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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| | | | | |
(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, | California | | 95035 |
(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 class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | KLAC | The 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 filer | ☒ | | | | Accelerated 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.
INDEX
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| | Page Number |
| | |
PART I | FINANCIAL INFORMATION | |
Item 1. | | |
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| | |
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| | |
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| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II | OTHER 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 securities | 1,637,751 | | | 1,315,294 | |
Accounts receivable, net | 1,630,746 | | | 1,753,361 | |
Inventories | 3,007,705 | | | 2,876,784 | |
Other current assets | 443,019 | | | 498,728 | |
Total current assets | 8,430,791 | | | 8,372,032 | |
Land, property and equipment, net | 1,059,925 | | | 1,031,841 | |
Goodwill | 2,278,805 | | | 2,278,820 | |
Deferred income taxes | 870,472 | | | 816,899 | |
Purchased intangible assets, net | 871,999 | | | 935,303 | |
Other non-current assets | 624,849 | | | 637,462 | |
Total assets | $ | 14,136,841 | | | $ | 14,072,357 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 363,662 | | | $ | 371,026 | |
Deferred system revenue | 665,777 | | | 651,720 | |
Deferred service revenue | 406,940 | | | 416,606 | |
| | | |
Other current liabilities | 2,381,364 | | | 2,303,490 | |
Total current liabilities | 3,817,743 | | | 3,742,842 | |
Long-term debt | 5,891,731 | | | 5,890,736 | |
Deferred tax liabilities | 505,812 | | | 529,287 | |
Deferred service revenue | 192,236 | | | 176,681 | |
Other non-current liabilities | 739,102 | | | 813,058 | |
Total liabilities | 11,146,624 | | | 11,152,604 | |
Commitments and contingencies (Notes 9, 14 and 15) | | | |
Stockholders’ equity: | | | |
Common stock and capital in excess of par value | 2,073,476 | | | 2,107,663 | |
Retained earnings | 966,179 | | | 848,431 | |
Accumulated other comprehensive loss | (49,438) | | | (36,341) | |
| | | |
| | | |
Total stockholders’ equity | 2,990,217 | | | 2,919,753 | |
Total liabilities and stockholders’ equity | $ | 14,136,841 | | | $ | 14,072,357 | |
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
KLA CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
(In thousands, except per share amounts) | 2023 | | 2022 | | | | |
Revenues: | | | | | | | |
Product | $ | 1,836,664 | | | $ | 2,195,609 | | | | | |
Service | 560,292 | | | 528,815 | | | | | |
Total revenues | 2,396,956 | | | 2,724,424 | | | | | |
Costs and expenses: | | | | | | | |
Costs of revenues | 946,891 | | | 1,041,226 | | | | | |
Research and development | 311,214 | | | 318,515 | | | | | |
Selling, general and administrative | 239,645 | | | 253,980 | | | | | |
| | | | | | | |
Interest expense | 74,234 | | | 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 | | | | | |
Provision for income taxes | 110,336 | | | 43,963 | | | | | |
| | | | | | | |
Net income | 741,375 | | | 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: | | | | | | | |
Basic | 136,412 | | | 141,829 | | | | | |
Diluted | 137,104 | | | 142,563 | | | | | |
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
KLA CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
(In thousands) | 2023 | | 2022 | | | | |
Net income | $ | 741,375 | | | $ | 1,026,065 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Currency translation adjustments: | | | | | | | |
Cumulative currency translation adjustments | (6,853) | | | (19,712) | | | | | |
Income tax benefit | 260 | | | — | | | | | |
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 benefit | 856 | | | 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 plans | 242 | | | 891 | | | | | |
Available-for-sale securities: | | | | | | | |
Net unrealized gains (losses) arising during the period | 1,244 | | | (6,964) | | | | | |
Reclassification adjustments for net losses included in net income | 12 | | | 174 | | | | | |
Income tax (provision) benefit | (269) | | | 1,460 | | | | | |
Net change related to available-for-sale securities | 987 | | | (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).
