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KLA CORP - Quarter Report: 2023 September (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 September 30, 2023
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 October 16, 2023, there were 135,932,316 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 Balance Sheets as of September 30, 2023 and June 30, 2023
Condensed Consolidated Statements of Stockholders Equity for the Three Months Ended September 30, 2023 and 2022
Item 2.
Item 3.
Item 4.
PART IIOTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


 
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PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS
KLA CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
 
(In thousands)September 30,
2023
June 30,
2023
ASSETS
Current assets:
Cash and cash equivalents$1,711,570 $1,927,865 
Marketable securities1,637,751 1,315,294 
Accounts receivable, net1,630,746 1,753,361 
Inventories3,007,705 2,876,784 
Other current assets443,019 498,728 
Total current assets8,430,791 8,372,032 
Land, property and equipment, net1,059,925 1,031,841 
Goodwill2,278,805 2,278,820 
Deferred income taxes870,472 816,899 
Purchased intangible assets, net871,999 935,303 
Other non-current assets624,849 637,462 
Total assets$14,136,841 $14,072,357 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$363,662 $371,026 
Deferred system revenue665,777 651,720 
Deferred service revenue406,940 416,606 
Other current liabilities2,381,364 2,303,490 
Total current liabilities3,817,743 3,742,842 
Long-term debt5,891,731 5,890,736 
Deferred tax liabilities505,812 529,287 
Deferred service revenue192,236 176,681 
Other non-current liabilities739,102 813,058 
Total liabilities11,146,624 11,152,604 
Commitments and contingencies (Notes 9, 14 and 15)
Stockholders’ equity:
Common stock and capital in excess of par value2,073,476 2,107,663 
Retained earnings966,179 848,431 
Accumulated other comprehensive loss(49,438)(36,341)
Total stockholders’ equity2,990,217 2,919,753 
Total liabilities and stockholders’ equity$14,136,841 $14,072,357 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
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KLA CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended September 30,
(In thousands, except per share amounts)20232022
Revenues:
Product$1,836,664 $2,195,609 
Service560,292 528,815 
Total revenues2,396,956 2,724,424 
Costs and expenses:
Costs of revenues946,891 1,041,226 
Research and development311,214 318,515 
Selling, general and administrative239,645 253,980 
Interest expense74,234 74,395 
Loss on extinguishment of debt— 13,286 
Other expense (income), net(26,739)(47,006)
Income before income taxes851,711 1,070,028 
Provision for income taxes110,336 43,963 
Net income741,375 1,026,065 
Less: Net income attributable to non-controlling interest— 74 
Net income attributable to KLA$741,375 $1,025,991 
Net income per share attributable to KLA
Basic$5.43 $7.23 
Diluted$5.41 $7.20 
Weighted-average number of shares:
Basic136,412 141,829 
Diluted137,104 142,563 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
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KLA CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended September 30,
(In thousands)20232022
Net income $741,375 $1,026,065 
Other comprehensive income (loss):
Currency translation adjustments:
Cumulative currency translation adjustments(6,853)(19,712)
Income tax benefit260 — 
Net change related to currency translation adjustments(6,593)(19,712)
Cash flow hedges:
Net unrealized gains (losses) arising during the period(1,481)1,768 
Reclassification adjustments for net gains included in net income(7,108)(10,175)
Income tax benefit856 1,188 
Net change related to cash flow hedges(7,733)(7,219)
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans242 891 
Available-for-sale securities:
Net unrealized gains (losses) arising during the period1,244 (6,964)
Reclassification adjustments for net losses included in net income12 174 
Income tax (provision) benefit(269)1,460 
Net change related to available-for-sale securities987 (5,330)
Other comprehensive loss(13,097)(31,370)
Less: Comprehensive income attributable to non-controlling interest— 74 
Total comprehensive income attributable to KLA$728,278 $994,621 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
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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, 2023136,750 $2,107,663 $848,431 $(36,341)$2,919,753 $— $2,919,753 
Net income— — 741,375 — 741,375 — 741,375 
Other comprehensive loss— — — (13,097)(13,097)— (13,097)
Net issuance under employee stock plans173 (68,237)— — (68,237)— (68,237)
Repurchase of common stock(956)(14,722)(444,371)— (459,093)— (459,093)
Cash dividends ($1.30 per share) and dividend equivalents declared
— — (179,256)— (179,256)— (179,256)
Stock-based compensation expense— 48,772 — — 48,772 — 48,772 
Balances as of September 30, 2023135,967 $2,073,476 $966,179 $(49,438)$2,990,217 $— $2,990,217 

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 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
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KLA CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended September 30,
(In thousands)20232022
Cash flows from operating activities:
Net income$741,375 $1,026,065 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization102,403 101,938 
Loss on extinguishment of debt— 13,286 
Unrealized foreign exchange loss and other9,970 1,783 
Asset impairment charges— 9,156 
Disposal of non-controlling interest— 8,270 
Stock-based compensation expense48,772 34,982 
Gain on sale of business— (29,687)
Deferred income taxes(71,322)(156,226)
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:
Accounts receivable107,018 (55,073)
Inventories(138,419)(265,530)
Other assets(7,520)45,637 
Accounts payable8,345 36,472 
Deferred system revenue14,057 (60,492)
Deferred service revenue5,901 (12,411)
Other liabilities63,160 313,375 
Net cash provided by operating activities883,740 1,011,545 
Cash flows from investing activities:
Net proceeds from sale of business— 75,358 
Business acquisitions, net of cash acquired— (27,144)
Capital expenditures(68,045)(84,352)
Purchases of available-for-sale securities(530,842)(256,793)
Proceeds from sale of available-for-sale securities7,983 26,608 
Proceeds from maturity of available-for-sale securities201,149 211,465 
Purchases of trading securities(49,958)(19,512)
Proceeds from sale of trading securities48,042 19,875 
Proceeds from other investments— 1,020 
Net cash used in investing activities(391,671)(53,475)
Cash flows from financing activities:
Payment of debt issuance costs— (6,515)
Proceeds from revolving credit facility— 300,000 
Repayment of debt— (662,250)
Common stock repurchases(455,412)(89,846)
Payment of dividends to stockholders(181,507)(187,984)
Issuance of common stock— 115 
Tax withholding payments related to vested and released restricted stock units(68,237)(54,952)
Purchase of non-controlling interest— (4,295)
Net cash used in financing activities(705,156)(705,727)
Effect of exchange rate changes on cash and cash equivalents(3,208)(17,971)
Net increase (decrease) in cash and cash equivalents(216,295)234,372 
Cash and cash equivalents at beginning of period1,927,865 1,584,908 
Cash and cash equivalents at end of period$1,711,570 $1,819,280 
Supplemental cash flow disclosures:
Income taxes paid, net$99,388 $101,061 
Interest paid$113,236 $44,216 
Non-cash activities:
Contingent consideration payable - financing activities$(920)$145 
Dividends payable - financing activities$1,853 $1,942 
Unsettled common stock repurchase - financing activities$11,000 $— 
Accrued purchases of land, property and equipment - investing activities$22,729 $34,027 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
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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, 2023 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, 2023, 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, 2023.
The Condensed Consolidated Financial Statements include the accounts of KLA and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The results of operations for the three months ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending June 30, 2024.
Management Estimates. The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets and liabilities (and related disclosure of contingent assets and liabilities) at the dates of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant Accounting Policies. There have been no material changes to our significant accounting policies summarized in Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Recent Accounting Pronouncements
Recently Adopted
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 prior business combination guidance, such assets and liabilities were recognized by the acquirer at fair value on the acquisition date. We adopted this update beginning in the first quarter of our fiscal year ending June 30, 2024 on a prospective basis. The impact of adopting this update will depend on the magnitude of contract assets and contract liabilities acquired in future acquisitions.

Updates Not Yet Effective
None.
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.
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As ofAs of
(Dollar amounts in thousands)September 30, 2023June 30, 2023$ Change% Change
Accounts receivable, net$1,630,746 $1,753,361 $(122,615)(7)%
Contract assets$93,300 $117,137 $(23,837)(20)%
Contract liabilities$1,264,953 $1,245,007 $19,946 %
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 three months ended September 30, 2023 was mainly due to $69.8 million of contract assets reclassified to accounts receivable, net as our right to consideration for these contract assets became unconditional, partially offset by $46.5 million of revenue recognized for which the payment is subject to conditions other than passage of time. Contract assets are included in other current assets on our Condensed Consolidated Balance Sheets.
The change in contract liabilities during the three months ended September 30, 2023 was mainly due to an increase in the value of products and services billed to customers for which control of the products and services has not transferred to the customers, partially offset by recognition in revenue of $601.1 million that was included in contract liabilities as of June 30, 2023. The change in contract liabilities during the three months ended September 30, 2022 was mainly due to the recognition in revenue of $489.5 million that was included in contract liabilities as of June 30, 2022, partially offset by 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. Contract liabilities are included in current and non-current liabilities on our Condensed Consolidated Balance Sheets.

