6,776 — — — — 6,776 
Goodwill disposal from sale of business (1)
— — — (42,622)— (42,622)
Goodwill adjustments(5,337)— — — — (5,337)
Foreign currency adjustments(57)— — — — (57)
Balance as of December 31, 2022$727,119 $25,908 $681,858 $830,349 $13,575 $2,278,809 
(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. We completed the required annual testing of goodwill for impairment for all reporting units as of February 28, 2022 and concluded there was no goodwill impairment as a result of that assessment.
There have been no significant events or circumstances affecting the valuation of goodwill subsequent to the annual assessment performed in the third quarter of the fiscal year ended June 30, 2022.


17

Table of Contents
Purchased Intangible Assets
The components of purchased intangible assets as of the dates indicated below were as follows:
(In thousands) As of December 31, 2022As 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 $750,923 $785,903 $1,523,691 $668,175 $855,516 
Customer relationships
4-9
358,567 185,462 173,105 366,567 167,819 198,748 
Trade name / Trademark
4-7
116,583 71,281 45,302 121,083 68,194 52,889 
Order backlog and other
<1-9
85,836 70,411 15,425 87,836 58,970 28,866 
Intangible assets subject to amortization(1)
2,097,812 1,078,077 1,019,735 2,099,177 963,158 1,136,019 
In-process research and development61,322 15,966 45,356 64,457 6,062 58,395 
Total$2,159,134 $1,094,043 $1,065,091 $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 $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 the 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 December 31, 2022, 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 December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Amortization expense - Costs of revenues$45,446 $41,124 $90,512 $82,248 
Amortization expense - SG&A20,128 12,389 40,256 24,778 
Amortization expense - Research and development31 31 62 62 
Total $65,605 $53,544 $130,830 $107,088 
Based on the purchased intangible assets gross carrying amount recorded as of December 31, 2022, the remaining estimated annual amortization expense is expected to be as follows:
Fiscal year ending June 30:Amortization (In thousands)
2023 (remaining six months)$129,787 
2024238,575 
2025222,123 
2026206,211 
2027129,630 
2028 and thereafter93,409 
Total$1,019,735 
18

Table of Contents
NOTE 8 – DEBT
The following table summarizes our debt as of December 31, 2022 and June 30, 2022:
As of December 31, 2022As 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 Facility225,000 5.423 %275,000 2.258 %
 Total6,175,000 6,725,000 
Unamortized discount/premium, net(18,429)(19,304)
Unamortized debt issuance costs(42,826)(44,978)
Total$6,113,745 $6,660,718 
Reported as:
Long-term debt$6,113,745 $6,660,718 
Total$6,113,745 $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.
19

Table of Contents
Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as of December 31, 2022 and June 30, 2022 was $5.58 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 December 31, 2022, we were in compliance with all of our covenants under the Indenture associated with the Senior Notes.
Revolving Credit Facility    
As of December 31, 2022, we have in place a renegotiated Credit Facility (“Credit Agreement”) and 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 six months ended December 31, 2022, we borrowed $300.0 million from the Revolving Credit Facility and repaid $350.0 million. As of December 31, 2022, we had outstanding $225.0 million aggregate principal amount of borrowings.
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 December 31, 2022, the all-in interest rate of the $225.0 million outstanding Term SOFR loans reflected 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 December 31, 2022, our maximum allowed leverage ratio was 3.50 to 1.00.
We were in compliance with all covenants under the Credit Agreement as of December 31, 2022.
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 15 years, including periods covered by options to extend the lease when it is reasonably certain that the option will be exercised.
Lease expense was $9.6 million and $19.1 million for the three and six months ended December 31, 2022, respectively, and $9.1 million and $18.3 million for the three and six months ended December 31, 2021, respectively. Expense related to short-term leases, which are not recorded on the Condensed Consolidated Balance Sheets, was not material for the three and six months ended December 31, 2022 and 2021. As of December 31, 2022 and June 30, 2022, the weighted-average remaining
20

