KLA Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Equity, Long-Term Incentive Compensation Plans and Non-controlling Interest

Equity, Long-Term Incentive Compensation Plans and Non-controlling Interest

9 Months Ended

Mar. 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

EQUITY, LONG-TERM INCENTIVE COMPENSATION PLANS AND NON-CONTROLLING INTEREST

NOTE 9 – EQUITY, LONG-TERM INCENTIVE COMPENSATION PLANS AND NON-CONTROLLING INTEREST

Equity Incentive Program

As of March 31, 2019, we were able to issue new equity incentive awards, such as restricted stock units (“RSUs”) and stock options, to our employees, consultants and members of our Board of Directors under our 2004 Equity Incentive Plan (the “2004 Plan”) with 11.8 million shares available for issuance.

For details of the 2004 Plan refer to Note 8 “Equity and Long-Term Incentive Compensation Plans,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Assumed Equity Plans

As of the Acquisition Date we assumed outstanding equity incentive awards under the following Orbotech equity incentive plans: (i) Equity Remuneration Plan for Key Employees of Orbotech Ltd. and its Affiliates and Subsidiaries (as Amended and Restated in 2005), (ii) 2010 Equity-Based Incentive Plan, and (iii) 2015 Equity-Based Incentive Plan (each, an “Assumed Equity Plan” and collectively the “Assumed Equity Plans”). The awards under the Assumed Equity Plans, previously issued in the form of stock options and restricted share units (“RSUs”), were generally settled as follows:


a)	Each award of Orbotech’s stock options and RSUs that was outstanding and vested immediately prior to the Acquisition Date (collectively the “Vested Equity Awards”) was canceled and terminated and converted into the right to receive the purchase consideration in respect of such Vested Equity Awards as of the Acquisition Date, and in the case of stock options, less the exercise price.

Each award of Orbotech’s stock options and RSUs that was outstanding and unvested immediately prior to the Acquisition Date was assumed by us (each, an “Assumed Option” and “Assumed RSU”, and collectively the “Assumed Equity Awards”) and converted to stock options and RSUs exercisable for the number of shares of our common stock equal to the product of (i) the number of Orbotech shares underlying such Assumed Equity Awards as of immediately prior to the Acquisition Date multiplied by (ii) the exchange ratio defined in the Acquisition Agreement. The Assumed Equity Awards generally retain all of the rights, terms and conditions of the respective plans under which they were originally granted, including the same service-based vesting schedule, applicable thereto.

As of the Acquisition Date, the estimated fair value of the Assumed Equity Awards was $55.0 million, of which $13.3 million was recognized as goodwill and the balance of $41.7 million will be recognized as stock-based compensation expense over the remainder term of the Assumed Equity Awards. The fair value of the Assumed Equity Awards for services rendered through the Acquisition Date was recognized as a component of the merger consideration, with the remaining fair value related to the post-combination services to be recorded as stock-based compensation over the remaining vesting period.

A total of 14,558 and 518,971 shares of our common stock underly the Assumed Options and RSUs and have an estimated weighted average fair value at the Acquisition Date of $53.27 and $104.49 per share, respectively. As of March 31, 2019, there were 14,558 and 482,317 shares of our common stock underlying the outstanding Assumed Options and RSUs, respectively, under the Assumed Equity Plans. The weighted-average remaining contractual terms, the aggregate intrinsic values, and the weighted average exercise price for the stock options outstanding under the Assumed Equity Plans as of March 31, 2019 were 4.67 years, $1.0 million, and $54.00 per share, respectively. No Assumed Options were exercised during the three months ended March 31, 2019.