Remaining Performance Obligations

As of September 30, 2023, we had $10.85 billion of remaining performance obligations, which represents our obligation to deliver products and services, and primarily consists of sales orders where written customer requests have been received. This amount includes customer deposits of $818.9 million as disclosed in Note 4 “Financial Statement Components” and excludes contract liabilities of $1.26 billion as described above. We expect to recognize approximately 40% to 50% of these performance obligations as revenue beyond the next 12 months, but this estimate is subject to constant change. The supply chain disruptions caused by the pandemic as well as elevated demand levels in recent years have led to customers agreeing to purchase equipment from us with lead times that are longer than our historical experience. More recently, we have seen the macro-driven slowdown has impacted consumers’ semiconductor device demand, causing the semiconductor industry to rebalance its supply chain and inventory levels. In response to this change, some of our customers began adjusting their capacity expansion-focused capital expenditure plans for calendar year 2023. As customers try to balance the evolution of their technological, production or market needs with the timing and content of orders placed with us, there is elevated risk of order modifications, pushouts, or cancellations.

In addition, in October 2022, the U.S. government issued 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 located in China, absent an export license. In October 2023, the U.S. government issued additional regulations that go into effect in November 2023. These additional rules are designed to update export controls on advanced computing semiconductors and semiconductor manufacturing equipment, as well as items that support supercomputing applications and end-uses, to arms embargoed countries, including China. They adjust the parameters included in the existing regulations that determine whether an advanced computing chip is restricted and impose new measures to address risks of circumvention of the controls established in October 2022. The regulations are very complex and we are still evaluating these rules and assessing their impact on our business and operations. We are taking appropriate measures to comply with all government regulations, and will continue to apply 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, now or in the future, 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.
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NOTE 3 – FAIR VALUE MEASUREMENTS
Our financial assets and liabilities are measured and recorded at fair value, except for our debt and certain equity investments in privately held companies. Equity investments without a readily available fair value are accounted for using the measurement alternative. The measurement alternative is calculated as cost minus impairment, if any, plus or minus changes resulting from observable price changes. See Note 8 “Debt” to our Condensed Consolidated Financial Statements for disclosure of the fair value of our Senior Notes, as defined in that Note.
Our non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.
Fair Value of Financial Instruments. We have evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of our cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate their carrying amounts due to the relatively short maturity of these items.
Fair Value Hierarchy. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 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 three months ended September 30, 2023.
The types of instruments valued based on quoted market prices in active markets include money market funds, certain U.S. Treasury securities, U.S. Government agency securities and equity securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
The types of instruments valued based on other observable inputs include corporate debt securities, 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 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.
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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 September 30, 2023 (In thousands)Total (Level 1) (Level 2) (Level 3)
Assets
Cash equivalents:
Money market funds and other$1,077,456 $1,077,456 $— $— 
U.S. Treasury securities12,740 — 12,740 — 
Marketable securities:
Corporate debt securities681,245 — 681,245 — 
Municipal securities30,478 — 30,478 — 
U.S. Government agency securities133,687 133,687 — — 
U.S. Treasury securities595,220 473,725 121,495 — 
Equity securities13,825 13,825 — — 
Total cash equivalents and marketable securities(1)
2,544,651 1,698,693 845,958 — 
Other current assets:
Derivative assets37,808 — 37,808 — 
Other non-current assets:
Executive Deferred Savings Plan248,455 223,621 24,834 — 
Total financial assets(1)
$2,830,914 $1,922,314 $908,600 $— 
Liabilities
Derivative liabilities$(27,682)$— $(27,682)$— 
Contingent consideration payable(5,528)— — (5,528)
Total financial liabilities$(33,210)$— $(27,682)$(5,528)
________________
(1) Excludes cash of $311.9 million held in operating accounts and time deposits of $492.8 million (of which $309.5 million were cash equivalents) as of September 30, 2023.
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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, 2023 (In thousands)Total(Level 1)(Level 2)(Level 3)
Assets
Cash equivalents:
Money market funds and other$1,257,223 $1,257,223 $— $— 
U.S. Government agency securities3,788 — 3,788 — 
U.S. Treasury securities11,500 — 11,500 — 
Marketable securities:
Corporate debt securities502,650 — 502,650 — 
Municipal securities31,788 — 31,788 — 
U.S. Government agency securities129,784 127,715 2,069 — 
U.S. Treasury securities518,215 425,234 92,981 — 
Equity securities18,159 18,159 — — 
Total cash equivalents and marketable securities(1)
2,473,107 1,828,331 644,776 — 
Other current assets:
Derivative assets35,712 — 35,712 — 
Other non-current assets:
Executive Deferred Savings Plan256,846 198,639 58,207 — 
Total financial assets(1)
$2,765,665 $2,026,970 $738,695 $— 
Liabilities
Derivative liabilities$(12,106)$— $(12,106)$— 
Contingent consideration payable(6,447)— — (6,447)
Total financial liabilities$(18,553)$— $(12,106)$(6,447)
________________
(1) Excludes cash of $298.6 million held in operating accounts and time deposits of $471.4 million (of which $356.7 million were cash equivalents) as of June 30, 2023.

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NOTE 4 – FINANCIAL STATEMENT COMPONENTS
Condensed Consolidated Balance Sheets
As ofAs of
(In thousands)September 30, 2023June 30, 2023
Accounts receivable, net:
Accounts receivable, gross$1,664,280 $1,786,993 
Allowance for credit losses(33,534)(33,632)
$1,630,746 $1,753,361 
Inventories:
Customer service parts$560,088 $524,096 
Raw materials1,614,050 1,559,202 
Work-in-process635,045 578,864 
Finished goods198,522 214,622 
$3,007,705 $2,876,784 
Other current assets:
Deferred costs of revenues$126,873 $133,067 
Prepaid expenses120,553 121,204 
Contract assets93,300 117,137 
Prepaid income and other taxes33,371 64,901 
Other current assets68,922 62,419 
$443,019 $498,728 
Land, property and equipment, net:
Land$78,261 $72,287 
Buildings and leasehold improvements862,733 825,975 
Machinery and equipment1,044,335 1,016,713 
Office furniture and fixtures59,221 58,036 
Construction-in-process169,306 168,817 
2,213,856 2,141,828 
Less: accumulated depreciation(1,153,931)(1,109,987)
$1,059,925 $1,031,841 
Other non-current assets:
Executive Deferred Savings Plan(1)
$248,455 $256,846 
Operating lease right of use assets218,053 208,706 
Other non-current assets158,341 171,910 
$624,849 $637,462 
Other current liabilities:
Customer deposits$675,582 $769,000 
Income taxes payable517,768 383,012 
Compensation and benefits472,768 370,536 
Other liabilities and accrued expenses365,615 383,407 
Executive Deferred Savings Plan(1)
248,818 258,223 
Interest payable65,299 105,270 
Operating lease liabilities35,514 34,042 
$2,381,364 $2,303,490 
Other non-current liabilities:
Income taxes payable$267,185 $322,113 
Customer deposits143,339 156,874 
Operating lease liabilities138,682 138,354 
Pension liabilities60,821 63,672 
Other non-current liabilities129,075 132,045 
$739,102 $813,058 
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________________
(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 benefit associated with changes in the EDSP liability included in selling, general and administrative (“SG&A”) expense was $9.3 million and $10.3 million during the three months ended September 30, 2023 and 2022, respectively. The amount of net losses associated with changes in the EDSP assets included in SG&A expense was $9.5 million and $10.3 million during the three months ended September 30, 2023 and 2022, respectively. For additional details, refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) (“AOCI”) as of the dates indicated below were as follows:
(In thousands)Currency Translation AdjustmentsUnrealized Gains (Losses) on Available-for-Sale SecuritiesUnrealized Gains (Losses) on DerivativesUnrealized Gains (Losses) on Defined Benefit PlansTotal
Balance as of September 30, 2023$(71,220)$(11,810)$52,211 $(18,619)$(49,438)
Balance as of June 30, 2023$(64,627)$(12,797)$59,944 $(18,861)$(36,341)
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 Ended
Location in the Condensed Consolidated Statement of OperationsSeptember 30,
20232022
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contractsRevenues$3,396 $14,605 
Costs of revenues and operating expenses2,775 (5,367)
Interest expense937 937 
Net gains reclassified from AOCI$7,108 $10,175 
Unrealized losses on available-for-sale securitiesOther expense (income), net$(12)$(174)