KLA CORPORATION
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total KLA Stockholders’ Equity | | Non- Controlling Interest | | Total Stockholders’ Equity |
(In thousands, except per share amounts) | Shares | | Amount | |
Balances as of June 30, 2023 | 136,750 | | | $ | 2,107,663 | | | $ | 848,431 | | | $ | (36,341) | | | $ | 2,919,753 | | | $ | — | | | $ | 2,919,753 | |
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Net income | — | | | — | | | 741,375 | | | — | | | 741,375 | | | — | | | 741,375 | |
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Other comprehensive loss | — | | | — | | | — | | | (13,097) | | | (13,097) | | | — | | | (13,097) | |
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Net issuance under employee stock plans | 173 | | | (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) | |
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Stock-based compensation expense | — | | | 48,772 | | | — | | | — | | | 48,772 | | | — | | | 48,772 | |
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Balances as of September 30, 2023 | 135,967 | | | $ | 2,073,476 | | | $ | 966,179 | | | $ | (49,438) | | | $ | 2,990,217 | | | $ | — | | | $ | 2,990,217 | |
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| Common Stock and Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total KLA Stockholders’ Equity | | Non- Controlling Interest | | Total Stockholders’ Equity |
(In thousands, except per share amounts) | Shares | | Amount | |
Balances as of June 30, 2022 | 141,804 | | | $ | 1,061,940 | | | $ | 366,882 | | | $ | (27,471) | | | $ | 1,401,351 | | | $ | (2,261) | | | $ | 1,399,090 | |
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Net income attributable to KLA | — | | | — | | | 1,025,991 | | | — | | | 1,025,991 | | | — | | | 1,025,991 | |
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Net income attributable to non-controlling interest | — | | | — | | | — | | | — | | | — | | | 74 | | | 74 | |
Other comprehensive loss | — | | | — | | | — | | | (31,370) | | | (31,370) | | | — | | | (31,370) | |
Net issuance under employee stock plans | 171 | | | (54,950) | | | — | | | — | | | (54,950) | | | — | | | (54,950) | |
Repurchase of common stock | (257) | | | (1,926) | | | (87,690) | | | — | | | (89,616) | | | — | | | (89,616) | |
Cash dividends ($1.30 per share) and dividend equivalents declared | — | | | — | | | (186,216) | | | — | | | (186,216) | | | — | | | (186,216) | |
Stock-based compensation expense | — | | | 34,982 | | | — | | | — | | | 34,982 | | | — | | | 34,982 | |
Purchase of non-controlling interest | — | | | 1,902 | | | — | | | — | | | 1,902 | | | (6,196) | | | (4,294) | |
Disposal of non-controlling interest | — | | | — | | | — | | | — | | | — | | | 8,383 | | | 8,383 | |
Balances as of September 30, 2022 | 141,718 | | | $ | 1,041,948 | | | $ | 1,118,967 | | | $ | (58,841) | | | $ | 2,102,074 | | | $ | — | | | $ | 2,102,074 | |
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See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
KLA CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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| Three Months Ended September 30, |
(In thousands) | 2023 | | 2022 |
Cash flows from operating activities: | | | |
Net income | $ | 741,375 | | | $ | 1,026,065 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
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Depreciation and amortization | 102,403 | | | 101,938 | |
Loss on extinguishment of debt | — | | | 13,286 | |
Unrealized foreign exchange loss and other | 9,970 | | | 1,783 | |
Asset impairment charges | — | | | 9,156 | |
Disposal of non-controlling interest | — | | | 8,270 | |
Stock-based compensation expense | 48,772 | | | 34,982 | |
Gain on sale of business | — | | | (29,687) | |
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Deferred income taxes | (71,322) | | | (156,226) | |
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions: | | | |
Accounts receivable | 107,018 | | | (55,073) | |
Inventories | (138,419) | | | (265,530) | |
Other assets | (7,520) | | | 45,637 | |
Accounts payable | 8,345 | | | 36,472 | |
Deferred system revenue | 14,057 | | | (60,492) | |
Deferred service revenue | 5,901 | | | (12,411) | |
Other liabilities | 63,160 | | | 313,375 | |
Net cash provided by operating activities | 883,740 | | | 1,011,545 | |
Cash flows from investing activities: | | | |
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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 securities | 7,983 | | | 26,608 | |
Proceeds from maturity of available-for-sale securities | 201,149 | | | 211,465 | |