Table of Contents
lease term was 4.6 and 4.8 years, respectively, and the weighted-average discount rate for operating leases was 2.46% and 2.18%, respectively.
Supplemental cash flow information related to leases was as follows:
Six Months Ended December 31,
In thousands20222021
Operating cash outflows from operating leases$19,363 $19,050 
Right of use assets obtained in exchange for new operating lease liabilities$18,760 $11,389 
Maturities of lease liabilities as of December 31, 2022 were as follows:
Fiscal Year Ending June 30:(In thousands)
2023 (remaining six months)$18,598 
202430,471 
202523,729 
202617,984 
202713,366 
2028 and thereafter15,733 
Total lease payments119,881 
Less imputed interest(7,270)
Total$112,611 
As of December 31, 2022, 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 December 31, 2022, 8.4 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 (the “Assumed Equity Plans”).
As of December 31, 2022, there were no shares of our common stock underlying the outstanding assumed 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.
21

Table of Contents
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, 20229,242 
RSUs granted(3)
(971)
RSUs canceled80 
Balance as of December 31, 20228,351 
__________________ 
(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 six months ended December 31, 2022 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 six months ended December 31, 2022 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 six months ended December 31, 2022 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. Compensation expense for RSUs with performance-based metrics is calculated based upon expected achievement of the metrics specified in the grant, or when a grant contains a market condition, the grant date fair value using a Monte Carlo simulation.
The following table shows stock-based compensation expense for the indicated periods: 
Three Months Ended December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Stock-based compensation expense by:
Costs of revenues$6,004 $4,094 $11,593 $7,932 
R&D8,792 4,901 17,148 9,595 
SG&A23,609 18,771 44,646 35,455 
Total stock-based compensation expense$38,405 $27,766 $73,387 $52,982 
Stock-based compensation capitalized as inventory as of December 31, 2022 and June 30, 2022 was $11.7 million and $8.6 million, respectively.
22

Table of Contents
Restricted Stock Units
The following table shows the activity and weighted-average grant date fair values for RSUs during the six months ended December 31, 2022:
Shares(1)
(In thousands)
Weighted-Average
Grant Date
Fair Value
Outstanding RSUs as of June 30, 2022(2)
1,593 $218.03 
Granted(3)
485 $389.71 
Vested and released(207)$162.71 
Withheld for taxes(148)$162.71 
Forfeited(41)$165.56 
Outstanding RSUs as of December 31, 2022(2)
1,682 $280.49 
__________________ 
(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 six months ended December 31, 2022 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 six months ended December 31, 2022).
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, vested, and tax benefits realized by us in connection with vested and released RSUs for the indicated periods:
Three Months Ended December 31,Six Months Ended December 31,
(In thousands, except for weighted-average grant date fair value)2022202120222021
Weighted-average grant date fair value per unit$312.42 $393.67 $389.71 $356.39 
Grant date fair value of vested RSUs$8,029 $10,563 $57,935 $47,303 
Tax benefits realized by us in connection with vested and released RSUs$2,308 $4,913 $12,851 $13,921 
As of December 31, 2022, the unrecognized stock-based compensation expense balance related to RSUs was $321.6 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 1.5 years. The intrinsic value of outstanding RSUs as of December 31, 2022 was $634.0 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 six months ended December 31, 2022 and 2021, we approved Cash LTI awards of $0.1 million and $12.9 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 December 31, 2022 and 2021, we recognized $19.4 million and $22.2 million, respectively, in compensation expense under the Cash LTI Plan. During the six months ended December 31, 2022 and 2021, we recognized $38.9 million and $44.0 million, respectively, in compensation expense under the Cash LTI Plan. As of December 31, 2022, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $131.0 million. For details, refer to Note 10
23

