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

Quarterly report pursuant to Section 13 or 15(d)

Equity and Long-Term Incentive Compensation Plans

Equity and Long-Term Incentive Compensation Plans

6 Months Ended

Dec. 31, 2018

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

EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS

NOTE 9 – EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS

Equity Incentive Program

As of December 31, 2018, we were able to issue 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 13.4 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.

Equity Incentive Plans - General Information

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



(In thousands)	Available For Grant⁽¹⁾
Balance as of June 30, 2018	3,680
Plan shares increased	12,000
Restricted stock units granted ⁽²⁾	(675	)
Restricted stock units granted adjustment ⁽³⁾	5
Restricted stock units canceled	20
Balance as of December 31, 2018	15,030

__________________


(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 six months ended December 31, 2018 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such RSUs that are deemed to have been earned). As of December 31, 2018, 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 six months ended December 31, 2018, 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 (0.4 million shares for the six months ended December 31, 2018 reflects the application of the multiplier described above).


(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 the six months ended December 31, 2018.

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 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 December 31,				Six months ended December 31,
(In thousands)	2018		2017		2018		2017
Stock-based compensation expense by:
Costs of revenues	$	1,823	$	1,656	$	3,654	$	3,072
Research and development	2,483		2,275		5,002		4,446
Selling, general and administrative	11,389		9,808		23,177		20,252
Total stock-based compensation expense	$	15,695	$	13,739	$	31,833	$	27,770

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



(In thousands)	As of December 31, 2018		As of June 30, 2018
Inventory	$	4,859	$	4,580

Restricted Stock Units

The following table shows the activity and weighted-average grant date fair value for RSUs during the six months ended December 31, 2018:



	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⁾	338		$	117.21
Granted adjustments⁽³⁾	(2	)	$	50.88
Vested and released	(383	)	$	66.41
Withheld for taxes	(264	)	$	66.41
Forfeited	(10	)	$	81.55
Outstanding restricted stock units as of December 31, 2018⁽²⁾	1,693		$	88.48

__________________


(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 RSUs granted to senior management with performance-based vesting criteria (in addition to service-based vesting criteria for any of such RSUs that are deemed to have been earned). As of December 31, 2018, 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, 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 0.2 million shares for the six months ended December 31, 2018) that may ultimately be issuable if all applicable performance-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 six months ended December 31, 2018.

The RSUs granted by us generally vest (a) with respect to awards with only service-based vesting criteria, in three or four equal installments 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, 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 December 31,					Six months ended December 31,
(In thousands, except for weighted-average grant date fair value)	2018		2017			2018		2017
Weighted-average grant date fair value per unit	$	96.51	$	105.15		$	117.21	$	91.39
Grant date fair value of vested restricted stock units	$	6,862	$	5,322		$	42,934	$	41,856
Tax benefits realized by us in connection with vested and released restricted stock units	$	3,812	$	(1,930	)	$	10,730	$	16,482

As of December 31, 2018, the unrecognized stock-based compensation expense balance related to RSUs was $116.4 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 1.5 years. The intrinsic value of outstanding RSUs as of December 31, 2018 was $151.5 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 Board of Directors’ members are not participating in this program. During the six months ended December 31, 2018 and 2017, we approved Cash LTI awards of $5.6 million and $4.0 million, respectively under our Cash LTI Plan. During the three months ended December 31, 2018 and 2017, we recognized $12.0 million and $11.5 million, respectively, in compensation expense under the Cash LTI Plan. During the six months ended December 31, 2018 and 2017, we recognized $27.2 million and $26.3 million, respectively, in compensation expense under the Cash LTI Plan. As of December 31, 2018, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $104.9 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 December 31,				Six months ended December 31,
	2018		2017		2018		2017
Stock purchase plan:
Expected stock price volatility	30.0	%	25.9	%	30.0	%	25.9	%
Risk-free interest rate	1.9	%	0.9	%	1.9	%	0.9	%
Dividend yield	2.9	%	2.6	%	2.9	%	2.6	%
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 December 31,				Six months ended December 31,
	2018		2017		2018		2017
Total cash received from employees for the issuance of shares under the ESPP	$	20,556	$	20,579	$	20,556	$	20,579
Number of shares purchased by employees through the ESPP	270		264		270		264
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP	$	92	$	47	$	603	$	894
Weighted-average fair value per share based on Black-Scholes model	$	22.73	$	19.04	$	22.73	$	19.04

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 December 31, 2018, a total of 2.4 million shares were reserved and available for issuance under the ESPP.

Quarterly cash dividends

On November 7, 2018, 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 December 4, 2018 to the stockholders of record as of the close of business on November 17, 2018. The total amount of regular quarterly cash dividends and dividend equivalents paid by us during the three months ended December 31, 2018 and 2017 was $114.5 million and $92.6 million, respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid by us during the six months ended December 31, 2018 and 2017 was $234.4 million and $186.7 million, respectively. The amount of accrued dividends payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of December 31, 2018 and June 30, 2018 was $5.4 million and $6.7 million, respectively. These accrued cash dividends 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 three months ended December 31, 2018 and 2017, the total special cash dividends paid with respect to vested RSUs were immaterial. During the six months ended December 31, 2018 and 2017, the total special cash dividends paid with respect to vested RSUs were $2.9 million and $6.2 million, respectively. As of December 31, 2018, all of the special cash dividends accrued with respect to outstanding RSUs were vested and paid in full. 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.