KLA CORP (KLAC) FY 2024 MD&A

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in Part I Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K (see “Special Note Regarding Forward-Looking Statements”). Discussions and analysis of fiscal year 2023 as compared against fiscal year 2022 have been omitted and can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the SEC.

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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 ICs, 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 PCBs, FPDs, specialty semiconductor devices and other electronic components, including advanced packaging, 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 drive demand for our process control and yield management solutions. Continuing advancement of innovation spurred by the performance, power and price 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 high performance computing, AI including 2-nanometer chip technology, 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 IoT.

Recently, the semiconductor industry environment has improved as the emergence of disruptive technologies such as AI and continuing advancement of innovation, as well as rising semiconductor content across end-markets and strategic investments in legacy nodes fuel growth. Our foundry/logic customers are slowly increasing their capital intensity, as they continue to scale and incorporate new technologies. Additionally, technology development investments supporting AI and high bandwidth memory are improving the environment for memory device manufacturers. While we continue to invest in technological innovation, factors such as delays from customers, in adopting new chips and technology methods, could impact process control capital intensity. Push out or cancellation of deliveries to our customers could still 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 and Component Inspection: a range of inspection, testing and measurement, and direct imaging for patterning products used by manufacturers of PCBs, FPDs, advanced packaging, MEMS and other electronic components. In March 2024, we made the decision to exit the Display business by announcing the end of manufacturing of most Display products by December 31, 2024, but we will continue to provide services to the installed base of Display products for existing customers.

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 remains a major region for manufacturing of legacy node 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 around self-sustainability 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

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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 went 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, in January 2024, KLA, among other companies, submitted comments to the BIS on the 2023 BIS Rules. 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 export licenses could also result in a substantial reduction to our 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 I 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 consolidated financial information for each of our last three fiscal years:

CRITICAL ACCOUNTING ESTIMATES

The preparation of our 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. In accordance with SEC guidance, the estimates within our accounting policies that we believe are the most critical to an investor’s understanding of our financial condition and results of operations, including those requiring more complex management judgment, are discussed below.

Revenue Recognition. We recognize revenue from sales at a point in time when we have satisfied our performance obligation by transferring control of the goods or services to the customer. To determine when to recognize revenue, we

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perform the following five steps: (1) identify the contract with customers, (2) identify the performance obligations in the contract, (3) determine the transaction consideration, (4) allocate the transaction consideration to the performance obligations in the contract, and (5) recognize revenue when, or as, a performance obligation is satisfied. Management uses judgments in identifying performance obligations, determining the stand-alone selling price (“SSP”) for each distinct performance obligation and allocating consideration from an arrangement to the individual performance obligations based on the SSP. We typically estimate the SSP of products and services based on observable transactions when the products and services are sold on a stand-alone basis and those prices fall within a reasonable range. We typically have established SSP ranges for individual products and services due to the stratification of these products by customers and circumstances. In these instances, we use information such as the size of the customer, geographic region as well as customization of the products in determining the SSP ranges. In instances where the SSP is not directly observable, we determine the SSP using information that includes market conditions, entity-specific factors including discounting strategies, information about the customer or class of customer that is reasonably available and other observable inputs. While changes in the allocation of SSP between performance obligations will not affect the amount of total revenue recognized for a particular contract, any material changes could impact the timing of revenue recognition, which could have a material effect on our financial position and results of operations. Additionally, management also uses judgments to evaluate whether or not the customer has obtained control of the product and consider several indicators in evaluating whether or not control has transferred to the customer, which could also impact the timing of revenue recognition, and could have a material effect on our financial position and results of operations.