Purchases of trading securities | (49,958) | | | (19,512) | |
Proceeds from sale of trading securities | 48,042 | | | 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) | |
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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) | |
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Issuance of common stock | — | | | 115 | |
Tax withholding payments related to vested and released restricted stock units | (68,237) | | | (54,952) | |
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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 period | 1,927,865 | | | 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: | | | |
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Contingent consideration payable - financing activities | $ | (920) | | | $ | 145 | |
Dividends payable - financing activities | $ | 1,853 | | | $ | 1,942 | |
Unsettled common stock repurchase - financing activities | $ | 11,000 | | | $ | — | |
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Accrued purchases of land, property and equipment - investing activities | $ | 22,729 | | | $ | 34,027 | |
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
KLA CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
Basis of Presentation. For purposes of this report, “KLA,” the “Company,” “we,” “our,” “us” or similar references mean KLA Corporation and its majority-owned subsidiaries unless the context requires otherwise. The Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.
The unaudited interim Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for audited financial statements. The balance sheet as of June 30, 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 of | | As of | | | | |
(Dollar amounts in thousands) | September 30, 2023 | | June 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 | | | 2 | % |
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.
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:
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Level 1 | | Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. |
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Level 2 | | Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
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Level 3 | | Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There were no transfers between Level 1, Level 2 and Level 3 fair value measurements during the 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.
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:
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| | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Little or No Market Activity Inputs |
As of September 30, 2023 (In thousands) | Total | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
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Money market funds and other | $ | 1,077,456 | | | $ | 1,077,456 | | | $ | — | | | $ | — | |
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U.S. Treasury securities | 12,740 | | | — | | | 12,740 | | | — | |
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Marketable securities: | | | | | | | |
Corporate debt securities | 681,245 | | | — | | | 681,245 | | | — | |
Municipal securities | 30,478 | | | — | | | 30,478 | | | — | |
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U.S. Government agency securities | 133,687 | | | 133,687 | | | — | | | — | |
U.S. Treasury securities | 595,220 | | | 473,725 | | | 121,495 | | | — | |
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Equity securities | 13,825 | | | 13,825 | | | — | | | — | |
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Total cash equivalents and marketable securities(1) | 2,544,651 | | | 1,698,693 | | | 845,958 | | | — | |
Other current assets: | | | | | | | |
Derivative assets | 37,808 | | | — | | | 37,808 | | | — | |
Other non-current assets: | | | | | | | |
Executive Deferred Savings Plan | 248,455 | | | 223,621 | | | 24,834 | | | — | |
Total financial assets(1) | $ | 2,830,914 | | | $ | 1,922,314 | | | $ | 908,600 | | | $ | — | |
Liabilities | | | | | | | |
Derivative liabilities | $ | (27,682) | | | $ | — | | | $ | (27,682) | | | $ | — | |
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Contingent consideration payable | (5,528) | | | — | | | — | | | (5,528) | |
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Total financial liabilities | $ | (33,210) | | | $ | — | | | $ | (27,682) | | | $ | (5,528) | |
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(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.
