the separate historical unaudited condensed consolidated financial statements of KLA as of and for the six months ended December 31, 2018, included in KLA’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (the “SEC”) on January 29, 2019;

the separate historical audited consolidated financial statements of KLA as of June 30, 2018 and 2017 and for the three years ended June 30, 2018, included in KLA’s Annual Report on Form 10-K filed with the SEC on August 6, 2018;

the separate historical audited consolidated financial statements of Orbotech as of December 31, 2018 and 2017 and for the three years ended December 31, 2018, included in Exhibit 99.1 of KLA’s Current Report on Form 8-K filed with the SEC on March 11, 2019; and

the separate historical unaudited condensed consolidated financial information of Orbotech for the six months ended June 30, 2018 and 2017, included in Orbotech’s Report on Form 6-K furnished with the SEC on August 2, 2018 and August 3, 2017, respectively.

ASSETS

Current assets:

Cash and cash equivalents

Marketable securities

Short-term deposits

Accounts receivable, net

Inventories

Other current assets

Total current assets

Land, property and equipment, net

Goodwill

Deferred income taxes

Marketable securities

Funds in respect of employee rights upon retirement

Equity method investees and other receivables

Purchased intangibles, net

Other non-current assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Deferred system revenue

Deferred service revenue

Deferred income

Current portion of long-term debt

Other current liabilities

Total current liabilities

Non-current liabilities:

Long-term debt

Deferred service revenue

Liability for employee rights upon retirement

Deferred income taxes

Other tax liabilities

Deferred and Contingent payment in respect to Frontline Acquisition

Other non-current liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity:

Common stock and capital in excess of par value

Retained earnings

Accumulated other comprehensive income (loss)

Less: Treasury shares at cost

Total stockholders’ equity

Non-controlling interests

Total liabilities and stockholders’ equity

Revenues

Costs and expenses:

Costs of revenues

Research and development, net

Selling, general and administrative

Equity in earnings of frontline

Amortization of intangible assets

Gain on Frontline Step Acquisition

Transaction cost pending merger with KLA

Interest expense

Other expense (income), net

Financial expenses - net

Income before income taxes

Provision for income taxes

Net income (loss)

Net loss (income) attributable to non-controlling interest

Net income (loss)

Net income (loss) per share:

Basic (in dollars per share)

Diluted (in dollars per share)

Cash dividends declared per share (in dollars per share)

Weighted-average number of shares (in thousands):

Basic

Diluted

Revenues

Costs and expenses:

Costs of revenues

Research and development, net

Selling, general and administrative

Equity in earnings of frontline

Amortization of intangible assets

Gain from release of AMST earn-out payment obligation

Transaction cost pending merger with KLA

Interest expense

Other expense (income), net

Financial expenses - net

Income before income taxes

Provision for income taxes

Net income (loss)

Net loss (income) attributable to non-controlling interest

Net income (loss)

Net income (loss) per share:

Basic (in dollars per share)

Diluted (in dollars per share)

Cash dividends declared per share (in dollars per share)

Weighted-average number of shares (in thousands):

Basic

Diluted

Basis of Presentation

Significant Accounting Policies

Calculation of Purchase Consideration and Purchase Price Allocation of the Transactions

Cash for outstanding Orbotech shares(1)

Value of KLA common stock issued for outstanding Orbotech Shares (2)

Cash for Orbotech equity awards (3)

Value of KLA common stock issued to settle Orbotech equity awards (4)

Value of KLA replacement equity awards attributable to precombination services (5)

Total Merger Consideration

Total cash consideration

Total equity consideration

Total Merger Consideration

Represents the total cash paid to Orbotech shareholders for outstanding Orbotech shares as Cash Consideration (“Cash Consideration”). The amount is based on 48,943,593 Orbotech Shares issued and outstanding as of February 20, 2019 and Cash Consideration of $38.86 per Orbotec share.

