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Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM	10-Q



(Mark one)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-09992

KLA CORPORATION

(Exact name of registrant as specified in its charter)



Delaware			04-2564110
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

One Technology Drive,	Milpitas,	California	95035
(Address of Principal Executive Offices)			(Zip Code)

(408) 875-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	KLAC	The Nasdaq Stock Market, LLC
		The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 18, 2019, there were 157,794,495 shares of the registrant’s Common Stock, $0.001 par value, outstanding.

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INDEX



		Page Number

PART I	FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019	3
	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2019 and 2018	5
	Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended September 30, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4	Controls and Procedures	52

PART II	OTHER INFORMATION
Item 1	Legal Proceedings	53
Item 1A	Risk Factors	53
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3	Defaults Upon Senior Securities	70
Item 4	Mine Safety Disclosures	70
Item 5	Other Information	70
Item 6	Exhibits	71

SIGNATURES		72

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PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

KLA CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)



(In thousands)	September 30, 2019			June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	988,348		$	1,015,994
Marketable securities	763,174			723,391
Accounts receivable, net	1,066,188			990,113
Inventories	1,254,240			1,262,500
Other current assets	283,799			323,077
Total current assets	4,355,749			4,315,075
Land, property and equipment, net	475,210			448,799
Goodwill	2,263,689			2,211,858
Deferred income taxes	216,629			206,141
Purchased intangible assets, net	1,549,201			1,560,670
Other non-current assets	368,921			265,973
Total assets	$	9,229,399		$	9,008,516
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	221,388		$	202,416
Deferred system revenue	277,515			282,348
Deferred service revenue	201,245			206,669
Current portion of long-term debt	250,000			249,999
Other current liabilities	993,299			827,054
Total current liabilities	1,943,447			1,768,486
Non-current liabilities:
Long-term debt	3,174,130			3,173,383
Deferred tax liabilities	688,170			702,285
Deferred service revenue	101,001			98,772
Other non-current liabilities	643,032			587,897
Total liabilities	6,549,780			6,330,823
Commitments and contingencies (Note 14 and Note 15)
Stockholders’ equity:
Common stock and capital in excess of par value	1,999,845			2,017,312
Retained earnings	733,173			714,825
Accumulated other comprehensive income (loss)	(71,855		)	(73,029		)
Total KLA stockholders’ equity	2,661,163			2,659,108
Non-controlling interest in consolidated subsidiaries	18,456			18,585
Total stockholders’ equity	2,679,619			2,677,693
Total liabilities and stockholders’ equity	$	9,229,399		$	9,008,516

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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KLA CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)



	Three months ended
	September 30,
(In thousands, except per share amounts)	2019			2018
Revenues:
Product	$	1,057,975		$	829,227
Service	355,439			264,033
Total revenues	1,413,414			1,093,260
Costs and expenses:
Costs of revenues	604,241			381,387
Research and development	210,580			153,530
Selling, general and administrative	188,345			114,438
Interest expense	40,350			26,362
Other expense (income), net	(1,618		)	(10,025		)
Income before income taxes	371,516			427,568
Provision for income taxes	25,120			31,624
Net income	346,396			395,944
Less: Net loss attributable to non-controlling interest	(129		)	—
Net income attributable to KLA	$	346,525		$	395,944
Net income per share attributable to KLA
Basic	$	2.18		$	2.55
Diluted	$	2.16		$	2.54
Weighted-average number of shares:
Basic	158,697			155,221
Diluted	160,131			156,083

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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KLA CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)



	Three months ended
	September 30,
(In thousands)	2019			2018
Net income	$	346,396		$	395,944
Other comprehensive income (loss):
Currency translation adjustments:
Change in currency translation adjustments	(2,438		)	(3,082		)
Change in income tax benefit or expense	393			—
Net change related to currency translation adjustments	(2,045		)	(3,082		)
Cash flow hedges:
Change in net unrealized gains or losses	(742		)	13,794
Reclassification adjustments for net gains or losses included in net income	1,527			(1,037		)
Change in income tax benefit or expense	(24		)	(3,295		)
Net change related to cash flow hedges	761			9,462
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans	729			142
Available-for-sale securities:
Change in net unrealized gains or losses	1,183			2,110
Reclassification adjustments for net gains or losses included in net income	4			481
Change in income tax benefit or expense	542			(502		)
Net change related to available-for-sale securities	1,729			2,089
Other comprehensive income (loss)	1,174			8,611
Less: Comprehensive loss attributable to non-controlling interest	(129		)	—
Total comprehensive income attributable to KLA	$	347,699		$	404,555

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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KLA CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)



	Common Stock and Capital in Excess of Par Value					Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total KLA Stockholders’ Equity			Non-Controlling Interest			Total Stockholders’ Equity
(In thousands, except per share amounts)	Shares		Amount			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total KLA Stockholders’ Equity			Non-Controlling Interest			Total Stockholders’ Equity
Balance as of June 30, 2019	159,475		2,017,312			714,825			(73,029		)	2,659,108			18,585			2,677,693
Net income attributable to KLA	—		—			346,525			—			346,525			—			346,525
Other comprehensive income	—		—			—			1,174			1,174			—			1,174
Net loss attributable to non-controlling interest	—		—			—			—			—			(129		)	(129		)
Net issuance under employee stock plans	281		(23,423		)	—			—			(23,423		)	—			(23,423		)
Repurchase of common stock	(1,659	)	(20,988		)	(207,508		)	—			(228,496		)	—			(228,496		)
Cash dividends ($0.75 per share) and dividend equivalents declared	—		—			(120,669		)	—			(120,669		)	—			(120,669		)
Stock-based compensation expense	—		26,944			—			—			26,944			—			26,944
Balance as of September 30, 2019	158,097		$	1,999,845		$	733,173		$	(71,855	)	$	2,661,163		$	18,456		$	2,679,619