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:
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| | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Little or No Market Activity Inputs |
As of June 30, 2023 (In thousands) | Total | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
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Money market funds and other | $ | 1,257,223 | | | $ | 1,257,223 | | | $ | — | | | $ | — | |
U.S. Government agency securities | 3,788 | | | — | | | 3,788 | | | — | |
U.S. Treasury securities | 11,500 | | | — | | | 11,500 | | | — | |
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Marketable securities: | | | | | | | |
Corporate debt securities | 502,650 | | | — | | | 502,650 | | | — | |
Municipal securities | 31,788 | | | — | | | 31,788 | | | — | |
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U.S. Government agency securities | 129,784 | | | 127,715 | | | 2,069 | | | — | |
U.S. Treasury securities | 518,215 | | | 425,234 | | | 92,981 | | | — | |
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Equity securities | 18,159 | | | 18,159 | | | — | | | — | |
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Total cash equivalents and marketable securities(1) | 2,473,107 | | | 1,828,331 | | | 644,776 | | | — | |
Other current assets: | | | | | | | |
Derivative assets | 35,712 | | | — | | | 35,712 | | | — | |
Other non-current assets: | | | | | | | |
Executive Deferred Savings Plan | 256,846 | | | 198,639 | | | 58,207 | | | — | |
Total financial assets(1) | $ | 2,765,665 | | | $ | 2,026,970 | | | $ | 738,695 | | | $ | — | |
Liabilities | | | | | | | |
Derivative liabilities | $ | (12,106) | | | $ | — | | | $ | (12,106) | | | $ | — | |
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Contingent consideration payable | (6,447) | | | — | | | — | | | (6,447) | |
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Total financial liabilities | $ | (18,553) | | | $ | — | | | $ | (12,106) | | | $ | (6,447) | |
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(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.
NOTE 4 – FINANCIAL STATEMENT COMPONENTS
Condensed Consolidated Balance Sheets
| | | | | | | | | | | |
| As of | | As of |
(In thousands) | September 30, 2023 | | June 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 materials | 1,614,050 | | | 1,559,202 | |
Work-in-process | 635,045 | | | 578,864 | |
Finished goods | 198,522 | | | 214,622 | |
| $ | 3,007,705 | | | $ | 2,876,784 | |
Other current assets: | | | |
Deferred costs of revenues | $ | 126,873 | | | $ | 133,067 | |
Prepaid expenses | 120,553 | | | 121,204 | |
Contract assets | 93,300 | | | 117,137 | |
Prepaid income and other taxes | 33,371 | | | 64,901 | |
Other current assets | 68,922 | | | 62,419 | |
| $ | 443,019 | | | $ | 498,728 | |
Land, property and equipment, net: | | | |
Land | $ | 78,261 | | | $ | 72,287 | |
Buildings and leasehold improvements | 862,733 | | | 825,975 | |
Machinery and equipment | 1,044,335 | | | 1,016,713 | |
Office furniture and fixtures | 59,221 | | | 58,036 | |
Construction-in-process | 169,306 | | | 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 assets | 218,053 | | | 208,706 | |
Other non-current assets | 158,341 | | | 171,910 | |
| $ | 624,849 | | | $ | 637,462 | |
Other current liabilities: | | | |
Customer deposits | $ | 675,582 | | | $ | 769,000 | |
Income taxes payable | 517,768 | | | 383,012 | |
Compensation and benefits | 472,768 | | | 370,536 | |
| | | |
Other liabilities and accrued expenses | 365,615 | | | 383,407 | |
Executive Deferred Savings Plan(1) | 248,818 | | | 258,223 | |
Interest payable | 65,299 | | | 105,270 | |
Operating lease liabilities | 35,514 | | | 34,042 | |
| $ | 2,381,364 | | | $ | 2,303,490 | |
Other non-current liabilities: | | | |
Income taxes payable | $ | 267,185 | | | $ | 322,113 | |
Customer deposits | 143,339 | | | 156,874 | |
Operating lease liabilities | 138,682 | | | 138,354 | |
Pension liabilities | 60,821 | | | 63,672 | |
Other non-current liabilities | 129,075 | | | 132,045 | |
| $ | 739,102 | | | $ | 813,058 | |
________________
(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 Adjustments | | Unrealized Gains (Losses) on Available-for-Sale Securities | | Unrealized Gains (Losses) on Derivatives | | Unrealized Gains (Losses) on Defined Benefit Plans | | Total |
Balance as of 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 Components | | | | Three Months Ended | | |
| Location in the Condensed Consolidated Statement of Operations | | September 30, | | |
| | 2023 | | 2022 | | | | |
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contracts | | Revenues | | $ | 3,396 | | | $ | 14,605 | | | | | |
| | Costs of revenues and operating expenses | | 2,775 | | | (5,367) | | | | | |
| | Interest expense | | 937 | | | 937 | | | | | |
| | | | | | | | | | |
| | Net gains reclassified from AOCI | | $ | 7,108 | | | $ | 10,175 | | | | | |
Unrealized losses on available-for-sale securities | | Other 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.