Represents the fair value of 12,235,885 shares of KLA common stock issued to Orbotech shareholders for outstanding Orbotech shares as Stock Consideration (“Stock Consideration” and, together with the Cash Consideration, “Merger Consideration”). The amount is based on 48,943,593 Orbotech shares issued and outstanding as of February 20, 2019, the Closing Date of the Merger, Stock Consideration of 0.25 of a share of KLA common stock per Orbotech share, and the closing KLA common stock price on February 19, 2019, the date immediately preceding the Closing Date of the Merger, of $108.26.

Includes the Cash Consideration of $9 million for the net settlement of vested and unsettled Orbotech stock options, and $1 million for the total of accelerated vesting of restricted stock unit awards and fractional shares related to common stock as of February 20, 2019.

Represents the fair value of share of KLA common stock issued to settle the intrinsic value remaining after the Cash Consideration settlement representing approximately 56,719 Orbotech stock options vested and unsettled as of February 20, 2019. The amount is based on the Stock Consideration and the closing KLA common stock price on February 19, 2019 of $108.26.

Represents the fair value of KLA’s replacement equity awards for pre-combination services. Pursuant to the terms of the Merger Agreement, Orbotech’s outstanding equity awards that are unvested as of the Closing Date will be replaced by KLA equity awards with the same terms and conditions. A portion of the fair value of KLA’s replacement equity awards issued represents consideration transferred, while a portion represents post-combination compensation expense based on the vesting terms of the equity awards.

Purchase price allocation

Cash and cash equivalents

Short-term deposit

Accounts receivable

Inventory

Other current assets

Property, plant and equipment

Deferred income taxes

Intangible assets

Other non-current assets

Total assets

Accounts payable

Unearned revenue

Current portion of long-term debt

Other current liabilities

Long-term debt

Other non-current liabilities

Total liabilities

Net assets acquired (a)

Purchase consideration

Value of non-controlling interest

Purchase consideration and value of non-controlling interest (b)

Goodwill attributable to Merger (b) - (a)

Intangible Assets

Developed technology

In-process technology

Customer related assets

Backlog

Trade name

Total

Reclassifications

Represents the reclassification of Orbotech’s Short-term deposits into Other current assets to conform to KLA’s balance sheet presentation.

Represents the reclassification of Orbotech’s Funds in respect of employee rights upon retirement and Equity method investees and other receivables into Other non-current assets to conform to KLA’s balance sheet presentation.

Represents the reclassification of Orbotech’s Deferred income into Deferred service revenue to conform to KLA’s balance sheet presentation.

Represents the reclassification of Orbotech’s Liabilities for employee rights upon retirement, Deferred income taxes, Other tax liabilities, and Deferred and contingent payment in respect of the Frontline acquisition into Other non-current liabilities to conform to KLA’s balance sheet presentation.

Represents the reclassification of Orbotech’s Amortization of intangible assets into Cost of revenues and Selling, general and administrative to conform to KLA’s statement of operations presentation.

Represents the reclassification of Orbotech’s Financial expenses – net, Gain from release of AMST earn-out payment obligation, and Gain on Frontline Step Acquisition into Interest expenses and Other expenses (income), net to conform to KLA’s statement of operations presentation. As discussed earlier, the unaudited pro forma condensed combined statements of operations have not been adjusted for the $91 million non-recurring gain resulting from Orbotech’s acquisition of Frontline included in Orbotech’s historical statement of operations for the six months ended December 31, 2018. Instead, the gain has only been reclassified to Other expenses (income) to conform to KLA’s statement of operations presentation.

Represents the reclassification of Orbotech’s Transaction cost pending merger with KLA into Selling, general and administrative to conform to KLA’s statement of operations presentation.

Merger related adjustments

Reflects the use of the combined company cash balance, including (i) the Cash Consideration paid, (ii) KLA and Orbotech transaction costs to close the Merger, (iii) Orbotech debt instruments repaid concurrent with the closing of the Merger, including any fees associated with the repayment, and (iv) payment of cash-based retention awards.