Table of Contents
“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-month 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 December 31,Six Months Ended December 31,
 2022202120222021
Stock purchase plan:
Expected stock price volatility41.6 %34.9 %41.6 %34.9 %
Risk-free interest rate1.1 %0.1 %1.1 %0.1 %
Dividend yield1.8 %1.4 %1.8 %1.4 %
Expected life (in years)0.50.50.50.5
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 December 31,Six Months Ended December 31,
2022202120222021
Total cash received from employees for the issuance of shares under the ESPP$33,793 $36,912 $33,793 $36,912 
Number of shares purchased by employees through the ESPP134 139 134 139 
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP$362 $231 $924 $1,198 
Weighted-average fair value per share based on Black-Scholes model$73.31 $71.82 $73.31 $71.82 
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 December 31, 2022, a total of 2.1 million shares were reserved and available for issuance under the ESPP.
Quarterly Cash Dividends
On December 1, 2022, we paid a quarterly cash dividend of $1.30 per share to stockholders of record as of the close of business on November 15, 2022. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months ended December 31, 2022 and 2021 was $184.2 million and $159.1 million, respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid during the six months ended December 31, 2022 and 2021 was $372.2 million and $322.0 million, respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of December 31, 2022 and June 30, 2022 was $11.2 million on each date. These amounts will be paid upon vesting of the underlying RSUs.
24

Table of Contents
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 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.
As of December 31, 2022, an aggregate of $2.77 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 December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Number of shares of common stock repurchased3,429 1,104 3,686 2,294 
Total cost of repurchases$370,982 $429,874 $460,598 $829,551 
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.
25

Table of Contents
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 December 31,Six Months Ended December 31,
2022202120222021
Numerator:
Net income attributable to KLA$978,795 $717,444 $2,004,786 $1,785,861 
Denominator:
Weighted-average shares - basic, excluding unvested RSUs141,299 151,251 141,564 151,791 
Effect of dilutive RSUs and options667 1,080 704 1,095 
Weighted-average shares - diluted141,966 152,331 142,268 152,886 
Basic net income per share attributable to KLA$6.93 $4.74 $14.16 $11.77 
Diluted net income per share attributable to KLA$6.89 $4.71 $14.09 $11.68 
Anti-dilutive securities excluded from the computation of diluted net income per share331 — 271 
NOTE 13 – INCOME TAXES
The following table provides details of income taxes:
Three Months Ended December 31,Six Months Ended December 31,
(Dollar amounts in thousands)2022202120222021
Income before income taxes$1,142,973$926,905$2,213,001$1,693,253
Provision (benefit) for income taxes$164,178$209,388$208,141$(92,749)
Effective tax rate14.4 %22.6 %9.4 %(5.5)%
Our effective tax rate is lower than the U.S. federal statutory rate during the three months ended December 31, 2022 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 six months ended December 31, 2022 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.
26

Table of Contents
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 Inflation Reduction Act of 2022 (“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 will record the excise tax as part of the cost basis of any treasury stock repurchased after December 31, 2022.
We are currently evaluating the applicability and impact of the CHIPS Act and the IRA 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 December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Receivables sold under factoring agreements$77,212 $79,918 $181,459 $147,036 
Proceeds from sales of LC$44,596 $19,493 $69,247 $41,166 
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 $3.2 billion as of December 31, 2022, 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.
27

Table of Contents
Cash LTI Plan. As of December 31, 2022, we have committed $186.7 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 $83.4 million, of which $52.3 million had been issued as of December 31, 2022, 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.
28

Table of Contents
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 a net gain of $0.9 million and $1.9 million in the three and six months ended December 31, 2022, 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 $0.6 million in the three and six months ended December 31, 2021, 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 December 31, 2022, the aggregate unamortized portion of the fair value of the forward contracts for the Rate Lock Agreements was a $52.9 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 December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Derivatives Designated as Cash Flow Hedging Instruments:
Rate lock agreements:
Amounts included in the assessment of effectiveness$(937)$— $— $— 
Foreign exchange contracts:
Amounts included in the assessment of effectiveness$9,896 $6,749 $10,712 $7,602 
Amounts excluded from the assessment of effectiveness$(720)$(8)$(705)$(9)
Derivatives Designated as Net Investment Hedging Instruments:
Foreign exchange contracts(1):
$(1,847)$(293)$1,832 $357 
    __________________ 
29