Inventory Valuation. Inventories are stated at the lower of cost or net realizable value using standard costs that approximate actual costs on a first-in, first-out basis. The carrying value of inventory is reduced for estimated obsolescence equal to the difference between its cost and the estimated net realizable value based on assumptions about future demand for meeting our product manufacturing plans and our customers’ support requirements. The estimate of net realizable value of inventory is impacted by assumptions regarding general semiconductor market conditions, manufacturing schedules, technology changes, new product introductions and possible alternative uses, and requires us to use significant judgment that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. If in any period we anticipate an adverse change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of revenues, resulting in a negative impact to our gross margin in that period. On the other hand, if in any period we are able to sell inventories that had been written down in a previous period to a level below the ultimate realized selling price, related revenue would be recorded with a lower or no offsetting charge to cost of revenues resulting in a net benefit to our gross margin in that period.

Goodwill and Long-Lived Assets Impairment. We assess goodwill for impairment annually as well as whenever events or changes in circumstances indicate that the carrying value of a reporting unit may not be recoverable. Events or changes in circumstances that could affect the likelihood that we will be required to recognize an impairment charge for goodwill include, but are not limited to, declines in our stock price or market capitalization, declines in our market share and declines in revenues or profits at our reporting units. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded for the difference.

We determine the fair value of a reporting unit using the income approach or market approach, or a combination of both. If multiple valuation methodologies are used, the results are judgmentally weighted. The income approach is estimated through discounted cash flow analysis. The estimated fair value of a reporting unit is computed by adding the present value of the estimated annual discounted cash flows over a discrete projection period to the residual value of the business at the end of the projection period. This valuation technique requires us to use significant estimates and assumptions, including long-term growth rates, discount rates and other inputs. The estimated growth rates for the projection period are based on our internal forecasts of anticipated future performance of the business. The residual value is estimated using a perpetual nominal growth rate, which is based on projected long-range inflation and long-term industry projections. The discount rates are calculated as the weighted average cost of capital of comparable peer companies, adjusted for company-specific risk. The market approach estimates the fair value of a reporting unit by utilizing the market comparable method, which uses revenue and earnings multiples from comparable companies.

Due to the downward revision of financial outlook for our PCB and Display businesses, we performed a quantitative goodwill impairment assessment and recorded impairment losses related to goodwill of $192.6 million in the second quarter of fiscal 2024.

In March 2024, we made the decision to exit the Display business but continue to provide services to the installed base for the discontinued product lines. This decision triggered a quantitative impairment assessment for the Display reporting unit as of March 31, 2024, which resulted in a total goodwill impairment charge of $70.5 million in the third quarter of fiscal 2024.

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Long-lived assets, including both tangible and purchased intangible assets, are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Events or changes in circumstances that could affect the likelihood that we will be required to recognize an impairment charge for long-lived assets primarily include declines in our operating cash flows from the use of these assets.

For finite-lived purchased intangible assets, we determine whether the assets are recoverable based on the forecasted undiscounted future cash flows that are expected to be generated by the lowest-level associated asset grouping. If the undiscounted cash flows used in the recoverability test are less than the assets’ carrying value, we recognize an impairment loss for the amount that the carrying value exceeds the fair value.

We determine the fair value of purchased intangible assets using the income approach, primarily by applying the relief-from-royalty or multi-period excess-earnings methods. In connection with the downward revision of financial outlook for our PCB and Display businesses noted above, we recorded impairment losses related to purchased intangible assets of $26.4 million during the second quarter of fiscal 2024. As a result of the Company's decision to exit the Display business, also described above, an immaterial purchased intangible asset impairment charge was recorded in the third quarter of fiscal 2024.

There can be no assurance that the estimates and assumptions used in our fair value calculations will prove to be an accurate prediction of the future. If our assumptions are not realized, or if there are future changes in any of the assumptions due to a change in economic conditions or otherwise, it is possible that a further impairment charge may need to be recorded in the future.

See Note 7 “Goodwill and Purchased Intangible Assets” in the Notes to the Consolidated Financial Statements for additional information.

