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, 2020

Share-based Payment Arrangement [Abstract]

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

Equity Incentive Program

As of March 31, 2020, we had 10.8 million shares available for issuance under our 2004 Equity Incentive Plan (the “2004 Plan”).

For details of the 2004 Plan refer to Note 9 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

Assumed Equity Plans

As of the Orbotech 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”).

As of March 31, 2020, there were 234,734 shares of our common stock underlying the outstanding Assumed RSUs under the Assumed Equity Plans. During the nine months ended March 31, 2020, there were 14,558 Assumed Options exercised with a weighted-average exercise price of $54.00 per share.

For details on the Assumed Equity Plans refer to Note 9 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

Equity Incentive Plans - General Information

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



(In thousands)	Available For Grant^{(1) (2)}
Balance as of June 30, 2019	11,613
Restricted stock units granted⁽³⁾	(948	)
Restricted stock units granted adjustment	103
Restricted stock units canceled	55
Balance as of March 31, 2020	10,823

__________________


(1)	The number of RSUs reflects the application of the award multiplier of 2.0x to calculate the impact of the award on the shares reserved under the 2004 Plan.


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

(3)

Includes RSUs granted to senior management during the nine months ended March 31, 2020 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”). This line item includes all such performance-based RSUs granted during the nine months ended March 31, 2020 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 nine months ended March 31, 2020 reflects the application of the multiplier described above).

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 March 31,				Nine Months Ended March 31,
(In thousands)	2020		2019		2020		2019
Stock-based compensation expense by:
Costs of revenues	$	4,162	$	3,105	$	10,389	$	6,759
Research and development	6,577		4,986		16,936		9,988
Selling, general and administrative	20,531		26,102		57,678		49,279
Total stock-based compensation expense	$	31,270	$	34,193	$	85,003	$	66,026

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



(In thousands)	As of March 31, 2020		As of June 30, 2019
Inventory	$	5,089	$	4,819

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, 2020:



	Shares⁽¹⁾ (In thousands)		Weighted-Average Grant Date Fair Value
Outstanding restricted stock units as of June 30, 2019⁽²⁾	2,902		$	91.84
Granted⁽³⁾	474		$	142.93
Granted adjustments	(52	)	$	111.41
Vested and released	(650	)	$	85.45
Withheld for taxes	(276	)	$	85.45
Forfeited	(49	)	$	104.62
Outstanding restricted stock units as of March 31, 2020⁽²⁾	2,349		$	103.98

__________________


(1)	Share numbers reflect actual shares subject to awarded RSUs.


(2)	Includes performance-based and market-based RSUs.


(3)	This line item includes performance-based RSUs granted during the nine months ended March 31, 2020 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 (0.2 million shares for the nine months ended March 31, 2020).

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)	2020		2019		2020		2019
Weighted-average grant date fair value per unit	$	168.92	$	97.60	$	142.93	$	103.59
Weighted-average fair value per unit assumed upon Orbotech Acquisition	$	—	$	104.49	$	—	$	104.49
Grant date fair value of vested restricted stock units	$	22,459	$	4,740	$	79,194	$	47,674
Tax benefits realized by us in connection with vested and released restricted stock units	$	4,942	$	170	$	18,596	$	10,900

As of March 31, 2020, the unrecognized stock-based compensation expense balance related to RSUs was $163.1 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, 2020 was $337.7 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 do not participate in this program. During the nine months ended March 31, 2020 and 2019, we approved Cash LTI awards of $6.0 million and $7.9 million, respectively under our Cash LTI Plan. Cash LTI awards issued to employees under the Cash LTI Plan will vest in three or four equal installments, with one-third or one-fourth of the aggregate amount of the Cash LTI award vesting on each anniversary of the grant date over a three or four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by us as of the applicable award vesting date. During the three months ended March 31, 2020 and 2019, we recognized $14.7 million and $12.2 million, respectively, in compensation expense under the Cash LTI Plan. During the nine months ended March 31, 2020 and 2019, we recognized $45.4 million and $39.4 million, respectively, in compensation expense under the Cash LTI Plan. As of March 31, 2020, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $105.8 million. For details, refer to Note 9 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

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,
	2020		2019		2020		2019
Stock purchase plan:
Expected stock price volatility	37.0	%	36.3	%	34.3	%	33.2	%
Risk-free interest rate	1.8	%	2.4	%	2.1	%	2.1	%
Dividend yield	1.9	%	3.3	%	2.2	%	3.1	%
Expected life (in years)	0.5		0.5		0.5		0.5

The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, 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,
	2020		2019		2020		2019
Total cash received from employees for the issuance of shares under the ESPP	$	—	$	—	$	24,500	$	20,556
Number of shares purchased by employees through the ESPP	—		—		237		270
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP	$	945	$	444	$	2,798	$	1,047
Weighted-average fair value per share based on Black-Scholes model	$	43.36	$	21.25	$	36.70	$	21.67

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, 2020, a total of 2.4 million shares were reserved and available for issuance under the ESPP.

Quarterly cash dividends

On February 11, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.85 per share on the outstanding shares of our common stock, which was paid on March 5, 2020 to the stockholders of record as of the close of business on February 22, 2020. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months ended March 31, 2020 and 2019 was $133.3 million and $113.6 million, respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid during the nine months ended March 31, 2020 and 2019 was $389.7 million and $348.0 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, 2020 and June 30, 2019 was $8.1 million and $7.3 million, respectively. These amounts will be paid upon vesting of the underlying RSUs.

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.