Cash Consideration paid for Orbotech ordinary shares, options, and RSUs

Repayment of Orbotech debt

Merger costs paid and anticipated to be paid (1)

Payment of cash-based retention awards (2)

Net cash outflow

These Merger costs have been excluded from the pro forma statements of operations, as they are not expected to have a continuing impact on the combined results. Refer to Note 5(h) for the corresponding adjustment on retained earnings.

Orbotech expects to pay up to a total of $16 million of cash-based retention awards in connection with the Merger. Of this amount, $15 million has been paid as of the Closing Date, with the remaining $1 million expected to be paid on the one-year anniversary of the Closing Date. These cash-based retention awards have not been reflected in the pro forma statements of operations, as they are not expected to have a continuing impact on the combined results.

Reflects an adjustment of $48 million to increase Inventories and decrease Accounts receivables to conform Orbotech’s revenue and cost recognition procedures with those of KLA. Refer to Note 5(j) for the corresponding adjustment on the pro forma condensed consolidated statements of operations.

Reflects the acquisition method of accounting based on the fair value of the assets and liabilities of Orbotech and the fair value of intangible assets acquired as discussed in Note 3 above.

Inventories - Elimination of historical balance

Inventories - Fair value

Inventory pro forma fair value adjustment (1)

Property, plant and equipment - Elimination of historical balance

Property, plant and equipment - Fair value

Total property, plant, and equipment pro forma adjustment

Intangible assets - Elimination of historical balance

Intangible assets - Fair value

Total intangible assets pro forma adjustment

Deferred service revenue - Elimination of historical balance

Deferred service revenue - Fair value

Total intangible assets pro forma adjustment

Favorable Component of Leases - Fair value

Total other non-current assets pro forma adjustment

After the Merger, the step-up in inventory fair value will increase cost of revenue as the inventory is sold. This increase is not reflected in the pro forma condensed combined statements of operations because it does not have a continuing impact, as the stepped-up inventory is expected to fully turn over in the five months following the Closing Date.

Reflects the elimination of Orbotech historical goodwill of $283 million and the recognition of $1,652 million of goodwill for Merger Consideration in excess of the fair value of the net assets acquired in the Merger.

Reflects the repayment of Orbotech debt instruments at closing of the Merger, including $16 million of current portion and $40 million of non-current portion.

Reflects the $427 million deferred tax impact associated with the incremental differences in book and tax basis created from the purchase price allocation. Deferred taxes associated with fair value adjustments reflect the statutory tax rates in the various jurisdictions where the taxes subject to adjustment are incurred. This adjustment also reflects $191 million of estimated deferred tax liability recognized related to the outside basis differences in Orbotech and its subsidiaries where there is insufficient evidence to show that the outside basis differences will be invested indefinitely. The estimated deferred tax liability is determined by applying the parent entity’s statutory income tax rate to each subsidiary’s retained earnings as of December 31, 2018 net of any applicable estimated foreign tax credits and including any applicable withholding taxes. The determination of the tax consequence is preliminary and is subject to change based on additional information to be obtained with regard to the planned repatriation of foreign earnings.

Reflects a total adjustment of $889 million comprised of (i) the issuance of KLA common stock to shareholders of Orbotech in connection with the Merger and to settle vested Orbotech equity awards, for a total value of $1,331 million based the closing KLA common stock price on February 19, 2019, the date immediately preceding the Closing Date of the Merger, on the Nasdaq Global Select Market, and (ii) $11 million for the fair value of Orbotech equity awards assumed for pre-combination service at closing of the Merger, as described in Note 3 above, (iii) offset by the elimination of Orbotech’s historical ordinary shares of $453 million. The remaining portion of the fair value of KLA replacement equity awards will be included in post-combination share-based compensation expense as the Orbotech employees continue to provide service over the remaining vesting period.