Income Taxes. The calculation of our effective tax rate involves significant judgment in the application of complex tax laws among various tax jurisdictions worldwide; identifying uncertain tax positions; and estimating the amount of deferred tax assets that will be realized in the future. We believe that our tax positions and judgments are reasonable, but actual results may differ. If one or more taxing authorities were to successfully overturn our tax positions, it could have a material adverse effect on our effective tax rate, results of operations, or cash flows.

Unrecognized tax benefits are recorded for uncertain tax positions on the largest amount that is more than 50% likely of being realized upon ultimate settlement. We recorded unrecognized tax benefits of $245.7 million and $213.1 million for the years ended June 30, 2024 and June 30, 2023, respectively. We reevaluate these uncertain tax positions on a quarterly basis based on certain factors including, but not limited to, changes in facts or circumstances; changes in tax law; audit settlements; new audit activities; and changes in accounting standards. Any changes to these factors can result in a material change to tax expense.

Our calculations of deferred tax assets and liabilities are based on estimates and judgments related to uncertainties in the application of complex tax laws and projections of future taxable income. The guidance requires that deferred tax assets be reduced by a valuation allowance if we determine it is more likely than not that a portion of the deferred tax asset will not be realized in the foreseeable future. We have determined that a valuation allowance is necessary against a portion of the deferred tax assets, but we anticipate that our future taxable income will be sufficient to recover the remainder of our deferred tax assets. We recorded a valuation allowance of $289.5 million and $259.2 million for the years ended June 30, 2024 and June 30, 2023, respectively, primarily related to California credit carry-forwards. Based on the enacted income apportionment rules in California, our future California income tax liability will not be sufficient to fully utilize the credit carry-forwards. We assess on a quarterly basis whether there should be a change to the valuation allowance for some portion or all of the deferred tax assets. If there is a change in our ability to recover our deferred tax assets that are not subject to a valuation allowance, we will be required to record an additional valuation allowance against such deferred tax assets which may materially increase our tax expense. If there is a change in our ability to utilize the California credit carry-forwards, we will be required to reduce our valuation allowance against such deferred tax assets which may materially decrease our tax expense.

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 Consolidated Financial Statements of those not yet adopted, see Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements.

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RESULTS OF OPERATIONS

Revenues and Gross Margin

Product 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 that 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 purchase agreements, the effect of fluctuations in foreign currency exchange rates and increased trade restrictions as discussed in the “Executive Summary” section above.

The decrease in product revenues by 11% in the fiscal year ended June 30, 2024 compared to the prior fiscal year is primarily due to the broad, macro-driven slowdown that has impacted semiconductor demand overall, causing the semiconductor industry to rebalance its supply chain and reduce inventory levels, and memory device manufacturers and foundry/logic customers to reduce their capacity expansion-focused capital expenditure plans.

Service revenues

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.

The increase in service revenues by 10% in the fiscal year ended June 30, 2024 compared to the prior fiscal year is primarily attributable to an increase in our installed base.

Revenues by segment(1)

__________

(1)Segment revenues exclude corporate allocations and the effects of changes in foreign currency exchange rates. For additional details, refer to Note 19 “Segment Reporting and Geographic Information” to our Consolidated Financial Statements.

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The primary factors impacting the performance of our segment revenues for fiscal year 2024 compared to fiscal year 2023 are summarized as follows:

•Revenue from our Semiconductor Process Control segment decreased in fiscal 2024 compared to fiscal 2023 primarily due to the broad, macro-driven slowdown that has impacted semiconductor demand overall, causing the semiconductor industry to rebalance its supply chain and reduce inventory levels, and memory device manufacturers and foundry/logic customers to reduce their capacity expansion-focused capital expenditure plans.

•Revenue from our Specialty Semiconductor Process segment, which comprises etching and deposition solutions for advanced packaging and specialty semiconductor markets, remained relatively flat in fiscal 2024 compared to fiscal 2023.

•Revenue from our PCB and Component Inspection segment decreased in fiscal 2024 as compared to fiscal 2023 primarily due to continued market softening.