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 September 30, 2023 and 2022 was $0.3 million and $0.4 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, 2023.
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NOTE 5 – MARKETABLE SECURITIES
The amortized cost and fair value of marketable securities as of the dates indicated below were as follows:
As of September 30, 2023 (In thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Corporate debt securities$687,213 $48 $(6,016)$681,245 
Money market funds and other1,077,456 — — 1,077,456 
Municipal securities31,032 (556)30,478 
U.S. Government agency securities134,563 — (876)133,687 
U.S. Treasury securities615,592 (7,637)607,960 
Equity securities(1)
3,211 10,614 — 13,825 
Subtotal2,549,067 10,669 (15,085)2,544,651 
Add: Time deposits(2)
492,767 — — 492,767 
Less: Cash equivalents1,399,666 — 1,399,667 
Marketable securities$1,642,168 $10,668 $(15,085)$1,637,751 
As of June 30, 2023 (In thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Corporate debt securities$508,511 $52 $(5,913)$502,650 
Money market funds and other1,257,223 — — 1,257,223 
Municipal securities32,525 — (737)31,788 
U.S. Government agency securities134,486 (918)133,572 
U.S. Treasury securities538,487 10 (8,782)529,715 
Equity securities(1)
3,211 14,948 — 18,159 
Subtotal2,474,443 15,014 (16,350)2,473,107 
Add: Time deposits(2)
471,439 — — 471,439 
Less: Cash equivalents1,629,248 — 1,629,252 
Marketable securities$1,316,634 $15,010 $(16,350)$1,315,294 
________________
(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 September 30, 2023, we had 591 investments in a gross unrealized loss position. The following table summarizes the fair value and gross unrealized losses of our investments that were in an unrealized loss position as of the dates indicated below.
As of September 30, 2023Less than 12 Months12 Months or GreaterTotal
(In thousands)Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Corporate debt securities$463,017 $(2,772)$165,161 $(3,244)$628,178 $(6,016)
Municipal securities11,480 (147)14,834 (409)26,314 (556)
U.S. Government agency securities112,180 (736)19,667 (140)131,847 (876)
U.S. Treasury securities305,758 (2,456)249,795 (5,181)555,553 (7,637)
Total$892,435 $(6,111)$449,457 $(8,974)$1,341,892 $(15,085)
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As of June 30, 2023Less than 12 Months12 Months or GreaterTotal
(In thousands)Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Corporate debt securities$310,613 $(2,242)$161,263 $(3,671)$471,876 $(5,913)
Municipal securities9,011 (199)17,253 (538)26,264 (737)
U.S. Government agency securities80,793 (459)36,406 (459)117,199 (918)
U.S. Treasury securities288,376 (4,117)183,475 (4,665)471,851 (8,782)
Total$688,793 $(7,017)$398,397 $(9,333)$1,087,190 $(16,350)
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 September 30, 2023 (In thousands)Amortized CostFair Value
Due within one year$846,346 $852,255 
Due after one year through three years795,822 785,496 
Total$1,642,168 $1,637,751 
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 months ended September 30, 2023 and 2022 were immaterial.
NOTE 6 - BUSINESS COMBINATIONS AND DISPOSITIONS
Business Combinations
On August 9, 2022, we acquired a privately held company, primarily to secure the supply of materials for existing products, for aggregate purchase consideration of $32.7 million, payable in cash. We allocated the purchase consideration as follows: $30.0 million to identifiable intangible assets, $2.3 million to net tangible assets, $6.5 million to deferred tax liabilities and $6.8 million to goodwill. The goodwill was assigned to the Wafer Inspection and Patterning reporting unit.
We have included the financial results of the acquisition in our Condensed Consolidated Financial Statements from the acquisition date, and these results were not material to our Condensed Consolidated Financial Statements. The goodwill recorded as a result of the above acquisition was not deductible for tax purposes.
As of September 30, 2023, we had $5.5 million of contingent consideration recorded for the acquisitions completed during our fiscal year ended June 30, 2019, all of which is classified as a current liability on the Condensed Consolidated Balance Sheet.
Business Dispositions
As of June 30, 2022, we owned approximately 94% of the outstanding equity interest in Orbograph Ltd. (“Orbograph”), a non-core business engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers. On August 9, 2022, we acquired the non-controlling interest in Orbograph. On August 11, 2022, we sold our entire interest in Orbograph to a portfolio company of a private equity firm for total consideration of $110.0 million and net cash proceeds from the transaction of $75.4 million. We recognized a pre-tax gain from the sale of $29.7 million, which was recorded as part of other expense (income), net. Included in the sale were $26.5 million in tangible assets, $30.5 million in liabilities and $61.2 million in goodwill and intangible assets.
For additional details of business combinations and assets held for sale, refer to Note 6 “Business Combinations and Dispositions” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
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
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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 three months ended September 30, 2023:
(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, 2023$727,130 $25,908 $681,858 $830,349 $13,575 $2,278,820 
Foreign currency adjustments(15)— — — — (15)
Balance as of September 30, 2023$727,115 $25,908 $681,858 $830,349 $13,575 $2,278,805 
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.
As of September 30, 2023, 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, 2023. There was no goodwill impairment as a result of that assessment. For additional details, refer to Note 7, "Goodwill and Purchased Intangible Assets" to our Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

Purchased Intangible Assets
The components of purchased intangible assets as of the dates indicated below were as follows:
(In thousands) As of September 30, 2023As of June 30, 2023
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
$1,552,074 $887,902 $664,172 $1,536,826 $841,815 $695,011 
Customer relationships
4-9
358,567 214,609 143,958 358,567 205,037 153,530 
Trade name / Trademark
4-7
119,083 86,068 33,015 116,583 78,749 37,834 
Order backlog and other
<1-7
83,336 82,590 746 85,836 82,264 3,572 
Intangible assets subject to amortization
2,113,060 1,271,169 841,891 2,097,812 1,207,865 889,947 
In-process research and development46,074 15,966 30,108 61,322 15,966 45,356 
Total$2,159,134 $1,287,135 $871,999 $2,159,134 $1,223,831 $935,303 
Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable. Impairment indicators primarily include declines in our operating cash flows from the use of these assets. If impairment indicators are present, we are required to perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to these long-lived assets to their carrying value.
As of September 30, 2023, there were no impairment indicators for purchased intangible assets.
Amortization expense for purchased intangible assets for the periods indicated below was as follows:
Three Months Ended September 30,
(In thousands)20232022
Amortization expense - Costs of revenues$46,088 $45,066 
Amortization expense - SG&A17,216 20,128 
Amortization expense - Research and development— 31 
Total $63,304 $65,225 
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Based on the purchased intangible assets gross carrying amount recorded as of September 30, 2023, the remaining estimated annual amortization expense is expected to be as follows:
Fiscal year ending June 30:Amortization (In thousands)
2024 (remaining nine months)$177,836 
2025224,688 
2026208,775 
2027132,194 
202849,727 
2029 and thereafter48,671 
Total$841,891 
NOTE 8 – DEBT
The following table summarizes our debt as of September 30, 2023 and June 30, 2023:
As of September 30, 2023As of June 30, 2023
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 %$750,000 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 %
 Total5,950,000 5,950,000 
Unamortized discount/premium, net(17,558)(17,848)
Unamortized debt issuance costs(40,711)(41,416)
Total$5,891,731 $5,890,736 
Reported as:
Long-term debt$5,891,731 $5,890,736 
Total$5,891,731 $5,890,736 
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 a 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
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(collectively, the “Indenture”) include covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions.
In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two of Moody’s Investors Service, S&P Global Ratings and Fitch Inc., unless we have exercised our rights to redeem the Senior Notes of such series, we will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s Senior Notes of that series pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of Senior Notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, up to, but not including, the date of repurchase.
Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as of September 30, 2023 and June 30, 2023 was $5.31 billion and $5.69 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 September 30, 2023, we were in compliance with all of our covenants under the Indenture associated with the Senior Notes.
Revolving Credit Facility    
As of September 30, 2023, we have in place a renegotiated Credit Agreement dated June 8, 2022 (“Credit Agreement”) for an unsecured Revolving Credit Facility (“Revolving Credit Facility”) having a maturity date of June 8, 2027 that allows us to borrow up to $1.50 billion. Subject to the terms of the Credit Agreement, the Revolving Credit Facility may be increased by an amount up to $250.0 million in the aggregate. As of September 30, 2023, we had no outstanding borrowings under the Revolving Credit Facility.
We may borrow, repay and reborrow funds under the Revolving Credit Facility until the maturity date, at which time we may exercise two one-year extension options with the consent of the lenders. We may prepay outstanding borrowings under the Revolving Credit Facility at any time without a prepayment penalty.
Borrowings under the Revolving Credit Facility can be made as Term Secured Overnight Financing Rate (“SOFR”) Loans or Alternate Base Rate (“ABR”) Loans, at the Company’s option. In the event that Term SOFR is unavailable, any Term SOFR elections will be converted to Daily Simple SOFR, if available. Each Term SOFR Loan will bear interest at a rate per annum equal to the applicable Adjusted Term SOFR rate, which is equal to the applicable Term SOFR rate plus 10 bps that shall not be less than zero, plus a spread ranging from 75 bps to 125 bps, as determined by the Company’s credit ratings at the time. Each ABR Loan will bear interest at a rate per annum equal to the ABR plus a spread ranging from 0 bps to 25 bps, as determined by the Company’s credit ratings at the time. We are also obligated to pay an annual commitment fee on the daily undrawn balance of the Revolving Credit Facility, which ranges from 4.5 bps to 12.5 bps, subject to an adjustment in conjunction with changes to our credit rating. The applicable interest rates and commitment fees are also subject to adjustment based on the Company’s performance against certain environmental sustainability key performance indicators (“KPI”) related to greenhouse gas emissions and renewable electricity usage. Our performance against these KPIs in calendar year 2022 resulted in reductions to the fees associated with our Revolving Credit Facility. As of September 30, 2023, we elected to pay interest on borrowings under the Revolving Credit Facility at the applicable Adjusted Term SOFR rate plus a spread of 97.5 bps and the applicable commitment fee on the daily undrawn balance of the Revolving Credit Facility was 8.5 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 may 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 September 30, 2023, our maximum allowed leverage ratio was 3.50 to 1.00.
We were in compliance with all covenants under the Credit Agreement as of September 30, 2023.
For additional details, refer to Note 8 “Debt” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
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.
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Our existing leases do not contain significant restrictive provisions or residual value guarantees; however, certain leases contain provisions for the payment of maintenance, real estate taxes or insurance costs by us. Our leases have remaining lease terms ranging from less than one year to 29 years, including periods covered by options to extend the lease when it is reasonably certain that the option will be exercised.
Lease expense was $12.4 million and $9.4 million for the three months ended September 30, 2023 and 2022, respectively. Expense related to short-term leases, which are not recorded on the Condensed Consolidated Balance Sheets, was not material for the three months ended September 30, 2023 and 2022. As of September 30, 2023 and June 30, 2023, the weighted-average remaining lease term was 6.6 and 6.7 years, respectively, and the weighted-average discount rate for operating leases was 3.43% and 3.36%, respectively.
Supplemental cash flow information related to leases was as follows:
Three Months Ended September 30,
In thousands20232022
Operating cash outflows from operating leases$10,002 $9,627 
Right of use assets obtained in exchange for new operating lease liabilities$12,968 $9,220 
Maturities of lease liabilities as of September 30, 2023 were as follows:
Fiscal Year Ending June 30:(In thousands)
2024 (remaining nine months)$30,560 
202537,843 
202629,918 
202723,728 
202815,664 
2029 and thereafter61,970 
Total lease payments199,683 
Less imputed interest(25,487)
Total$174,196 
As of September 30, 2023, we did not have material leases that had not yet commenced.
NOTE 10 – EQUITY, LONG-TERM INCENTIVE COMPENSATION PLANS AND NON-CONTROLLING INTEREST
Equity Incentive Program
As of September 30, 2023, 7.4 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, 2023. On August 3, 2023, our Board of Directors adopted the KLA Corporation 2023 Incentive Award Plan, which is intended to replace our 2004 Plan. The new plan is subject to approval by our stockholders at the annual meeting of stockholders to be held on November 1, 2023.
Equity Incentive Plans - General Information
The following table summarizes the combined activity under our equity incentive plans:
(In thousands)
Available
 For Grant(1)
Balance as of June 30, 20237,761 
Restricted stock units granted(2)
(386)
Restricted stock units canceled27 
Balance as of September 30, 20237,402 
__________________ 
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(1)The number of restricted stock units (“RSU”) 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)Includes RSUs granted to senior management during the three months ended September 30, 2023 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such RSUs that are deemed to have been earned) (“performance-based RSU”). This line item includes all such performance-based RSUs granted during the three months ended September 30, 2023 reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (0.2 million shares for the three months ended September 30, 2023 reflects the application of the multiplier described above).

