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

Quarterly report pursuant to Section 13 or 15(d)

Revenue

Revenue

6 Months Ended

Dec. 31, 2018

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 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 will 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 sales 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 cost 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.

The following table summarizes the effects of adopting ASC 606 on our condensed consolidated balance sheet as of December 31, 2018:



December 31, 2018 (In thousands)	As reported under ASC 606			Prior to adoption of ASC 606			Effect of changes
ASSETS
Accounts receivable, net	$	658,080		$	678,863		$	(20,783	)
Other current assets	127,350			71,214			56,136
Deferred income taxes	225,124			206,674			18,450
LIABILITIES
Deferred system revenue	$	196,242		$	—		$	196,242
Deferred service revenue	168,936			66,759			102,177
Deferred system profit	—			319,696			(319,696		)
Other current liabilities	714,873			733,220			(18,347		)
Deferred service revenue, non-current	90,466			83,338			7,128
STOCKHOLDERS’ EQUITY
Retained earnings	$	1,048,804		$	962,561		$	86,243
Accumulated other comprehensive income (loss)	(70,447		)	(70,502		)	55

The following table summarizes the effects of adopting ASC 606 on our condensed consolidated statements of operations for the three months ended December 31, 2018:



Three months ended December 31, 2018 (In thousands, except per share amounts)	As reported under ASC 606			Prior to adoption of ASC 606			Effect of changes
Revenues:
Product	$	852,201		$	875,415		$	(23,214	)
Service	267,697			230,683			37,014
Costs and expenses:
Costs of revenues	408,260			392,916			15,344
Other expense (income), net	(9,228		)	(9,187		)	(41		)
Provision for income taxes	46,863			48,401			(1,538		)
Net income	$	369,100		$	369,065		$	35
Net income per share
Basic	$	2.43		$	2.43		$	—
Diluted	$	2.42		$	2.42		$	—

The following table summarizes the effects of adopting ASC 606 on our condensed consolidated statements of operations for the six months ended December 31, 2018:



Six months ended December 31, 2018 (In thousands, except per share amounts)	As reported under ASC 606			Prior to adoption of ASC 606			Effect of changes
Revenues:
Product	$	1,681,428		$	1,576,088		$	105,340
Service	531,730			460,643			71,087
Costs and expenses:
Costs of revenues	789,647			734,790			54,857
Other expense (income), net	(19,253		)	(19,213		)	(40		)
Provision for income taxes	78,487			64,335			14,152
Net income	$	765,044		$	657,586		$	107,458
Net income per share:
Basic	$	4.98		$	4.29		$	0.69
Diluted	$	4.96		$	4.27		$	0.69

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.

Contract Balances



	As of		As of
(In thousands, except for percentage)	December 31, 2018		July 1, 2018		$ Change			% Change
Accounts receivable, net	$	658,080	$	635,878	$	22,202		3.49	%
Contract assets	$	23,316	$	14,727	$	8,589		58.32	%
Contract liabilities	$	455,644	$	556,691	$	(101,047	)	(18.15	)%

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 six months ended December 31, 2018 was mainly due to $23.2 million of revenue recognized in excess of the amounts billed to the customers, partially offset by $14.6 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 condensed consolidated balance sheet.

During the six months ended December 31, 2018, we recognized revenue of $371.4 million that was included in contract liabilities as of July 1, 2018. This was partially offset by 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 condensed consolidated balance sheets.

Remaining Performance Obligations

As of December 31, 2018, we had $1.66 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.