Revenues - Top Customers

The following customers each accounted for more than 10% of our total revenues primarily in our Semiconductor Process Control segment for the indicated periods:

Revenues by region

Revenues by region, based on ship-to location, for the periods indicated were as follows:

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.

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The following table summarizes the major factors that contributed to the changes in gross margin:

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 increase in our gross margin from 59.8% to 60.0% during the fiscal year ended June 30, 2024 is primarily attributable to a decrease in other service and manufacturing costs and a more profitable mix of products and services sold, partially offset by a lower revenue volume of products and services sold.

Segment gross profit(1)

_________________

(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 19 “Segment Reporting and Geographic Information” to our Consolidated Financial Statements.

The primary factors impacting the performance of our segment gross profits for fiscal year 2024 compared to fiscal year 2023 are summarized as follows:

•Semiconductor Process Control segment gross profit decreased primarily due to a lower revenue volume of products and services sold.

•Specialty Semiconductor Process segment gross profit remained relatively flat.

•PCB and Component Inspection segment gross profit decreased primarily due to a non-cash expenses to write off excess and obsolete inventory largely related to the discontinued Display product lines.

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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.

R&D expenses during the fiscal year ended June 30, 2024 decreased compared to the fiscal year ended June 30, 2023 primarily due to a decrease in engineering project material costs of $36.5 million, a decrease in consulting costs of $7.1 million and a decrease in restructuring expense of $5.8 million. These decreases were partially offset by an increase in employee-related expenses of $31.1 million.

Our future operating results will depend significantly on our ability to make products and provide services that have a competitive advantage in our marketplace. To do this, we believe that we must continue to make substantial and focused investments in our R&D. We remain committed to product development in new and emerging technologies.

Selling, General and Administrative

SG&A expenses during the fiscal year ended June 30, 2024 decreased compared to the fiscal year ended June 30, 2023 primarily due to $16.8 million of compensation-related expense from the sale of Orbograph Ltd. (“Orbograph”) recorded in the fiscal year ended June 30, 2023, a decrease in allowance for credit losses of $13.9 million, a decrease in depreciation expense of $11.5 million, a decrease in restructuring expense of $6.6 million and a decrease in promotional expenses of $5.9 million. These decreases were partially offset by an increase in facility-related expenses of $25.3 million and an increase in consulting costs of $12.5 million.

Impairment of Goodwill and Purchased Intangible Assets

During the second quarter of fiscal 2024, we noted a significant deterioration of the long-term forecast for our PCB and Display businesses. As a result, we recorded a $219.0 million goodwill and purchased intangible asset impairment charge for the PCB and Display reporting unit in the second quarter of fiscal 2024. In March 2024, we made the decision to exit the Display business but continue to provide services to the installed base for the discontinued product lines. As a result, we recorded a $70.5 million goodwill impairment charge and an immaterial amount of purchased intangible assets were abandoned in the third quarter of fiscal 2024. See Note 7 “Goodwill and Purchased Intangible Assets” to our Consolidated Financial Statements for further details.

Restructuring Charges

Over the last few years, management approved plans to streamline our operations, which included reductions of workforce.

Restructuring charges were $21.6 million for the year ended June 30, 2024, primarily due to severance and related charges for the restructuring of the PCB and Display operating segment, as described further in Note 7 “Goodwill and Purchased Intangible Assets,” as well as writedowns of certain right of use (“ROU”) assets and fixed assets that were abandoned. Restructuring charges were $44.0 million for the year ended June 30, 2023, primarily due to workforce reductions announced and substantially completed in the third and fourth fiscal quarters.

For additional information, refer to Note 20 “Restructuring Charges” to our Consolidated Financial Statements.

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Interest Expense and Other Expense (Income), Net

The increase in interest expense during the fiscal year ended June 30, 2024 compared to the fiscal year ended June 30, 2023 was primarily due to additional interest expense on our $750.0 million Senior Notes issued in February 2024.