Equity Incentive Plans - General Information

The following table summarizes the combined activity under our equity incentive plans:



(In thousands)	Available For Grant^{(1) (5)}
Balance as of June 30, 2018	3,680
Plan shares increased	12,000
Restricted stock units granted ⁽²⁾⁽³⁾	(2,209	)
Restricted stock units granted adjustment ⁽⁴⁾	5
Restricted stock units canceled	20
Plan shares expired (1998 Director Plan)	(1,660	)
Balance as of March 31, 2019	11,836

__________________


(1)	The number of RSUs reflects the application of the award multiplier (1.8x or 2.0x depending on the grant date of the applicable award).

(2)

Includes RSUs granted to senior management during the nine months ended March 31, 2019 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such RSUs that are deemed to have been earned) (“performance-based RSUs”). As of March 31, 2019, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied. Therefore, this line item includes all such performance-based RSUs granted during the nine months ended March 31, 2019, reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (0.7 million shares for the nine months ended March 31, 2019 reflects the application of the multiplier described above).

(3)

Includes RSUs granted to executive management during the three months ended March 31, 2019 with both a market condition and a service condition (“market-based RSUs”). Under the award agreements, the vesting of the market-based RSUs is contingent on achieving total stockholder return (including stock price appreciation and cash dividends) objectives on a per share basis of equal to or greater than 150%, 175% and 200% multiplied by the measurement price of $116.39 during the five-year period ending March 20, 2024. The awards are split into three tranches and, to the extent that total stockholder return targets have been met, one-third of the maximum number of shares available under these awards will vest on each of the third, fourth, and fifth anniversaries of the grant date. This line item includes all such market-based RSUs granted during the three months ended March 31, 2019 reported at the maximum possible number of shares that may ultimately be issuable if all applicable market-based criteria are met at their maximum levels and all applicable service-based criteria are fully satisfied (0.5 million shares for the nine months ended March 31, 2019 reflects the application of the multiplier described above).


(4)	Represents the portion of RSUs granted with performance-based vesting criteria and reported at the actual number of shares issued upon achievement of the performance vesting criteria during the nine months ended March 31, 2019.


(5)	No additional stock options, RSUs or other awards will be granted under the Assumed Equity Plans.

The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For RSUs granted without “dividend equivalent” rights, fair value is calculated using the closing price of our common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on those RSUs. The fair value for RSUs granted with “dividend equivalent” rights is determined using the closing price of our common stock on the grant date. The fair value for market-based RSUs is estimated on the grant date using a Monte Carlo simulation model with the following assumptions: expected volatility of 28.14%, based on a combination of implied volatility from traded options on our common stock and the historical volatility of our common stock; dividend yield of 2.47%, based on our current expectations about our anticipated dividend policy; risk-free interest rate of 2.38%, based on the implied yield available on U.S. Treasury zero-coupon issues with terms equal to the contractual terms of each tranche; and an expected term which takes into consideration the vesting term and the contractual term of the market-based award. The awards are amortized over service periods of 3, 4, and 5 years, which is the longer of the explicit service period or the period in which the market target is expected to be met. The fair value for purchase rights under our Employee Stock Purchase Plan is determined using a Black-Scholes model.

The following table shows stock-based compensation expense for the indicated periods:



	Three months ended March 31,				Nine months ended March 31,
(In thousands)	2019 ⁽¹⁾		2018		2019		2018
Stock-based compensation expense by:
Costs of revenues	$	3,105	$	2,386	$	6,759	$	5,458
Research and development	4,986		3,185		9,988		7,631
Selling, general and administrative	26,102		10,639		49,279		30,891
Total stock-based compensation expense	$	34,193	$	16,210	$	66,026	$	43,980

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(1)	Includes $10.9 million of stock-based compensation expense acceleration for certain equity awards for Orbotech employees.