KLA Common Stock issued for outstanding Orbotech Shares

Value of KLA Common Stock issued to settle Orbotech equity awards

Value of KLA replacement equity awards attributable to precombination services

Total issuance of KLA Common Stock

Elimination of Orbotech historical ordinary shares and capital in excess of par value

Total common stock pro forma adjustment

Reflects the adjustment to KLA’s retained earnings to record (i) elimination of Orbotech retained earnings of $760 million, (ii) KLA’s Merger transaction costs of $20 million, (iii) Orbotech’s Merger transaction costs of $33 million (as described in Note 5(a) above), and (iv) KLA’s payment of cash-based retention awards of $15 million (as described in Note 5(a) above). The Merger transaction costs primarily consist of investment banking fees, legal and accounting services. These Merger transaction costs and retention cash awards are not reflected in the unaudited pro forma condensed combined statements of operations because they are not expected to have a continuing impact on the operating results of the combined company.

Reflects the elimination of Orbotech’s historical treasury shares and accumulated other comprehensive loss.

Reflects two separate adjustments to conform Orbotech’s accounting policies to those of KLA. First, reflects an adjustment to record certain overhead expense that had been capitalized in inventory by Orbotech. Historically, Orbotech capitalized in inventory certain overhead expenses, including service overhead and logistic costs. Based on KLA’s accounting policy, such costs are expensed as part of cost of revenues. $0 million (as a result of rounding) and $2 million are expensed for the six months ended December 31, 2018 and the twelve months ended June 30, 2018, respectively. Second, reflects adjustments to conform Orbotech’s revenue and costs of revenues recognition procedures with those of KLA, specifically those related to timing of transfer of control over products to the customer. Revenue decreased by $12 million and $11 million, and costs of revenues decreased by $4 million and $5 million for the six months ended December 31, 2018 and the twelve months ended June 30, 2018, respectively. Refer to Note 5(b) for the corresponding adjustment on the pro forma condensed combined balance sheet.

Reflects the adjustments to record elimination of historical depreciation expense and recognition of new depreciation expense based on the fair value of property, plant and equipment. The depreciation of property, plant and equipment is based on the estimated remaining useful lives of the assets, and is calculated on a straight-line basis.

Elimination of Orbotech historical depreciation expense

Depreciation of acquired property, plant & equipment

Total additional depreciation expense

Reflects the adjustments to record amortization expense related to identifiable intangible assets calculated on a straight-line basis. The amortization of intangible assets is based on the periods over which the economic benefits of the intangible assets are expected to be realized.

Elimination of Orbotech’s historical intangible asset amortization

Amortization of purchased identifiable intangible assets

Total additional intangible asset amortization expense

Reflects the adjustments to share-based compensation expense for equity-based retention awards. In connection with the Merger, KLA has granted certain retention awards to certain employees and senior management employees, including the Chief Executive Officer (“Levy”) and Chief Operating Officer (“Steimberg”) of Orbotech. The equity-based retention awards granted to non-management employees have an aggregate grant date fair value of $12 million, and the awards granted to senior management (including executive officers but which, for this purpose, will not include Levy and Steimberg) have an aggregate grant date fair value of $4 million, all of which vest 50% in the first year and 50% in the second year. Steimberg has been granted performance-based restricted stock units with a target value of $6.9 million, which vest 75% in the first year and 25% in the second year, and time-based restricted stock units with a value of $2.3 million, which vest 50% in the first year and 50% in the second year. The aforementioned awards result in total adjustments to the pro forma statements of operations of $6 million and $15 million for the six months ended December 31, 2018 and the year ended June 30, 2018, respectively. In addition, Levy has been granted performance-based restricted stock units with a target value of $5.7 million and time-based restricted stock units with a value of $1.9 million, both of which vest over a one-year period. Certain senior management employees, including Levy and Steimberg, also are entitled to the acceleration of certain compensation arrangements upon a change in control, which total amount of such acceleration is approximately $6 million and will be recognized by KLA on the Closing Date. The unaudited pro forma condensed combined statements of operations do not reflect the adjustments for (i) the cash-based retention awards (as described in Note 5(a) above), (ii) the awards granted to Levy, or (iii) the acceleration occurring upon a change in control, as they are not expected to have a continuing impact on the operating results of the combined company.