Other expense (income), net is comprised primarily of fair value adjustments and realized gains or losses on sales of marketable and non-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.

The change in Other expense (income), net during the fiscal year ended June 30, 2024 compared to the fiscal year ended June 30, 2023 was primarily due to the following: higher interest income of $87.8 million due to higher rates, partially offset by the following: a pre-tax gain of $29.7 million from the sale of our interest in Orbograph to a portfolio company of a private equity firm in fiscal year 2023 and a higher net fair value loss of $17.3 million from an equity security compared to the prior fiscal year.

Loss on Extinguishment of Debt

For the fiscal years ended June 30, 2024 and 2022, we had no loss on extinguishment of debt. For the fiscal year ended June 30, 2023, loss on extinguishment of debt reflected a pre-tax net loss of $13.3 million associated with the redemption of $500.0 million of our 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:

Tax expense was higher as a percentage of income before taxes during the fiscal year ended June 30, 2024 compared to the fiscal year ended June 30, 2023 primarily due to the impact of the following items:

•Tax expense as a percentage of income increased during the fiscal year ended June 30, 2024 due to a $263.1 million goodwill impairment charge, which is non-deductible for income tax purposes; and

•Tax expense decreased by $35.2 million during the fiscal year ended June 30, 2023 primarily relating to a decrease in our unrecognized tax benefits from the settlement of income tax examinations.

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 (“EDSP”), the tax effects of employee stock activity and the effectiveness of our tax planning strategies. We also continue to monitor the adoption of Pillar Two relating to the global minimum tax in each of our tax jurisdictions to evaluate its impact on our effective income tax rate.

For discussions on tax examinations, assessments and certain related proceedings, see Note 14 “Income Taxes” to our Consolidated Financial Statements.

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Liquidity and Capital Resources

Cash, Cash Equivalents and Marketable Securities:

As of June 30, 2024, our cash, cash equivalents and marketable securities totaled $4.50 billion, which represents an increase of $1.26 billion from June 30, 2023. The increase is mainly due to net cash provided by operating activities of $3.31 billion and net proceeds from debt issuance of $735.0 million, partially offset by stock repurchases of $1.74 billion, cash used for payments of dividends and dividend equivalents of $773.0 million and capital expenditures of $277.4 million.

As of June 30, 2024, $1.13 billion of our $4.50 billion of cash, cash equivalents, and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to indefinitely reinvest $122.1 million of the cash, cash equivalents and marketable securities held by our foreign subsidiaries for which we assert that earnings are permanently reinvested. If, however, a portion of these funds were to be repatriated to the U.S., we would be required to accrue and pay state and foreign taxes of approximately 1%-22% of the funds repatriated. The amount of taxes due will depend on the amount and manner of the repatriation, as well as the location from which the funds are repatriated. We have accrued state and foreign tax on the remaining cash of $1.01 billion of the $1.13 billion held by our foreign subsidiaries and branch offices. As such, these funds can be returned to the U.S. without accruing any additional U.S. tax expense.

Cash Dividends:

The total amounts of regular quarterly cash dividends and dividend equivalents paid during the fiscal years ended June 30, 2024, 2023 and 2022 were $773.0 million, $732.6 million and $638.5 million, respectively. The increase in the amount of regular quarterly cash dividends and dividends equivalents paid during the fiscal year ended June 30, 2024 as compared to the fiscal year ended June 30, 2023 reflected the increase in the level of our regular quarterly cash dividend from $1.30 to $1.45 per share that was announced during the three months ended September 30, 2023. The amounts of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights were $11.8 million and $12.2 million as of June 30, 2024 and 2023, respectively. These amounts will be paid upon vesting of the underlying unvested RSUs as described in Note 10 “Equity, Long-term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements.

On August 1, 2024, we announced that our Board of Directors had declared a quarterly cash dividend of $1.45 per share. Refer to Note 21 “Subsequent Events” to our Consolidated Financial Statements for additional information regarding the declaration of our quarterly cash dividend announced subsequent to June 30, 2024.