The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For RSUs granted without “dividend equivalent” rights, fair value is calculated using the closing price of our common stock on the grant date, adjusted to exclude the present value of dividends that are not accrued on those RSUs. The fair value for RSUs granted with “dividend equivalent” rights is determined using the closing price of our common stock on the grant date.
The following table shows stock-based compensation expense for the indicated periods: 
Three Months Ended September 30,
(In thousands)20232022
Stock-based compensation expense by:
Costs of revenues$7,669 $5,589 
R&D13,028 8,356 
SG&A28,075 21,037 
Total stock-based compensation expense$48,772 $34,982 
Stock-based compensation capitalized as inventory as of September 30, 2023 and June 30, 2023 was $17.5 million and $16.7 million, respectively.
Restricted Stock Units
The following table shows the activity and weighted-average grant date fair values for RSUs during the three months ended September 30, 2023:
Shares(1)
(In thousands)
Weighted-Average
Grant Date
Fair Value
Outstanding RSUs as of June 30, 2023(2)
1,715 $312.40 
Granted(3)
193 $501.15 
Vested and released(309)$212.16 
Forfeited(14)$342.70 
Outstanding RSUs as of September 30, 2023(2)
1,585 $354.61 
__________________ 
(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 three months ended September 30, 2023 reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (0.1 million shares for the three months ended September 30, 2023).
The RSUs granted by us generally vest as follows: (i) with respect to awards with only service-based vesting criteria, over periods ranging from two to four years; (ii) with respect to awards with both performance-based and service-based vesting criteria, over periods ranging from three to four years; and (iii) with respect to awards with both market-based and service-based vesting criteria, in three equal installments on the third, fourth and fifth anniversaries of the grant date, in each case subject to the recipient remaining employed by us as of the applicable vesting date. The RSUs granted to the independent members of the Board of Directors vest annually. 
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The following table shows the weighted-average grant date fair value per unit for the RSUs granted, aggregate grant date fair value of RSUs vested and tax benefits realized by us in connection with vested and released RSUs for the indicated periods:
Three Months Ended September 30,
(In thousands, except for weighted-average grant date fair value)20232022
Weighted-average grant date fair value per unit$501.15 $397.40 
Grant date fair value of vested RSUs$65,524 $49,906 
Tax benefits realized by us in connection with vested and released RSUs$16,054 $10,543 
As of September 30, 2023, the unrecognized stock-based compensation expense balance related to RSUs was $417.3 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 1.7 years. The intrinsic value of outstanding RSUs as of September 30, 2023 was $726.8 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 both the three months ended September 30, 2023 and 2022, we approved Cash LTI awards of $0.1 million. 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 September 30, 2023 and 2022, we recognized $18.5 million and $19.5 million, respectively, in compensation expense under the Cash LTI Plan. As of September 30, 2023, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $132.8 million. For details, refer to Note 10 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Employee Stock Purchase Plan
Our Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 15% of their eligible earnings toward the semi-annual purchase of our common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).
The offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period, until otherwise amended, is equal to 85% of the lesser of (i) the fair market value of our common stock at the commencement of the applicable six months offering period or (ii) the fair market value of our common stock on the purchase date. We estimate the fair value of purchase rights under the ESPP using a Black-Scholes model.
The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes model and the straight-line attribution approach with the following weighted-average assumptions: 
 Three Months Ended September 30,
 20232022
Stock purchase plan:
Expected stock price volatility32.8 %41.6 %
Risk-free interest rate5.1 %1.1 %
Dividend yield1.1 %1.8 %
Expected life (in years)0.50.5
There was no cash received from employees for the issuance of shares under the ESPP or shares purchased by employees through the ESPP in the three months ended September 30, 2023 and 2022. The following table shows the tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value
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per share for the indicated periods:
(In thousands, except for weighted-average fair value per share)Three Months Ended September 30,
20232022
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP$1,365 $562 
Weighted-average fair value per share based on Black-Scholes model$114.32 $73.31 
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 September 30, 2023, a total of 2.2 million shares were reserved and available for issuance under the ESPP.
Quarterly Cash Dividends
On September 1, 2023, we paid a quarterly cash dividend of $1.30 per share to stockholders of record as of the close of business on August 15, 2023. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months ended September 30, 2023 and 2022 was $181.5 million and $188.0 million, respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of September 30, 2023 and June 30, 2023 was $9.9 million and $12.2 million, respectively. These amounts will be paid upon vesting of the underlying RSUs.
Non-Controlling Interest
As of June 30, 2022, we owned approximately 94% of the outstanding equity interest in Orbograph, a non-core business engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers. On August 11, 2022, we sold our interest in Orbograph; for further details, refer to Note 6 “Business Combinations and Dispositions” to our Condensed Consolidated Financial Statements.
NOTE 11 – STOCK REPURCHASE PROGRAM
Our Board of Directors has authorized a program that permits us to repurchase our common stock, including an increase in the authorized repurchase amount of $2.00 billion in the first quarter of fiscal 2024. 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.
Under the authoritative guidance, share repurchases are recognized as a reduction to retained earnings to the extent available, with any excess recognized as a reduction of capital in excess of par value. In addition, as explained further in Note 13 “Income Taxes,” the Inflation Reduction Act of 2022 (“IRA”) introduced a 1% excise tax imposed on certain stock repurchases by publicly traded companies made after December 31, 2022. The excise tax is recorded as part of the cost basis of treasury stock repurchased after December 31, 2022 and, as such, is included in stockholders’ equity.
As of September 30, 2023, an aggregate of $3.45 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 September 30,
(In thousands)20232022
Number of shares of common stock repurchased956 257 
Total cost of repurchases$459,093 $89,616 
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NOTE 12 – NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying our outstanding dilutive RSUs had been issued. The dilutive effect of outstanding RSUs is reflected in diluted net income per share by application of the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share attributable to KLA:
(In thousands, except per share amounts)Three Months Ended September 30,
20232022
Numerator:
Net income attributable to KLA$741,375 $1,025,991 
Denominator:
Weighted-average shares - basic, excluding unvested RSUs136,412 141,829 
Effect of dilutive RSUs and options692 734 
Weighted-average shares - diluted137,104 142,563 
Basic net income per share attributable to KLA$5.43 $7.23 
Diluted net income per share attributable to KLA$5.41 $7.20 
Anti-dilutive securities excluded from the computation of diluted net income per share123 205 
NOTE 13 – INCOME TAXES
The following table provides details of income taxes:
Three Months Ended September 30,
(Dollar amounts in thousands)20232022
Income before income taxes$851,711$1,070,028
Provision for income taxes$110,336$43,963
Effective tax rate13.0 %4.1 %
Our effective tax rate is lower than the U.S. federal statutory rate during the three months ended September 30, 2023 primarily due to the proportion of earnings generated in jurisdictions with tax rates lower than the U.S. statutory rate and the proportion of U.S. earnings eligible for the Foreign Derived Intangible Income deduction.
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, 2019. 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, 2019.
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.
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
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investments in an advanced manufacturing facility that is placed in service after December 31, 2022. There was no material impact to our financial statements from the AMIC provision during the three months ended September 30, 2023.
President Biden also signed into law the IRA on August 16, 2022. The IRA has several new provisions including a 15% corporate alternative minimum tax (“CAMT”) for certain large corporations that have at least an average of $1.0 billion of adjusted financial statement income over a consecutive three-tax-year period. The CAMT was effective for us in the quarter ended September 30, 2023 and we are not expecting to have any tax impact from the CAMT for the fiscal year ended June 30, 2024.
The IRA also introduced a 1% excise tax imposed on certain stock repurchases by publicly traded companies made after December 31, 2022. We began recording the excise tax as part of the cost basis of treasury stock repurchased after December 31, 2022.
Other than the AMIC, the CAMT and the excise tax imposed on certain stock repurchases as mentioned above, we are currently evaluating the applicability and impact of the other provisions in the IRA and the CHIPS Act on our Condensed Consolidated Financial Statements including our future cash flows.
NOTE 14 – LITIGATION AND OTHER LEGAL MATTERS
We are named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of our business. Actions filed against us include commercial, intellectual property (“IP”), customer, and labor and employment related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws. In general, legal proceedings and claims, regardless of their merit, and associated internal investigations (especially those relating to IP or confidential information disputes) are often expensive to prosecute, defend or conduct, and may divert management’s attention and other Company resources. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome. We believe the amounts provided in our Condensed Consolidated Financial Statements are adequate in light of the probable and estimated liabilities. However, because such matters are subject to many uncertainties and the ultimate outcomes are not predictable, there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in our Condensed Consolidated Financial Statements or will not have a material adverse effect on our results of operations, financial condition or cash flows.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Factoring. We have factoring agreements with financial institutions to sell certain of our trade receivables and promissory notes from customers without recourse. We do not believe we are at risk for any material losses as a result of these agreements. In addition, we periodically sell certain letters of credit (“LC”), without recourse, received from customers in payment for goods and services.
The following table shows total receivables sold under factoring agreements and proceeds from sales of LC for the indicated periods:
 Three Months Ended September 30,
(In thousands)20232022
Receivables sold under factoring agreements$45,607 $104,247 
Proceeds from sales of LC$— $24,651 
Factoring and LC fees for the sale of certain trade receivables were recorded in other expense (income), net and were not material for the periods presented.
Purchase Commitments. We maintain commitments to purchase inventory from our suppliers as well as goods, services and other assets in the ordinary course of business. Our liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed between the parties. This forecasted time-horizon can vary among different suppliers. Our estimate of our significant purchase commitments primarily for material, services, supplies and asset purchases is approximately $2.3 billion as of September 30, 2023, a majority of which are due within the next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.
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Cash LTI Plan. As of September 30, 2023, we have committed $168.8 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 $74.2 million, of which $41.2 million had been issued as of September 30, 2023, primarily to fund guarantees to customs authorities for value-added tax and other operating requirements of our consolidated subsidiaries in Europe, Israel and Asia.
Indemnification Obligations. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to us. These obligations arise under the terms of our certificate of incorporation, our bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that we are required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred by several of our current and former directors, officers and employees in connection with these matters. For example, we have paid or reimbursed legal expenses incurred in connection with the investigation of our historical stock option practices and the related litigation and government inquiries. Although the maximum potential amount of future payments we could be required to make under the indemnification obligations generally described in this paragraph is theoretically unlimited, we believe the fair value of this liability, to the extent estimable, is appropriately considered within the reserve we have established for currently pending legal proceedings.
We are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which we customarily agree to hold the other party harmless against losses arising therefrom, or provide customers with other remedies to protect against bodily injury or damage to personal property caused by our products, non-compliance with our product performance specifications, infringement by our products of third-party IP rights and a breach of warranties, representations and covenants related to matters such as title to assets sold, validity of certain IP rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by us is typically subject to the other party making a claim to and cooperating with us pursuant to the procedures specified in the particular contract. This usually allows us to challenge the other party’s claims or, in case of breach of IP representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, our obligations under these agreements may be limited in terms of amounts, activity (typically at our option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, we may have recourse against third parties and/or insurance covering certain payments made by us.
In addition, we may, in limited circumstances, enter into agreements that contain customer-specific commitments on pricing, tool reliability, spare parts stocking levels, response time and other commitments. Furthermore, we may give these customers limited audit or inspection rights to enable them to confirm that we are complying with these commitments. If a customer elects to exercise its audit or inspection rights, we may be required to expend significant resources to support the audit or inspection, as well as to defend or settle any dispute with a customer that could potentially arise out of such audit or inspection. To date, we have made no significant accruals in our Condensed Consolidated Financial Statements for this contingency. While we have not in the past incurred significant expenses for resolving disputes regarding these types of commitments, we cannot make any assurance that we will not incur any such liabilities in the future.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material effect on our business, financial condition, results of operations or cash flows.
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NOTE 16 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The authoritative guidance requires companies to recognize all derivative instruments, including foreign exchange contracts and rate lock agreements (collectively “derivatives”), as either assets or liabilities at fair value on the Condensed Consolidated Balance Sheets. In accordance with the accounting guidance, we designate foreign currency forward transactions and options contracts and interest rate forward transactions as cash flow hedges. In accordance with the accounting guidance, we also designate certain foreign currency exchange contracts as net investment hedge transactions intended to mitigate the variability of the value of certain investments in foreign subsidiaries.
Our foreign subsidiaries operate and sell our products in various global markets. As a result, we are exposed to risks relating to changes in foreign currency exchange rates. We utilize foreign exchange contracts to hedge against future movements in foreign currency exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro, the pound sterling and the new Israeli shekel.
We routinely hedge our exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These foreign exchange contracts, designated as cash flow hedges, generally have maturities of less than 18 months. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material losses.
Since fiscal 2015, we have entered into four sets of forward contracts to hedge the benchmark interest rate on portions of our Senior Notes prior to issuance (“Rate Lock Agreements”). Upon issuance of the associated debt, the Rate Lock Agreements were settled and their fair values were recorded within AOCI. The resulting gains and losses from these transactions are amortized to interest expense over the lives of the associated debt. We recognized net gains of $0.9 million in the three months ended September 30, 2023, 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 a net gain of $0.9 million in the three months ended September 30, 2022, 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 September 30, 2023, the aggregate unamortized portion of the fair value of the forward contracts for the Rate Lock Agreements was a $50.1 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.
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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 September 30,
(In thousands)20232022
Derivatives Designated as Cash Flow Hedging Instruments:
Rate lock agreements:
Amounts included in the assessment of effectiveness$— $937 
Foreign exchange contracts:
Amounts included in the assessment of effectiveness$(1,533)$816 
Amounts excluded from the assessment of effectiveness$52 $15 
Derivatives Designated as Net Investment Hedging Instruments:
Foreign exchange contracts(1):
$2,536 $3,679 
    __________________ 
(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 September 30,Three Months Ended September 30,
20232022
(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$2,396,956 $1,497,750 $74,234 $(26,739)$2,724,424 $1,613,721 $74,395 $(47,006)
Gains (Losses) on Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amount of gains (losses) reclassified from AOCI to earnings$— $— $937 $— $— $— $937 $— 
Foreign exchange contracts:
Amount of gains (losses) reclassified from AOCI to earnings$3,649 $2,775 $— $— $14,915 $(5,367)$— $— 
Amount excluded from the assessment of effectiveness recognized in earnings$(253)$— $— $52 $(310)$— $— $455 
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Amount of gains (losses) recognized in earnings$— $— $— $(11,397)$— $— $— $14,374 