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 other | 1,077,456 | | | — | | | — | | | 1,077,456 | |
| | | | | | | |
Municipal securities | 31,032 | | | 2 | | | (556) | | | 30,478 | |
| | | | | | | |
U.S. Government agency securities | 134,563 | | | — | | | (876) | | | 133,687 | |
U.S. Treasury securities | 615,592 | | | 5 | | | (7,637) | | | 607,960 | |
Equity securities(1) | 3,211 | | | 10,614 | | | — | | | 13,825 | |
| | | | | | | |
Subtotal | 2,549,067 | | | 10,669 | | | (15,085) | | | 2,544,651 | |
Add: Time deposits(2) | 492,767 | | | — | | | — | | | 492,767 | |
Less: Cash equivalents | 1,399,666 | | | 1 | | | — | | | 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 other | 1,257,223 | | | — | | | — | | | 1,257,223 | |
Municipal securities | 32,525 | | | — | | | (737) | | | 31,788 | |
| | | | | | | |
U.S. Government agency securities | 134,486 | | | 4 | | | (918) | | | 133,572 | |
U.S. Treasury securities | 538,487 | | | 10 | | | (8,782) | | | 529,715 | |
Equity securities(1) | 3,211 | | | 14,948 | | | — | | | 18,159 | |
| | | | | | | |
Subtotal | 2,474,443 | | | 15,014 | | | (16,350) | | | 2,473,107 | |
Add: Time deposits(2) | 471,439 | | | — | | | — | | | 471,439 | |
Less: Cash equivalents | 1,629,248 | | | 4 | | | — | | | 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, 2023 | Less than 12 Months | | 12 Months or Greater | | Total |
(In thousands) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Corporate debt securities | $ | 463,017 | | | $ | (2,772) | | | $ | 165,161 | | | $ | (3,244) | | | $ | 628,178 | | | $ | (6,016) | |
Municipal securities | 11,480 | | | (147) | | | 14,834 | | | (409) | | | 26,314 | | | (556) | |
| | | | | | | | | | | |
U.S. Government agency securities | 112,180 | | | (736) | | | 19,667 | | | (140) | | | 131,847 | | | (876) | |
U.S. Treasury securities | 305,758 | | | (2,456) | | | 249,795 | | | (5,181) | | | 555,553 | | | (7,637) | |
Total | $ | 892,435 | | | $ | (6,111) | | | $ | 449,457 | | | $ | (8,974) | | | $ | 1,341,892 | | | $ | (15,085) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of June 30, 2023 | Less than 12 Months | | 12 Months or Greater | | Total |
(In thousands) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Corporate debt securities | $ | 310,613 | | | $ | (2,242) | | | $ | 161,263 | | | $ | (3,671) | | | $ | 471,876 | | | $ | (5,913) | |
Municipal securities | 9,011 | | | (199) | | | 17,253 | | | (538) | | | 26,264 | | | (737) | |
| | | | | | | | | | | |
U.S. Government agency securities | 80,793 | | | (459) | | | 36,406 | | | (459) | | | 117,199 | | | (918) | |
U.S. Treasury securities | 288,376 | | | (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 Cost | | Fair Value |
Due within one year | $ | 846,346 | | | $ | 852,255 | |
Due after one year through three years | 795,822 | | | 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
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 Process | | Printed Circuit Board (“PCB”) and Display | | Component Inspection | | Total |
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:
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(In thousands) | | | As of September 30, 2023 | | As 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 | | | |