Stock Repurchases:

The shares repurchased under our stock repurchase program have reduced our basic and diluted weighted-average shares outstanding for the fiscal years ended June 30, 2024 and 2023. Our stock repurchase program is intended, 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. As of June 30, 2024, an aggregate of $2.18 billion was available for repurchase under our stock repurchase program, which reflects an increase in the authorized repurchase amount of $2.00 billion in the first quarter of fiscal 2024.

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Cash Flows Provided by Operating Activities:

We have historically financed our liquidity requirements through cash generated from operations. Net cash provided by operating activities during the fiscal year ended June 30, 2024 decreased by $361.2 million compared to the fiscal year ended June 30, 2023, from $3.67 billion to $3.31 billion, primarily as a result of the following factors:

•A decrease in collections of approximately $769 million mainly driven by lower shipments and customer prepayments;

•An increase in income tax payments of approximately $336 million as some of the tax payments due in the prior fiscal year were delayed to the current fiscal year due to California Flood Tax Relief; and

•An increase in debt interest payment of approximately $53 million; partially offset by

•A decrease in accounts payable payments of approximately $720 million as we adjusted inventory levels to reflect lower business volumes;

•An increase in interest income of approximately $87 million, driven by higher interest rates and invested cash balances.

Cash Flows Used in Investing Activities

Net cash used in investing activities during the fiscal year ended June 30, 2024 was $1.48 billion compared to $482.6 million during the fiscal year ended June 30, 2023. This increase in cash used was mainly due to an increase in net purchases of available-for-sale, equity and trading securities of $1.01 billion and a decrease in proceeds from the sale of a business of $75.4 million, partially offset by a decrease in capital expenditures of $64.2 million and a decrease in cash used in business acquisitions of $23.5 million.

Cash Flows Used in Financing Activities:

Net cash used in financing activities during the fiscal year ended June 30, 2024 was $1.78 billion compared to $2.83 billion during the fiscal year ended June 30, 2023. This decrease was mainly due to a net increase in debt-related proceeds of $1.53 billion, partially offset by an increase in cash used for common stock repurchases of $423.9 million, and an increase in cash paid for dividends and dividend equivalents of $40.5 million.

Senior Notes:

As of June 30, 2024, we had an aggregate principal amount of senior, unsecured notes totaling $6.70 billion with due dates ranging from fiscal 2025 through fiscal 2063. For additional information on these senior notes, see Note 8 “Debt” in the Notes to the Consolidated Financial Statements. As of June 30, 2024, we were in compliance with all of our covenants under the relevant indentures associated with the Senior Notes.

Revolving Credit Facility:

We have in place a Credit Agreement for an unsecured Revolving Credit Facility with a maturity 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 June 30, 2024 and 2023, we had no outstanding borrowings under the Revolving Credit Facility. We were in compliance with all covenants under the Credit Agreement as of June 30, 2024 (the leverage ratio was 1.51 to 1.00 and our then maximum allowed leverage ratio was 3.50 to 1.00). Considering our current liquidity position, short-term financial forecasts and ability to prepay the Revolving Credit Facility, if necessary, we expect to continue to be in compliance with our financial covenants at the end of our fiscal year ending June 30, 2025. For additional information on the Revolving Credit Facility, see Note 8 “Debt” in the Notes to the Consolidated Financial Statements.

Factoring Arrangements

We have agreements with financial institutions to sell certain of our trade receivables and promissory notes from customers without recourse. In addition, we periodically sell certain letters of credit (“LC”), without recourse, received from customers as 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:

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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.

We maintain guarantee arrangements available through various financial institutions for up to $83.9 million, of which $49.9 million had been issued as of June 30, 2024, primarily to fund guarantees to customs authorities for value-added tax and other operating requirements of our subsidiaries in Europe, Israel, and Asia.