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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)September 30, 2023June 30, 2023
Cash flow hedge contracts - foreign currency
Purchase$292,336 $218,315 
Sell$149,964 $123,951 
Net investment hedge contracts - foreign currency
Sell$87,157 $87,157 
Other foreign currency hedge contracts
Purchase$610,168 $527,349 
Sell$273,171 $204,902 
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
 LocationSeptember 30, 2023June 30, 2023LocationSeptember 30, 2023June 30, 2023
(In thousands)Fair ValueFair Value
Derivatives designated as hedging instruments
Foreign exchange contractsOther current assets$16,982 $24,498 Other current liabilities$(6,141)$(442)
Total derivatives designated as hedging instruments16,982 24,498 (6,141)(442)
Derivatives not designated as hedging instruments
Foreign exchange contractsOther current assets20,826 11,214 Other current liabilities(21,541)(11,664)
Total derivatives not designated as hedging instruments20,826 11,214 (21,541)(11,664)
Total derivatives$37,808 $35,712 $(27,682)$(12,106)
The changes in AOCI, before taxes, related to derivatives for the indicated periods were as follows:
Three Months Ended September 30,
(In thousands)20232022
Beginning AOCI$81,611 $77,018 
Amount reclassified to earnings as net gains(7,108)(10,175)
Net change in unrealized gains1,055 5,447 
Ending AOCI$75,558 $72,290 
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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 September 30, 2023Gross 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$37,808 $— $37,808 $(18,749)$— $19,059 
Derivatives - liabilities$(27,682)$— $(27,682)$18,749 $— $(8,933)
As of June 30, 2023Gross 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$35,712 $— $35,712 $(8,968)$— $26,744 
Derivatives - liabilities$(12,106)$— $(12,106)$8,968 $— $(3,138)
NOTE 17 – RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2023 and 2022, we purchased from, or sold to, several entities where one or more of our executive officers or members of our Board of Directors or their immediate family members were, during the periods presented, an executive officer or a board member of a subsidiary, including Advanced Micro Devices, Inc., Agilent Technologies, Inc., Ansys, Inc., Citrix Systems, Inc., HP Inc., Keysight Technologies, Inc. and Microchip Technology Incorporated. 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 September 30,
(In thousands)20232022
Total revenues$3,362 $757 
Total purchases$1,821 $245 
Our receivable balances from these parties were $2.1 million and $1.0 million as of September 30, 2023 and June 30, 2023, respectively. Our payable balances to these parties were $1.7 million as of September 30, 2023 and immaterial as of June 30, 2023. All of the related party transactions were made at current market rates.
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.
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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 comprised of two operating segments, Wafer Inspection and Patterning and GSS.
Specialty Semiconductor Process
The Specialty Semiconductor Process 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 comprised 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 comprised 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 September 30,
(In thousands)20232022
Semiconductor Process Control:
Revenues$2,135,478 $2,397,759 
Segment gross profit1,386,529 1,576,982 
Specialty Semiconductor Process:
Revenues126,719 127,867 
Segment gross profit69,301 67,040 
PCB, Display and Component Inspection:
Revenues136,043 200,745 
Segment gross profit39,820 85,674 
Totals:
Revenues for reportable segments$2,398,240 $2,726,371 
Segment gross profit$1,495,650 $1,729,696 