The following table shows stock-based compensation capitalized as inventory as of the dates indicated below:



(In thousands)	As of March 31, 2019		As of June 30, 2018
Inventory	$	4,943	$	4,580

Restricted Stock Units

The following table shows the activity and weighted-average grant date fair value for RSUs during the nine months ended March 31, 2019:



	Shares⁽¹⁾ (In thousands)		Weighted-Average Grant Date Fair Value
Outstanding restricted stock units as of June 30, 2018⁽²⁾	2,014		$	76.50
Granted⁽²⁾	1,104		$	103.59
Granted adjustments⁽³⁾	(2	)	$	50.88
Assumed upon Orbotech Acquisition⁽⁴⁾	519		$	104.49
Vested and released	(409	)	$	68.73
Withheld for taxes	(285	)	$	68.73
Forfeited	(10	)	$	81.55
Outstanding restricted stock units as of March 31, 2019⁽²⁾	2,931		$	93.46

__________________


(1)	Share numbers reflect actual shares subject to awarded RSUs. Under the terms of the 2004 Plan, the number of shares subject to each award reflected in this number is multiplied by either 1.8x or 2.0x (depending on the grant date of the award) to calculate the impact of the award on the share reserve under the 2004 Plan.

(2)

Includes performance-based and market-based RSUs. As of March 31, 2019, it had not yet been determined the extent to which (if at all) the performance-based or market-based vesting criteria had been satisfied. Therefore, this line item includes all such RSUs reported at the maximum possible number of shares (42 thousand shares for the fiscal year ended June 30, 2017, 0.2 million shares for the fiscal year ended June 30, 2018 and 0.6 million shares for the nine months ended March 31, 2019) that may ultimately be issuable if all applicable performance-based and market-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.


(3)	Represents the portion of RSUs granted with performance-based vesting criteria and reported at the actual number of shares issued upon achievement of the performance vesting criteria during nine months ended March 31, 2019.


(4)	Represents Assumed RSUs under the Assumed Equity Plans. Since the Assumed RSUs do not have “dividend equivalent” rights, the fair value was calculated using the closing price of our common stock on the Acquisition Date, adjusted to exclude the present value of dividends.

The RSUs granted by us generally vest (a) with respect to awards with only service-based vesting criteria, over periods ranging from two to four years and (b) with respect to awards with both performance-based and service-based vesting criteria, in two equal installments on the third and fourth anniversaries of the grant date and (c) with respect to awards with both market-based and service-based vesting criteria in three equal installments on the third, fourth and fifth anniversaries of the grant date, in each case subject to the recipient remaining employed by us as of the applicable vesting date. The RSUs granted to the independent members of the Board of Directors vest annually.

The following table shows the weighted-average grant date fair value per unit for the RSUs granted, vested, and tax benefits realized by us in connection with vested and released RSUs for the indicated periods:



	Three months ended March 31,				Nine months ended March 31,
(In thousands, except for weighted-average grant date fair value)	2019		2018		2019		2018
Weighted-average grant date fair value per unit	$	97.60	$	109.80	$	103.59	$	91.84
Weighted-average fair value per unit assumed upon Orbotech Acquisition	$	104.49	$	—	$	104.49	$	—
Grant date fair value of vested restricted stock units	$	4,740	$	745	$	47,674	$	42,601
Tax benefits realized by us in connection with vested and released restricted stock units	$	170	$	249	$	10,900	$	16,731

As of March 31, 2019, the unrecognized stock-based compensation expense balance related to RSUs was $171.5 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of 1.6 years. The intrinsic value of outstanding RSUs as of March 31, 2019 was $350.0 million.

Cash-Based Long-Term Incentive Compensation

We have adopted a cash-based long-term incentive (“Cash LTI Plan”) program for many of our employees as part of our employee compensation program. Executives and non-employee members of the board of directors are not participating in this program. During the nine months ended March 31, 2019 and 2018, we approved Cash LTI awards of $7.9 million and $5.9 million, respectively under our Cash LTI Plan. During the three months ended March 31, 2019 and 2018, we recognized $12.2 million and 11.6 million, respectively, in compensation expense under the Cash LTI Plan. During the nine months ended March 31, 2019 and 2018, we recognized $39.4 million and 37.9 million, respectively, in compensation expense under the Cash LTI Plan. As of March 31, 2019, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $93.7 million. For details, refer to Note 8 “Equity and Long-Term Incentive Compensation Plans,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 15% of their eligible earnings toward the semi-annual purchase of our common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).

The offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of our common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of our common stock on the purchase date. We estimate the fair value of purchase rights under the ESPP using a Black-Scholes model.

The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes model and the straight-line attribution approach with the following weighted-average assumptions:



	Three months ended March 31,				Nine months ended March 31,
	2019		2018		2019		2018
Stock purchase plan:
Expected stock price volatility	36.3	%	31.5	%	33.2	%	28.7	%
Risk-free interest rate	2.4	%	1.3	%	2.1	%	1.1	%
Dividend yield	3.3	%	2.4	%	3.1	%	2.5	%
Expected life (in years)	0.5		0.5		0.5		0.5

The following table shows the tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods:



(In thousands, except for weighted-average fair value per share)	Three months ended March 31,				Nine months ended March 31,
	2019		2018		2019		2018
Total cash received from employees for the issuance of shares under the ESPP	$	—	$	—	$	20,556	$	20,579
Number of shares purchased by employees through the ESPP	—		—		270		264
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP	$	444	$	787	$	1,047	$	1,681
Weighted-average fair value per share based on Black-Scholes model	$	21.25	$	23.61	$	21.67	$	21.89

The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which we estimate will be required to be issued under the ESPP during the forthcoming fiscal year. As of March 31, 2019, a total of 2.4 million shares were reserved and available for issuance under the ESPP.

Quarterly cash dividends

On January 31, 2019, our Board of Directors declared a regular quarterly cash dividend of $0.75 per share on the outstanding shares of our common stock, which was paid on March 1, 2019 to the stockholders of record as of the close of business on February 15, 2019. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months ended March 31, 2019 and 2018 was $113.6 million and $92.1 million, respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid by us during the nine months ended March 31, 2019 and 2018 was $348.0 million and $278.8 million, respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of March 31, 2019 and June 30, 2018 was $6.5 million and $6.7 million, respectively. These amounts will be paid upon vesting of the underlying RSUs.

Special cash dividend

On November 19, 2014, our Board of Directors declared a special cash dividend of $16.50 per share on our outstanding common stock. The declaration and payment of the special cash dividend was part of our leveraged recapitalization transaction under which the special cash dividend was financed through a combination of existing cash and proceeds from the debt financing disclosed in Note 8 “Debt” that was completed during the three months ended December 31, 2014. The total amount of the special cash dividend accrued by us at the declaration date was substantially paid out during the three months ended December 31, 2014, except for the aggregate special cash dividend of $43.0 million that was accrued for the unvested RSUs and to be paid when such underlying unvested RSUs vest. During the second quarter of fiscal 2019, all of the special cash dividends accrued with respect to outstanding RSUs were vested and paid in full. During the nine months ended March 31, 2019 and 2018, the total special cash dividends paid with respect to vested RSUs were $2.9 million and $6.3 million, respectively. For details of the special cash dividend, refer to Note 8 “Equity and Long-Term Incentive Compensation Plans,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Non-controlling Interest

We have consolidated the results of Orbotech LT Solar, LLC (“OLTS”) and Orbograph Ltd. (“Orbograph”), in which we own approximately 84% and 94% of the outstanding equity interest, respectively. OLTS is engaged in the research, development and marketing of products for the deposition of thin film coating of various materials on crystalline silicon photovoltaic wafers for solar energy panels through plasma-enhanced chemical vapor deposition (“PECVD”). Orbograph is engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers.

Additionally, we have consolidated the results of PixCell, an Israeli company developing diagnostic equipment for point-of-care hematology applications of which we own approximately 52% of the outstanding equity interest and are entitled to appoint the majority of this company’s directors.