Material Cash Requirements

The following is a schedule summarizing our future material cash requirements as of June 30, 2024:

______________

(1)Represents $6.70 billion aggregate principal amount of Senior Notes due from fiscal year 2025 to fiscal year 2063.

(2)The interest payments associated with the Senior Notes payable included in the table above are based on the principal amount multiplied by the applicable interest rate for each series of Senior Notes. As of July 2, 2024, the commitment fee payment under the Revolving Credit Facility for the undrawn balance is payable at 5.5 bps based on the daily undrawn balance, and we assumed no borrowings under the Revolving Credit Facility for the future and utilized the existing commitment fee rate for the projected interest payments included in the table above. Our future interest payments for the Revolving Credit Facility are subject to change due to our actual borrowings under the Revolving Credit Facility, any upgrades or downgrades to our then-effective credit rating as well as the Company’s performance against certain environmental sustainability KPIs related to GHG emissions and renewable electricity usage.

(3)Represents an estimate of significant commitments to purchase inventory from our suppliers as well as an estimate of significant purchase commitments associated with goods, services and other assets in the ordinary course of business. Our obligation under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers. 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 the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.

(4)Represents the estimated income tax payable obligation related to uncertain tax positions as well as related accrued interest. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes.

(5)Operating lease obligations represent the undiscounted lease payments under non-cancelable leases, but exclude non-lease components.

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(6)As part of our employee compensation program, we issue cash-based long-term incentive (“Cash LTI”) awards to many of our employees. Cash LTI awards issued to employees under the Cash Long-Term Incentive Plan (“Cash LTI Plan”) generally vest in three or four equal installments. The amounts in the table above are those committed under the Cash LTI Plan; the expected total payment after estimated forfeitures is approximately $123 million. For additional details, refer to Note 10 “Equity, Long-term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements.

(7)Represents an estimate of expected benefit payments up to fiscal year 2034 that was actuarially determined and excludes the minimum cash required to contribute to our defined benefit pension plans. As of June 30, 2024, our defined benefit pension plans do not have material required minimum cash contribution obligations.

(8)Represents the amount committed under our non-qualified executive deferred compensation plan. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to the uncertainties in the timing around participant’s separation and any potential changes that participants may decide to make to the previous distribution elections.

(9)Represents the transition tax liability associated with our deemed repatriation of accumulated foreign earnings resulting from the enactment of the Tax Act into law on December 22, 2017.

(10)Represents severance payments due upon dismissal of an employee or upon termination of employment in certain other circumstances as required under Israeli law.

(11)Represents amounts committed for accrued dividends payable for quarterly cash dividends for unvested RSUs granted with dividend equivalent rights. For additional details, refer to Note 10 “Equity, Long-term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements.

Working Capital:

Working capital was $5.37 billion as of June 30, 2024, which represents an increase of $741.2 million compared to our working capital as of June 30, 2023. As of June 30, 2024, our principal sources of liquidity consisted of $4.50 billion of cash, cash equivalents and marketable securities and availability under our Revolving Credit Facility. Our liquidity may be affected by many factors, some of which are based on the normal ongoing operations of the business, spending for business acquisitions, and other factors such as uncertainty in the global and regional economies and the semiconductor, semiconductor-related and electronic device industries. Although cash requirements will fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with the liquidity provided by existing cash and cash equivalents balances and our Revolving Credit Facility, will be sufficient to satisfy our liquidity requirements associated with working capital needs, capital expenditures, cash dividends, stock repurchases and other contractual obligations, including repayment of outstanding debt, for at least the next 12 months.

Our credit ratings as of June 30, 2024 are summarized below:

In December 2023, Fitch upgraded our senior unsecured credit rating from A- to A. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the semiconductor and semiconductor capital equipment industries, our financial position, material acquisitions and changes in our business strategy.

Off-Balance Sheet Arrangements:

As of June 30, 2024, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition and results of operations that are material to investors.

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