The following table reconciles total reportable segment revenues to total revenues for the indicated periods:
 Three Months Ended September 30,
(In thousands)20232022
Total revenues for reportable segments$2,398,240 $2,726,371 
Corporate allocations and effects of changes in foreign currency exchange rates(1,284)(1,947)
Total revenues$2,396,956 $2,724,424 
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The following table reconciles total segment gross profit to income before income taxes for the indicated periods:
 Three Months Ended September 30,
(In thousands)20232022
Total segment gross profit$1,495,650 $1,729,696 
Acquisition-related charges, corporate allocations and effects of changes in foreign currency exchange rates(1)
45,585 46,498 
R&D311,214 318,515 
SG&A239,645 253,980 
Interest expense74,234 74,395 
Loss on extinguishment of debt— 13,286 
Other expense (income), net(26,739)(47,006)
Income before income taxes$851,711 $1,070,028 
__________________
(1)Acquisition-related charges primarily include amortization of intangible assets 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 September 30,
20232022
Revenues:
China$1,025,944 43 %$839,661 31 %
Taiwan405,343 17 %748,334 27 %
North America250,713 10 %233,754 %
Japan227,377 10 %217,709 %
Korea219,821 %407,462 15 %
Europe and Israel168,436 %164,073 %
Rest of Asia99,322 %113,431 %
Total$2,396,956 100 %$2,724,424 100 %
The following is a summary of revenues by major product categories for the indicated periods:
(Dollar amounts in thousands)Three Months Ended September 30,
20232022
Revenues:
Wafer Inspection$1,010,198 42 %$1,102,542 41 %
Patterning542,488 23 %733,370 27 %
Specialty Semiconductor Process112,103 %114,444 %
PCB, Display and Component Inspection71,164 %134,443 %
Services560,292 23 %528,815 19 %
Other100,711 %110,810 %
Total$2,396,956 100 %$2,724,424 100 %
Wafer Inspection and Patterning products are offered in the Semiconductor Process Control segment. Services are offered in multiple segments. Other includes primarily refurbished systems, remanufactured legacy systems, and enhancements and upgrades for previous-generation products that are part of the Semiconductor Process Control segment.
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In the three months ended September 30, 2023, one customer accounted for approximately 11% of total revenues. In the three months ended September 30, 2022, two customers accounted for approximately 20% and 11% of total revenues. One customer and two customers on an individual basis accounted for greater than 10% of net accounts receivable at September 30, 2023 and at June 30, 2023, respectively.
Land, property and equipment, net by geographic region as of the dates indicated below were as follows: 
As ofAs of
(In thousands)September 30, 2023June 30, 2023
Land, property and equipment, net:
United States$686,532 $672,561 
Singapore155,152 150,989 
Israel92,641 92,815 
Europe88,694 74,015 
Rest of Asia36,906 41,461 
Total$1,059,925 $1,031,841 
NOTE 19 – RESTRUCTURING CHARGES
From time to time, management approves restructuring plans including workforce reductions in an effort to streamline operations.
Restructuring charges were $0.6 million and $16.2 million for the three months ended September 30, 2023 and 2022, respectively. The fiscal year 2023 charges include one-time transaction bonuses triggered by the sale of Orbograph. As of September 30, 2023 and June 30, 2023, the accrual for restructuring charges was $3.0 million and $11.0 million, respectively.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “relies,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continues,” “thinks,” “seeks,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Such forward-looking statements include those regarding, among others: the future impacts of the COVID-19 pandemic; forecasts of the future results of our operations, including profitability; orders for our products and capital equipment generally; sales of semiconductors; the investments by our customers in advanced technologies and new materials; growth of revenue in the semiconductor industry, the semiconductor capital equipment industry and our business; technological trends in the semiconductor industry; future developments or trends in the global capital and financial markets; our future product offerings and product features; the success and market acceptance of new products; timing of shipment of order backlog; our future product shipments and product and service revenues; our future gross margins; our future research and development (“R&D”) expenses and selling, general and administrative (“SG&A”) expenses; international sales and operations; our ability to maintain or improve our existing competitive position; success of our product offerings; creation and funding of programs for R&D; results of our investment in leading edge technologies; the effects of hedging transactions; the effect of the sale of trade receivables and promissory notes from customers; the effect of future compliance with laws and regulations; our future effective income tax rate; our recognition of tax benefits; the effects of any audits or litigation; future payments of dividends to our stockholders; the completion of any acquisitions of third parties, or the technology or assets thereof; benefits received from any acquisitions and development of acquired technologies; sufficiency of our existing cash balance, investments, cash generated from operations and the unfunded portion of our Revolving Credit Facility (as defined below in the “Revolving Credit Facility” section of “Results of Operations”) to meet our operating and working capital requirements, including debt service and payment thereof; future dividends, and stock repurchases; our compliance with the financial covenants under the Credit Agreement (as defined below in the “Revolving Credit Facility” section of “Results of Operations”) for our Revolving Credit Facility; the adoption of new accounting pronouncements; our repayment of our outstanding indebtedness; and our environmental, social and governance (“ESG”) related targets, goals and commitments.
Our actual results may differ significantly from those projected in the forward-looking statements in this report. Factors that might cause or contribute to such differences include, but are not limited to:
Our vulnerability to a weakening in the condition of the financial markets and the global economy;
Risks related to our international operations;
Evolving Bureau of Industry and Security (“BIS”) of the U.S. Department of Commerce (“Commerce”) rules and regulations (the “2022 BIS Rules,” the “2023 BIS Rules” and, collectively, the “BIS Rules”) and their impact on our ability to sell products to and provide services to certain customers in People’s Republic of China (“China”);
Costly intellectual property (“IP”) disputes that could result in our inability to sell or use the challenged technology;
Risks related to the legal, regulatory and tax environments in which we conduct our business;
Increasing attention to ESG matters and the resulting costs, risks and impact on our business;
Unexpected delays, difficulties and expenses in executing against our environmental, climate, diversity and inclusion or other ESG target, goals and commitments;
Our ability to attract, retain and motivate key personnel;
Our vulnerability to disruptions and delays at our third party service providers;
Cybersecurity threats, cyber incidents affecting our and our business partners’ systems and networks;
Our inability to access critical information in a timely manner due to system failures;
Our ability to identify suitable acquisition targets and successfully integrate and manage acquired businesses;
Climate change, earthquake, flood or other natural catastrophic events, public health crises such as the COVID-19 pandemic or terrorism and the adverse impact on our business operations;
The war between Israel and Hamas, and the significant military activity in that region;
Lack of insurance for losses and interruptions caused by terrorists and acts of war, and our self-insurance of certain risks including earthquake risk;
Risks related to fluctuations in foreign currency exchange rates;
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Risks related to fluctuations in interest rates and the market values of our portfolio investments;
Risks related to tax and regulatory compliance audits;
Any change in taxation rules or practices and our effective tax rate;
Compliance costs with federal securities laws, rules, regulations, NASDAQ requirements, and evolving accounting standards and practices;
Ongoing changes in the technology industry, and the semiconductor industry in particular, including future growth rates, pricing trends in end-markets, or changes in customer capital spending patterns;
Our vulnerability to a highly concentrated customer base;
The cyclicality of the industries in which we operate;
Our ability to timely develop new technologies and products that successfully address changes in the industry;
Our ability to maintain our technology advantage and protect proprietary rights;
Our ability to compete in the industry;
Availability and cost of the materials and parts used in the production of our products;
Our ability to operate our business in accordance with our business plan;
Risks related to our debt and leveraged capital structure;
We may not be able to declare cash dividends at all or in any particular amount;
Liability to our customers under indemnification provisions if our products fail to operate properly or contain defects or our customers are sued by third parties due to our products;
Our government funding for R&D is subject to audit, and potential termination or penalties;
We may incur significant restructuring charges or other asset impairment charges or inventory write offs; and
We are subject to risks related to receivables factoring arrangements and compliance risk of certain settlement agreements with the government.
For a more detailed discussion of these and other risk factors that might cause or contribute to differences from the forward-looking statements in this report, see Part II, Item 1A “Risk Factors” in this report as well as Part I, Item 1 “Business” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2023. You should carefully review these risks and also review the risks described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”). You are cautioned not to place undue reliance on these forward-looking statements, and we expressly assume no obligation and do not intend to update the forward-looking statements in this report after the date hereof.
EXECUTIVE SUMMARY
We are a leading supplier of process control and yield management solutions and services for the semiconductor and related electronics industries. Our broad portfolio of inspection and metrology products, and related service, software and other offerings, support R&D and manufacturing of integrated circuits (“IC”), wafers and reticles. Our products, services and expertise are used by our customers to measure, detect, analyze and resolve critical and nanometric level product defects, helping them to manage manufacturing process challenges and to obtain higher finish product yields at lower cost. We also offer advanced technology solutions to address various manufacturing needs of printed circuit boards (“PCB”), flat panel displays (“FPD”), specialty semiconductor devices and other electronic components, including advanced packaging, light-emitting diode (“LED”), power devices, compound semiconductor, and data storage industries, as well as general materials research.
Our semiconductor customers generally operate in one or both of the major semiconductor device manufacturing markets: memory and foundry/logic. The pervasive and increasing needs for semiconductors in many consumer and industrial products, the rapid proliferation of new applications for more advanced semiconductor devices, and the increasing complexity associated with leading edge semiconductor manufacturing drives demand for our process control and yield management solutions. Continuing advancement of technology spurred by the economic, power and performance benefits of being at the leading edge, increasing involvement in legacy nodes as semiconductor content increases, and innovation and growth of new enabling technologies are fueling long-term growth for the semiconductor equipment industry. End-market demand drivers that are expected to continue in the long term are related to artificial intelligence (“AI”), the deployment of 5G telecommunications technology and associated high-end mobile devices, the electrification and digitization of the automotive industry, the revival of personal computer demand and associated innovations to support remote work, virtual collaboration, remote learning and entertainment, and the growth of the Internet of Things (“IoT”). Recently, the macro-driven slowdown has impacted semiconductor device demand as the semiconductor industry rebalances its supply chain and inventory levels. As a result of this
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change as well as a higher interest rate environment, memory device manufacturers and foundry/logic customers are reducing their capacity expansion-focused capital expenditure plans for calendar 2023. In addition, semiconductor and other technology delays from customers, in converting to new chips and technology methods, for example, may result in impacts to process control capital intensity. Therefore, while we continue to invest in technological innovation, we are focusing on moderating our spending levels to reflect the changing environment. Push out or cancellation of deliveries to our customers could cause earnings volatility, due to the timing of revenue recognition as well as increased risk of inventory-related charges.
We are organized into three reportable segments as follows:
Semiconductor Process Control: a comprehensive portfolio of inspection, metrology and data analytics products as well as related service offerings that help IC manufacturers achieve target yields throughout the semiconductor fabrication process, from R&D to final volume production.
Specialty Semiconductor Process: advanced vacuum deposition and etching process tools used by a broad range of specialty semiconductor customers.
PCB, Display and Component Inspection: a range of inspection, testing and measurement, and direct imaging for patterning products used by manufacturers of PCBs, FPDs, advanced packaging, microelectromechanical systems other electronic components.
A majority of our revenues are derived from outside the U.S., and include geographic regions such as China, Taiwan, Korea, Japan, Europe and Israel, and Rest of Asia. China has emerged as a major region for manufacturing of logic and memory chips, adding to its role as the world’s largest consumer of ICs. Additionally, a significant portion of global FPD and PCB manufacturing has migrated to China. Chinese government initiatives are propelling China to expand its domestic manufacturing capacity and attracting investment from semiconductor manufacturers from Taiwan, Korea, Japan and the U.S. Although China is currently seen as an important long-term growth region for the semiconductor and electronics capital equipment sector, Commerce has adopted regulations and added certain China-based entities to the U.S. Entity List (a list of parties that are generally ineligible to receive U.S.-regulated items without prior licensing from BIS), restricting our ability to provide products and services to such entities without a license. In addition, Commerce has imposed export licensing requirements on China-based customers that are military end users or engaged in military end uses, as well as requiring our customers to obtain an export license when they use certain semiconductor capital equipment based on U.S. technology to manufacture products connected to certain entities on the U.S. Entity List.
In addition, in October 2022, BIS issued the 2022 BIS Rules, which imposed 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 China, and for the provision of support by U.S. Persons to certain advanced IC fabs located in China. In particular, the 2022 BIS Rules impose export license requirements effectively on all KLA products and services to customers located in China that fabricate:
a. Non-planar ICs (e.g., FinFet or GaaFeT) or 14/16nm and below logic ICs;