Table of Contents
(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 December 31,Three Months Ended December 31,
20222021
(In thousands)RevenuesCosts of Revenues and Operating ExpensesInterest ExpenseOther Expense (Income), NetRevenuesCosts of Revenues and Operating ExpensesInterest ExpenseOther Expense (Income), Net
Total amounts presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded$2,983,887 $1,784,708 $74,280 $(18,074)$2,352,630 $1,386,672 $37,852 $1,201 
Gains (Losses) on Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amount of gains (losses) reclassified from AOCI to earnings$— $— $937 $— $— $— $(279)$— 
Foreign exchange contracts:
Amount of gains (losses) reclassified from AOCI to earnings$16,361 $(3,904)$— $— $1,643 $(348)$— $— 
Amount excluded from the assessment of effectiveness recognized in earnings$(433)$— $— $455 $(104)$— $— $658 
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Amount of gains (losses) recognized in earnings$— $— $— $(8,081)$— $— $— $5,994 
Six Months Ended December 31,Six Months Ended December 31,
20222021
(In thousands)RevenuesCosts of Revenues and Operating ExpensesInterest ExpenseOther Expense (Income), NetRevenuesCosts of Revenues and Operating ExpensesInterest ExpenseOther Expense (Income), Net
Total amounts presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded$5,708,311 $3,398,429 $148,675 $(65,080)$4,436,468 $2,651,710 $76,164 $15,341 
Gains (Losses) on Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amount of gains (losses) reclassified from AOCI to earnings$— $— $1,874 $— $— $— $(558)$— 
Foreign exchange contracts:
Amount of gains (losses) reclassified from AOCI to earnings$31,276 $(9,271)$— $— $3,486 $(580)$— $— 
Amount excluded from the assessment of effectiveness recognized in earnings$(743)$— $— $910 $(218)$— $— $1,315 
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Amount of gains (losses) recognized in earnings$— $— $— $6,293 $— $— $— $7,063 
30

Table of Contents
The U.S. dollar equivalent of all outstanding notional amounts of foreign currency hedge contracts with maximum remaining maturities of approximately 12 months as of the dates indicated below, were as follows:
As ofAs of
(In thousands)December 31, 2022June 30, 2022
Cash flow hedge contracts - foreign currency
Purchase$196,825 $124,641 
Sell$156,841 $176,259 
Net investment hedge contracts - foreign currency
Sell$66,436 $66,436 
Other foreign currency hedge contracts
Purchase$517,063 $565,586 
Sell$371,668 $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 DerivativesLiability Derivatives
Balance SheetAs ofAs ofBalance SheetAs ofAs of
 LocationDecember 31, 2022June 30, 2022LocationDecember 31, 2022June 30, 2022
(In thousands)Fair ValueFair Value
Derivatives designated as hedging instruments
Foreign exchange contractsOther current assets$17,957 $20,595 Other current liabilities$(6,313)$8,406 
Total derivatives designated as hedging instruments17,957 20,595 (6,313)8,406 
Derivatives not designated as hedging instruments
Foreign exchange contractsOther current assets1,517 19,716 Other current liabilities(20,599)25,909 
Total derivatives not designated as hedging instruments1,517 19,716 (20,599)25,909 
Total derivatives$19,474 $40,311 $(26,912)$34,315 
The changes in AOCI, before taxes, related to derivatives for the indicated periods were as follows:
Three Months Ended December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Beginning AOCI$72,290 $(25,546)$77,018 $(25,830)
Amount reclassified to earnings as net (gains) losses(12,961)(912)(23,136)(2,130)
Net change in unrealized gains (losses)6,392 5,627 11,839 7,129 
Ending AOCI$65,721 $(20,831)$65,721 $(20,831)
31

