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

6 Months Ended

Dec. 31, 2023

Share-Based Payment Arrangement [Abstract]

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

Equity Incentive Program

On August 3, 2023, our Board of Directors adopted the KLA Corporation 2023 Incentive Award Plan (the “2023 Plan”) which replaced our 2004 Equity Incentive Plan (the “2004 Plan”) for grants of equity awards occurring on or after November 1, 2023. The new plan was approved by our stockholders at the annual meeting of stockholders held on November 1, 2023. As of December 31, 2023, 10.6 million shares remained available for issuance under our 2023 Plan. For details of the 2004 Plan refer to Note 10 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

Equity Incentive Plans - General Information

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


(In thousands)			Available For Grant(1)
Balance as of June 30, 2023			7,761
Plan shares increased			3,250
Restricted stock units granted(2)			(412)

Restricted stock units canceled			36

Balance as of December 31, 2023			10,635

__________________

(1)The number of restricted stock units (“RSU”) reflects the application of the award multiplier of 2.0x to calculate the impact of the award on the shares reserved under the 2023 Plan.

(2)Includes RSUs granted to senior management during the six months ended December 31, 2023 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 RSU”). This line item includes all such performance-based RSUs granted during the six months ended December 31, 2023 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 six months ended December 31, 2023 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. 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 following table shows stock-based compensation expense for the indicated periods:


	Three Months Ended December 31,				Six Months Ended December 31,
(In thousands)	2023		2022		2023		2022
Stock-based compensation expense by:
Costs of revenues	$	8,082	$	6,004	$	15,751	$	11,593
R&D	12,753		8,792		25,781		17,148
SG&A	27,785		23,609		55,860		44,646
Total stock-based compensation expense	$	48,620	$	38,405	$	97,392	$	73,387

Stock-based compensation capitalized as inventory as of December 31, 2023 and June 30, 2023 was $20.9 million and $16.7 million, respectively.

Restricted Stock Units

The following table shows the activity and weighted-average grant date fair values for RSUs during the six months ended December 31, 2023:


	Shares(1) (In thousands)	Weighted-Average Grant Date Fair Value
Outstanding RSUs as of June 30, 2023(2)	1,715	$	312.40
Granted(3)	206	$	499.58



Vested and released	(340)	$	218.31

Forfeited	(18)	$	353.05
Outstanding RSUs as of December 31, 2023(2)	1,563	$	356.98

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

(2)Includes performance-based RSUs.

(3)This line item includes performance-based RSUs granted during the six months ended December 31, 2023 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 (0.1 million shares for the six months ended December 31, 2023).

The RSUs granted by us generally vest as follows: (i) with respect to awards with only service-based vesting criteria, over periods ranging from two to four years; (ii) with respect to awards with both performance-based and service-based vesting criteria, over periods ranging from three to four years; and (iii) 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, aggregate grant date fair value of RSUs 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)	2023		2022		2023		2022
Weighted-average grant date fair value per unit	$	476.53	$	312.42	$	499.58	$	389.71

Grant date fair value of vested RSUs	$	8,529	$	8,029	$	74,053	$	57,935
Tax benefits realized by us in connection with vested and released RSUs	$	2,669	$	2,308	$	18,723	$	12,851

As of December 31, 2023, the unrecognized stock-based compensation expense balance related to RSUs was $379.8 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, 2023 was $908.5 million.

Cash-Based Long-Term Incentive Compensation

We have adopted a cash-based long-term incentive (“Cash LTI”) program (“Cash LTI Plan”) 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 the Cash LTI Plan. During both the six months ended December 31, 2023 and 2022, we approved Cash LTI awards of $0.1 million. 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 December 31, 2023 and 2022, we recognized $18.2 million and $19.4 million, respectively, in compensation expense under the Cash LTI Plan. During the six months ended December 31, 2023 and 2022, we recognized $36.7 million and $38.9 million, respectively, in compensation expense under the Cash LTI Plan. As of December 31, 2023, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $114.7 million. For details, refer to Note 10 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

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, until otherwise amended, is equal to 85% of the lesser of (i) the fair market value of our common stock at the commencement of the applicable six months 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,
	2023		2022		2023		2022
Stock purchase plan:
Expected stock price volatility	32.8	%	41.6	%	32.8	%	41.6	%
Risk-free interest rate	5.1	%	1.1	%	5.1	%	1.1	%
Dividend yield	1.1	%	1.8	%	1.1	%	1.8	%
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 December 31,				Six Months Ended December 31,
	2023		2022		2023		2022
Total cash received from employees for the issuance of shares under the ESPP	$	48,433	$	33,793	$	48,433	$	33,793
Number of shares purchased by employees through the ESPP	118		134		118		134
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP	$	331	$	362	$	1,696	$	924
Weighted-average fair value per share based on Black-Scholes model	$	114.32	$	73.31	$	114.32	$	73.31

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, 2023, a total of 2.5 million shares were reserved and available for issuance under the ESPP.

Quarterly Cash Dividends

On December 1, 2023, we paid a quarterly cash dividend of $1.45 per share to stockholders of record as of the close of business on November 15, 2023. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months ended December 31, 2023 and 2022 was $196.9 million and $184.2 million, respectively. The total amount of regular quarterly cash dividends and dividend equivalents paid during the six months ended December 31, 2023 and 2022 was $378.4 million and $372.2 million, respectively. The amount of accrued dividend equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of December 31, 2023 and June 30, 2023 was $11.8 million and $12.2 million, respectively. These amounts will be paid upon vesting of the underlying RSUs.

Non-Controlling Interest

As of June 30, 2022, we owned approximately 94% of the outstanding equity interest in Orbograph, a non-core business engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers. On August 11, 2022, we sold our interest in Orbograph; for further details, refer to Note 6 “Business Combinations and Dispositions” to our Condensed Consolidated Financial Statements.