b. NAND ICs at 128 layers and above; and

c. DRAM ICs using a “production” technology node of 18 nanometer half-pitch or less.

KLA is also restricted from providing certain U.S. origin tools, software and technology to certain wafer fab equipment manufacturers located in China, absent an export license.

In October 2023, BIS issued additional rules that go into effect in November 2023. These 2023 BIS Rules are designed to update export controls on advanced computing semiconductors and semiconductor manufacturing equipment, as well as items that support supercomputing applications and end-uses, to arms embargoed countries, including China. The 2023 BIS Rules adjust the parameters included in the 2022 BIS Rules that determine whether an advanced computing chip is restricted and impose new measures to address risks of circumvention of the controls established by the 2022 BIS Rules. The 2023 BIS Rules are very complex and we are still evaluating these rules and assessing their impact on our business and operations. We are taking appropriate measures to comply with all BIS Rules, and will continue to apply 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, now or in the future, will be granted.
The possible negative effects on our future business of export licenses not being granted could be material and could disrupt our supply chain and product shipment, and impair our ability to complete product development in a timely manner, or our ability to support existing customers of covered products or supply customers of covered products outside the impacted regions, and may require us to transition certain operations out of one or more of the identified countries. Failure to obtain
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export licenses could also result in a substantial reduction to our remaining performance obligations (“RPO”) or require us to return substantial deposits received from customers in China for purchase orders. We are continuously assessing the aggregate potential impact of government regulations on our financial results and operations. See Part II, Item 1A “Risk Factors” in this report for more information regarding how such actions by the U.S. government or another country could significantly impact our ability to provide our products and services to existing and potential customers, especially in China, and adversely affect our business, financial condition and results of operations.
The following table sets forth some of our key quarterly unaudited financial information: 
(In thousands, except net income per share)Three Months Ended
September 30,
2023
June 30,
2023
March 31,
2023
December 31,
2022
September 30,
2022
Total revenues$2,396,956 $2,355,137 $2,432,608 $2,983,887 $2,724,424 
Costs of revenues$946,891 $962,949 $1,005,346 $1,208,786 $1,041,226 
Gross margin60.5 %59.1 %58.7 %59.5 %61.8 %
Net income attributable to KLA(1)
$741,375 $684,654 $697,837 $978,795 $1,025,991 
Diluted net income per share attributable to KLA(2)
$5.41 $4.97 $5.03 $6.89 $7.20 
__________________ 
(1)For the explanation why our net income attributable to KLA decreased to $741.4 million in the three months ended September 30, 2023 compared to the three months ended September 30, 2022, refer to the “Results of Operations” section below, as the change is a result of movements in various income statement line items.
(2)Diluted net income per share is computed independently for each of the quarters presented based on the weighted-average fully diluted shares outstanding for each quarter. Therefore, the sum of quarterly diluted net income per share information may not equal annual (or other multiple-quarter calculations of) diluted net income per share.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience and evaluate them on an ongoing basis to ensure that they remain reasonable under current conditions. Actual results could differ from those estimates. We discuss the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors on a quarterly basis, and the Audit Committee has reviewed our related disclosure in this Quarterly Report on Form 10-Q.
There have been no material changes in our critical accounting estimates and policies since our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. 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 our fiscal year ended June 30, 2023 for additional details on significant accounting policies. In addition, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended June 30, 2023 for a complete description of our critical accounting estimates.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including those recently adopted and the expected dates of adoption as well as estimated effects, if any, on our Condensed Consolidated Financial Statements of those not yet adopted, see Note 1 “Basis of Presentation” to our Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
Revenues and Gross Margin
Revenues
Our business is affected by the concentration of our customer base and our customers’ capital equipment procurement schedules as a result of their investment plans. Our product revenues in any particular period are impacted by the amount of new orders we receive during that period and, depending upon the duration of manufacturing and installation cycles, in the preceding periods. Revenue is also impacted by average customer pricing, customer revenue deferrals associated with volume
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purchase agreements, the effect of fluctuations in foreign currency exchange rates and increased trade restrictions as discussed in the “Executive Summary” section above.
Service revenues are generated from product maintenance and support services, as well as billable time and material service calls made to our customers. The amount of our service revenues is typically a function of the number of systems installed at our customers’ sites and the utilization of those systems, but it is also impacted by other factors, such as our rate of service contract renewals, the types of systems being serviced and fluctuations in foreign currency exchange rates.
 Three Months Ended September 30,Q1 FY24
vs.
Q1 FY23
(Dollar amounts in thousands)20232022
Revenues:
Product$1,836,664 $2,195,609 $(358,945)(16)%
Service560,292 528,815 31,477 %
Total revenues$2,396,956 $2,724,424 $(327,468)(12)%
Costs of revenues$946,891 $1,041,226 $(94,335)(9)%
Gross margin60.5 %61.8 %