Table of Contents
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 December 31, 2022Gross 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 InstrumentsCash Collateral ReceivedNet Amount
Derivatives - assets$19,474 $— $19,474 $(19,474)$— $— 
Derivatives - liabilities$(26,912)$— $(26,912)$19,474 $— $(7,438)
As of June 30, 2022Gross 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 InstrumentsCash Collateral ReceivedNet 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 six months ended December 31, 2022 and 2021, 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 December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Total revenues$11,042 $264 $11,799 $623 
Total purchases$3,035 $193 $3,280 $272 
Our receivable balances from these parties were $4.3 million and $1.1 million as of December 31, 2022 and June 30, 2022, respectively. Our payable balances to these parties were immaterial as of December 31, 2022 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.
32

Table of Contents
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 December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Semiconductor Process Control:
Revenues$2,657,395 $2,052,202 $5,055,154 $3,831,285 
Segment gross profit1,678,037 1,342,937 3,255,019 2,504,866 
Specialty Semiconductor Process:
Revenues158,085 112,738 285,952 214,767 
Segment gross profit84,040 60,274 151,080 114,995 
PCB, Display and Component Inspection:
Revenues169,959 187,977 370,704 390,785 
Segment gross profit53,864 82,322 139,538 176,798 
Totals:
Revenues for reportable segments$2,985,439 $2,352,917 $5,711,810 $4,436,837 
Segment gross profit$1,815,941 $1,485,533 $3,545,637 $2,796,659 

The following table reconciles total revenues for reportable segments to total revenues for the indicated periods:
 Three Months Ended December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Total revenues for reportable segments$2,985,439 $2,352,917 $5,711,810 $4,436,837 
Corporate allocations and effects of changes in foreign currency exchange rates(1,552)(287)(3,499)(369)
Total revenues$2,983,887 $2,352,630 $5,708,311 $4,436,468 
33

Table of Contents

The following table reconciles total segment gross profit to total income before income taxes for the indicated periods:
 Three Months Ended December 31,Six Months Ended December 31,
(In thousands)2022202120222021
Total segment gross profit$1,815,941 $1,485,533 $3,545,637 $2,796,659 
Acquisition-related charges, corporate allocations, and effects of changes in foreign currency exchange rates(1)
40,840 41,065 87,338 81,977 
R&D332,826 265,031 651,341 523,184 
SG&A243,096 213,479 497,076 406,740 
Interest expense74,280 37,852 148,675 76,164 
Loss on extinguishment of debt— — 13,286 — 
Other expense (income), net(18,074)1,201 (65,080)15,341 
Income before income taxes$1,142,973 $926,905 $2,213,001 $1,693,253 
__________________
(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 December 31,Six Months Ended December 31,
2022202120222021
Revenues:
Taiwan$768,999 26 %$776,442 33 %$1,517,333 27 %$1,403,526 31 %
China681,701 23 %544,537 23 %1,521,362 27 %1,229,693 28 %
Korea590,936 20 %323,095 14 %998,398 17 %562,278 13 %
North America366,641 12 %271,594 12 %600,395 10 %449,334 10 %
Japan269,746 %196,282 %487,455 %371,449 %
Europe and Israel169,614 %175,195 %333,687 %262,635 %
Rest of Asia136,250 %65,485 %249,681 %157,553 %
Total$2,983,887 100 %$2,352,630 100 %$5,708,311 100 %$4,436,468 100 %
The following is a summary of revenues by major product categories for the indicated periods:
(Dollar amounts in thousands)Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Revenues:
Wafer Inspection$1,256,540 42 %$1,104,032 48 %$2,359,082 41 %$1,991,544 45 %
Patterning861,262 29 %508,785 22 %1,594,632 28 %948,376 21 %
Specialty Semiconductor Process145,542 %104,932 %259,986 %198,052 %
PCB, Display and Component Inspection108,644 %121,750 %243,087 %259,637 %
Services520,479 17 %456,861 19 %1,049,294 18 %910,811 21 %
Other91,420 %56,270 %202,230 %128,048 %
Total$2,983,887 100