KLA Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Revenue

Revenue

12 Months Ended

Jun. 30, 2019

Revenue from Contract with Customer [Abstract]

REVENUE

NOTE 2 — REVENUE

New Revenue Accounting Standard

Method and Impact of Adoption

At the beginning of the fiscal year 2019, we adopted ASC 606 using the modified retrospective transition approach for all contracts completed and not completed as of the date of adoption. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with ASC 605. A cumulative effect of applying ASC 606 was recorded to the beginning retained earnings to reflect the impact of all existing arrangements under ASC 606.

The cumulative effect of applying ASC 606 represents a net decrease to retained earnings of $21.0 million as of July 1, 2018, which primarily related to the following:

•

A decrease of approximately $97.0 million in retained earnings related to the deferral of estimated fair value of the warranty services provided with our products for which revenue will be recognized in future periods under ASC 606. Further, upon adoption of ASC 606, we recognize the standard warranty for a majority of products as a separate performance obligation, while in prior periods, we accounted for the estimated warranty cost as a charge to costs of revenues when revenue was recognized. This was partially offset by an increase in retained earnings of approximately $37.0 million related to reversal of standard warranty expense, which was charged to costs of revenues in prior periods.


•	An increase in retained earnings of approximately $26.0 million due to a change in the timing of transfer of control over products to the customers.

Under ASC 606, revenue is recognized earlier than it would have been recognized under legacy guidance primarily due to our assessment of timing of transfer of control. Additionally, we render standard warranty coverage on our products for 12 months, providing labor and parts necessary to repair and maintain the products during the warranty period. Prior to adoption of ASC 606, we accounted for the estimated warranty cost as a charge to costs of sales when revenue was recognized. Upon adoption of ASC 606, the standard warranty for the majority of products is recognized as a separate performance obligation in service revenue.

Consistent with our policy, revenue on the majority of Orbotech’s contracts is recognized upon delivery because this represents the point in time at which control is transferred to the customers. Revenues derived from performance obligations such as warranty and service contracts are recognized over the period of the service.

The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our Consolidated Balance Sheets as follows:



As of June 30, 2019 (In thousands)	As Reported Under ASC 606			Prior to Adoption of ASC 606			Effect of Changes
ASSETS
Accounts receivable, net	$	990,113		$	1,097,098		$	(106,985	)
Other current assets	323,077			158,342			164,735
Deferred income taxes	206,141			195,537			10,604
LIABILITIES
Deferred system revenue	$	282,348		$	—		$	282,348
Deferred service revenue	206,669			114,874			91,795
Deferred system profit	—			382,085			(382,085		)
Other current liabilities	827,054			853,253			(26,199		)
Deferred service revenue, non-current	98,772			88,289			10,483
STOCKHOLDERS’ EQUITY
Retained earnings	$	714,825		$	622,989		$	91,836
Accumulated other comprehensive income (loss)	(73,029		)	(73,205		)	176

The following table, including the results from the acquisition of Orbotech, summarizes the effects of adopting ASC 606 on our Consolidated Statements of Operations as follows:



Year ended June 30, 2019 (In thousands, except per share amounts)	As Reported Under ASC 606			Prior to Adoption of ASC 606			Effect of Changes
Revenues:
Product	$	3,392,243		$	3,356,837		$	35,406
Service	1,176,661			1,029,796			146,865
Costs and expenses:
Costs of revenues	1,869,377			1,819,060			50,317
Other expense (income), net	(31,462		)	(30,989		)	(473		)
Provision for income taxes	121,214			101,838			19,376
Net income attributable to KLA	1,175,617			1,062,566			113,051
Net income per share attributable to KLA
Basic	$	7.53		$	6.81		$	0.72
Diluted	$	7.49		$	6.77		$	0.72

Contract Balances



	As of		As of
(In thousands, except for percentage)	June 30, 2019		July 1, 2018		$ Change		% Change
Accounts receivable, net	$	990,113	$	635,878	$	354,235	56	%
Contract assets	$	94,015	$	14,727	$	79,288	538	%
Contract liabilities	$	587,789	$	556,691	$	31,098	6	%

Our payment terms and conditions vary by contract type, although terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of shipment, with the remainder payable within 30 days of acceptance.

The change in contract assets during the fiscal year ended June 30, 2019 was mainly due to an increase in contract assets of $76.3 million from the Orbotech Acquisition in the third quarter of fiscal year 2019 and $16.8 million of revenue recognized in excess of the amounts billed to the customers, partially offset by $14.7 million of contract assets reclassified to net accounts receivable as our right to consideration for these contract assets became unconditional. Contract assets are included in other current assets on our Consolidated Balance Sheets.

During the fiscal year ended June 30, 2019, we recognized revenue of $461.3 million that was included in contract liabilities as of July 1, 2018. This was partially offset by an increase in contract liabilities of $43.2 million from the Orbotech Acquisition in the third quarter of fiscal year 2019, and the value of products and services billed to customers for which control of the products and service has not transferred to the customers. Contract liabilities are included in current and non-current liabilities on our Consolidated Balance Sheets.

Remaining Performance Obligations

As of June 30, 2019, we had $1.84 billion of remaining performance obligations, which represents our obligation to deliver products and services, and consists primarily of sales orders where written customer requests have been received. We expect to recognize approximately 5% to 15% of these performance obligations as revenue beyond the next twelve months, subject to risk of delays, pushouts, and cancellation by the customer, usually with limited or no penalties.

Refer to Note 17 “Segment Reporting and Geographic Information” for information related to revenue by geographic region as well as significant product and service offerings.

Practical expedients

We apply the following practical expedients:


•	We account for shipping and handling costs as activities to fulfill the promise to transfer the goods, instead of a promised service to our customer.


•	We have elected to not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less.


•	We have elected to expense costs to obtain a contract as incurred because the expected amortization period is one year or less.


•	We have elected to reflect the aggregate effect of all modifications that occurred before July 1, 2018 in determining the transaction price, identifying the satisfied and unsatisfied performance obligations, and allocating the transaction price to the performance obligations.