Product revenues during the three months ended September 30, 2023 decreased compared to the three months ended September 30, 2022 primarily due to the broad, macro-driven slowdown that has impacted semiconductor device demand overall, causing the semiconductor industry to rebalance its supply chain and inventory levels and memory device manufacturers and foundry/logic customers to reduce their capacity expansion-focused capital expenditure plans for calendar 2023.
Service revenues during the three months ended September 30, 2023 increased compared to the three months ended September 30, 2022 primarily due to an increase in our installed base.
Revenues by segment(1)
 Three Months Ended September 30,Q1 FY24
vs.
Q1 FY23
(Dollar amounts in thousands)20232022
Revenues:
Semiconductor Process Control$2,135,478 $2,397,759 $(262,281)(11)%
Specialty Semiconductor Process126,719 127,867 (1,148)(1)%
PCB, Display and Component Inspection136,043 200,745 (64,702)(32)%
Total revenues for reportable segments$2,398,240 $2,726,371 $(328,131)(12)%

(1)Segment revenues exclude corporate allocations and the effects of changes in foreign currency exchange rates. For additional details, refer to Note 18 “Segment Reporting and Geographic Information” to our Condensed Consolidated Financial Statements.
Revenues from our Semiconductor Process Control segment during the three months ended September 30, 2023 decreased compared to three months ended September 30, 2022 primarily due to the broad, macro-driven slowdown that has impacted semiconductor device demand overall, causing the semiconductor industry to rebalance its supply chain and inventory levels, and memory device manufacturers and foundry/logic customers to reduce their capacity expansion-focused capital expenditure plans for calendar 2023. Revenues in the Specialty Semiconductor Process segment during the three months ended September 30, 2023 remained relatively flat compared to the three months ended September 30, 2022. Revenues in the PCB, Display and Component Inspection segment during the three months ended September 30, 2023 decreased compared to the three months ended September 30, 2022 primarily due to market softening.
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The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods: 
Three Months Ended September 30,
(Dollar amounts in thousands)20232022
China$1,025,944 43 %$839,661 31 %
Taiwan405,343 17 %748,334 27 %
North America250,713 10 %233,754 %
Japan227,377 10 %217,709 %
Korea219,821 %407,462 15 %
Europe and Israel168,436 %164,073 %
Rest of Asia99,322 %113,431 %
Total$2,396,956 100 %$2,724,424 100 %
A significant portion of our revenues continues to be generated in Asia, where a substantial portion of the world’s semiconductor manufacturing capacity is located, and we expect that trend to continue.
Gross margin
Our gross margin fluctuates with revenue levels and product mix and is affected by variations in costs related to manufacturing and servicing our products, including our ability to scale our operations efficiently and effectively in response to prevailing business conditions.
The following table summarizes the major factors that contributed to the changes in gross margin:
Gross Margin
Three Months Ended
September 30, 202261.8%
Revenue volume of products and services(1.7)%
Mix of products and services sold0.8%
Manufacturing labor, overhead and efficiencies(0.3)%
Other service and manufacturing costs(0.1)%
September 30, 202360.5%
Changes in gross margin, from revenue volume of products and services, reflect our ability to leverage existing infrastructure to generate higher revenues. Changes in gross margin from the mix of products and services sold reflect the impact of changes within the composition of product and service offerings. Changes in gross margin from manufacturing labor, overhead and efficiencies reflect our ability to manage costs and drive productivity as we scale our manufacturing activity to respond to customer requirements, and amortization of intangible assets. Changes in gross margin from other service and manufacturing costs include the impact of customer support costs, including the efficiencies with which we deliver services to our customers, and the effectiveness with which we manage our production plans and inventory risk.
The decrease in our gross margin during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 is primarily due to a lower revenue volume of products and services sold partially offset by a more profitable mix of products and services sold.
Segment gross profit(1)
 Three Months Ended September 30,Q1 FY24
vs.
Q1 FY23
(Dollar amounts in thousands)20232022
Segment gross profit:
Semiconductor Process Control$1,386,529 $1,576,982 $(190,453)(12)%
Specialty Semiconductor Process69,301 67,040 2,261 %
PCB, Display and Component Inspection39,820 85,674 (45,854)(54)%
Total segment gross profit$1,495,650 $1,729,696 $(234,046)(14)%
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________________ 
(1)    Segment gross profit is calculated as segment revenues less segment costs of revenues and excludes corporate allocations, amortization of intangible assets and the effects of changes in foreign currency exchange rates. For additional details, refer to Note 18 “Segment Reporting and Geographic Information” to our Condensed Consolidated Financial Statements.
Gross profit in the Semiconductor Process Control segment during the three months ended September 30, 2023 decreased compared to the three months ended September 30, 2022 primarily due to a lower revenue volume of products and services sold, partially offset by a more profitable mix. Gross profit in the Specialty Semiconductor Process segment during the three months ended September 30, 2023 remained relatively flat compared to the three months ended September 30, 2022. Gross profit in the PCB, Display and Component Inspection segment during the three months ended September 30, 2023 decreased compared to the three months ended September 30, 2022 primarily due to a lower revenue volume of products and services sold and an increase in other service and manufacturing costs.
Research and Development
R&D expenses may fluctuate with product development phases and project timing as well as our R&D efforts. As technological innovation is essential to our success, we may incur significant costs associated with R&D projects, including compensation for engineering talent, engineering material costs and other expenses.
(Dollar amounts in thousands)Three Months Ended September 30,Q1 FY24
vs.
Q1 FY23
20232022
R&D expenses$311,214 $318,515 $(7,301)(2)%
R&D expenses as a percentage of total revenues13 %12 %
R&D expenses during the three months ended September 30, 2023 decreased compared to the three months ended September 30, 2022 primarily due to a decrease in engineering project material costs of $7.9 million and a decrease in depreciation expense of $6.1 million. These decreases were partially offset by an increase in employee-related expenses of $7.1 million.
Selling, General and Administrative
Three Months Ended September 30,Q1 FY24
vs.
Q1 FY23
(Dollar amounts in thousands)20232022
SG&A expenses$239,645 $253,980 $(14,335)(6)%
SG&A expenses as a percentage of total revenues10 %%
SG&A expenses during the three months ended September 30, 2023 decreased compared to the three months ended September 30, 2022 primarily due to a one-time compensation-related expense of $16.8 million from the sale of Orbograph Ltd. (“Orbograph”) recognized in the prior year and a decrease in allowances for credit losses of $7.2 million. These decreases were partially offset by an increase in facility-related expenses of $9.3 million.

Restructuring Charges
Restructuring charges were $0.6 million and $16.2 million for the three months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the accrual for restructuring charges was $3.0 million.
For additional information, refer to Note 19 “Restructuring Charges” to our Condensed Consolidated Financial Statements.
Interest Expense and Other Expense (Income), Net
Other expense (income), net is comprised primarily of realized gains or losses on sales of marketable securities, gains or losses from revaluations of certain foreign currency denominated assets and liabilities as well as foreign currency contracts, interest-related accruals (such as interest and penalty accruals related to our tax obligations) and interest income earned on our invested cash, cash equivalents and marketable securities.
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(Dollar amounts in thousands)Three Months Ended September 30,Q1 FY24
vs.
Q1 FY23
20232022
Interest expense$74,234 $74,395 $(161)— %
Other expense (income), net$(26,739)$(47,006)$20,267 43 %
Interest expense as a percentage of total revenues%%
Other expense (income), net as a percentage of total revenues(1)%(2)%
Interest expense during the three months ended September 30, 2023 remained relatively flat compared to the three months ended September 30, 2022.
The change in other expense (income), net during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to a gain of $29.7 million from the sale of our interest in Orbograph Ltd. to a private equity firm in the quarter ended September 20, 2022 and a release of $10.8 million of interest accruals in the first quarter of fiscal 2023 related to uncertain tax positions due to the settlement of the Orbotech Ltd. (“Orbotech”) Israel Tax Authority examinations, partially offset by an increase in interest income of $22.4 million due to higher interest rates.
Loss on Extinguishment of Debt
For the three months ended September 30, 2023, we had no loss on extinguishment of debt. For the three months ended September 30, 2022, loss on extinguishment of debt reflected a pre-tax net loss of $13.3 million associated with the redemption of $500.0 million of the Senior Notes due 2024, including associated redemption premiums, accrued interest and other fees and expenses.
Provision for Income Taxes
The following table provides details of income taxes:    
Three Months Ended September 30,
(Dollar amounts in thousands)20232022
Income before income taxes$851,711 $1,070,028 
Provision for income taxes$110,336 $43,963 
Effective tax rate13.0 %4.1 %
The effective tax rate during the three months ended September 30, 2023 was higher compared to the three months ended September 30, 2022 primarily due to the impact of the following items that occurred during the three months ended September 30, 2022:     
Tax expense decreased by $62 million during the three months ended September 30, 2022 relating to a decrease in our deferred tax liabilities on unremitted earnings and unrealized gains; and
Tax expense decreased by $31.8 million during the three months ended September 30, 2022 relating to a decrease in our unrecognized tax benefits from the settlement of income tax examinations; partially offset by
Tax expense increased by $11.7 million during the three months ended September 30, 2022 relating to the sale of an Orbotech subsidiary.
Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with acquisitions, R&D credits as a percentage of aggregate pre-tax income, non-taxable or non-deductible increases or decreases in the assets held within our Executive Deferred Savings Plan, the tax effects of employee stock activity and the effectiveness of our tax planning strategies.
For discussions on tax examinations, assessments and certain related proceedings, see Note 13 “Income Taxes” to our Condensed Consolidated Financial Statements.
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Liquidity and Capital Resources