(in millions)

Incremental share-based compensation expense from equity-based retention awards

Total incremental share-based compensation expense

Reflects the net adjustments to share-based compensation expense for the post-combination portion of Orbotech’s equity awards assumed by KLA. The new share-based compensation expense is amortized on a straight-line basis over the remaining vesting periods. The following table reflects the elimination of Orbotech’s historical share-based compensation expense and the fair value of KLA’s replacement equity awards to be recognized over the period for which the post-combination service of Orbotech’s employees is required:

(in millions)

Reversal of Orbotech’s historical share-based compensation expense

Post-combination share-based compensation expense

Total incremental share-based compensation expense

incurred Merger costs, which were recorded in KLA and Orbotech’s selling, general and administrative expenses for the respective historical periods included in the pro forma condensed combined statements of operations for the six months ended December 31, 2018 and the twelve months ended June 30, 2018.

KLA Merger costs

Orbotech Merger costs

Total adjustments to eliminate Merger costs

Reflects the adjustments to eliminate interest expense associated with the repayment of Orbotech’s existing debt.

Reflects an estimate of the tax impacts of the Merger on the statements of operations, primarily related to the fair value adjustments for acquired property and equipment and intangibles and the elimination of non-recurring transactions costs. The taxes associated with these adjustments reflect the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred, adjusted for the expected non-deductibility of the Merger costs. KLA’s effective tax rate following the Merger will be affected by various factors, including tax planning, the repatriation of foreign earnings, and other permanent tax differences and therefore may differ from the estimated amount materially.

Reflects the adjustments to weighted average shares outstanding.

Historical weighted average shares outstanding

Issued KLA common stock as consideration for Orbotech shares

Pro forma weighted average shares (basic)

Historical weighted average shares outstanding

Anti-dilutive securities excluded from the computation of diluted net income per share

Issued KLA Common Stock as consideration for Orbotech shares

Dilutive Impact of Unvested Orbotech Options, RSUs and Equity-Based Retention Awards (1)

Pro forma weighted average shares (diluted)

The dilutive impact of unvested Orbotech options, restricted stock units, and equity-based retention awards for the six months ended December 31, 2018 and twelve months ended June 30, 2018, each on a pro forma basis, was 11,982 options, 517,859 restricted stock units and 301,989 equity-based retention awards.

Financing related adjustments

Reflects the cash proceeds and new debt from the Financing of $900 million. The revolving Credit Facility has a total commitment of $1 billion and matures on November 30, 2023. The debt issuance costs of $3 million have already been presented as a deferred asset in other non-current assets and the remaining balance and reflected in KLA’s historical consolidated balance sheet as of December 31, 2018.

Reflects the interest expense and amortization of debt issuance costs associated with the Financing, totaling approximately $16 million and $33 million for the six months ended December 31, 2018 and the year ended June 30, 2018, respectively. Interest is calculated as 1.125% plus LIBOR and is payable on the last day of every March, June, September and December. For purpose of the pro forma interest calculation, a LIBOR rate of 2.49% as of February 19, 2019 has been utilized. A 0.125% change in interest rate would result in a change in interest expense of $1 million annually.

Reflects the tax effect of the Financing on the statements of operations using historical statutory tax rates by jurisdiction. The taxes associated with these adjustments reflect the statutory tax rates in the various jurisdictions where the taxes subject to adjustment are expected to be incurred, adjusted for the expected non-deductibility of the transaction costs.