	Common Stock and Capital in Excess of Par Value					Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total KLA Stockholders’ Equity			Non-Controlling Interest		Total Stockholders’ Equity
(In thousands, except per share amounts)	Shares		Amount			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total KLA Stockholders’ Equity			Non-Controlling Interest		Total Stockholders’ Equity
Balance as of June 30, 2018	156,048		$	617,999		$	1,056,445		$	(53,933	)	$	1,620,511		$	—	$	1,620,511
Adoption of ASC 606	—		—			(21,215		)	75			(21,140		)	—		(21,140		)
Reclassification of stranded tax effects	—		—			10,920			(10,920		)	—			—		—
Balance as of July 1, 2018	156,048		617,999			1,046,150			(64,778		)	1,599,371			—		1,599,371
Net income	—		—			395,944			—			395,944			—		395,944
Other comprehensive income	—		—			—			8,611			8,611			—		8,611
Net issuance under employee stock plans	332		(26,961		)	—			—			(26,961		)	—		(26,961		)
Repurchase of common stock	(2,781	)	(11,010		)	(296,777		)	—			(307,787		)	—		(307,787		)
Cash dividends ($0.75 per share) and dividend equivalents declared	—		—			(117,947		)	—			(117,947		)	—		(117,947		)
Stock-based compensation expense	—		16,138			—			—			16,138			—		16,138
Balance as of September 30, 2018	153,599		$	596,166		$	1,027,370		$	(56,167	)	$	1,567,369		$	—	$	1,567,369

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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KLA CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Three months ended September 30,
(In thousands)	2019			2018
Cash flows from operating activities:
Net income	$	346,396		$	395,944
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	98,588			16,087
Loss (gains) on unrealized foreign exchange and other	12,794			3,895
Stock-based compensation expense	26,944			16,138
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:
Accounts receivable	(75,214		)	36,079
Inventories	(5,091		)	(55,738		)
Other assets	(8,930		)	(16,853		)
Accounts payable	18,885			(14,765		)
Deferred system revenue	(4,833		)	(79,810		)
Deferred service revenue	(4,337		)	(13,325		)
Other liabilities	91,043			93,753
Net cash provided by operating activities	496,245			381,405
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(78,530		)	(11,787		)
Capital expenditures	(32,566		)	(22,330		)
Proceeds from disposition of non-marketable securities	1,086			—
Purchases of available-for-sale securities	(263,767		)	—
Proceeds from sale of available-for-sale securities	25,449			91,238
Proceeds from maturity of available-for-sale securities	198,751			254,757
Purchases of trading securities	(9,021		)	(4,619		)
Proceeds from sale of trading securities	11,905			7,612
Net cash (used in) provided by investing activities	(146,693		)	314,871
Cash flows from financing activities:
Common stock repurchases	(228,496		)	(299,974		)
Payment of dividends to stockholders	(121,636		)	(122,757		)
Issuance of common stock	114			—
Tax withholding payments related to vested and released restricted stock units	(23,538		)	(26,961		)
Payment of contingent consideration payable	(57		)	—
Net cash used in financing activities	(373,613		)	(449,692		)
Effect of exchange rate changes on cash and cash equivalents	(3,585		)	(1,452		)
Net (decrease) increase in cash and cash equivalents	(27,646		)	245,132
Cash and cash equivalents at beginning of period	1,015,994			1,404,382
Cash and cash equivalents at end of period	$	988,348		$	1,649,514
Supplemental cash flow disclosures:
Income taxes paid	$	19,862		$	24,962
Interest paid	$	26,347		$	537
Non-cash activities:
Business acquisition holdback amounts - investing activities	$	—		$	440
Contingent consideration payable - financing activities	$	9,366		$	3,102
Dividends payable - financing activities	$	1,552		$	4,783
Unsettled common stock repurchase - financing activities	$	8,000		$	7,812
Accrued purchases of land, property and equipment - investing activities	$	16,074		$	9,242

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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KLA CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Basis of Presentation. On July 15, 2019 we changed our corporate name from “KLA-Tencor Corporation” to “KLA Corporation”. For purposes of this report, “KLA,” the “Company,” “we,” “our,” “us,” or similar references mean KLA Corporation, and its majority-owned subsidiaries unless the context requires otherwise. The Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the unaudited interim financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair statement of the financial position, results of operations, comprehensive income, stockholders’ equity and cash flows for the periods indicated. These financial statements and notes, however, should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the SEC on August 16, 2019.

The Condensed Consolidated Financial Statements include the accounts of KLA and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending June 30, 2020.

Certain reclassifications have been made to the prior year’s Condensed Consolidated Financial Statements to conform to the current year presentation. The reclassifications did not have material effects on the prior year’s Condensed Consolidated Balance Sheets, Statements of Operations, Comprehensive Income and Cash Flows.

Acquisition of Orbotech, Ltd. On February 20, 2019 (the “Closing Date” or “Acquisition Date”), we completed the acquisition of Orbotech, Ltd. (“Orbotech”) for total consideration of $3.26 billion. The acquisition of Orbotech is referred to as the “Orbotech Acquisition”. The Orbotech Acquisition was accounted for by applying the acquisition method of accounting for business combinations. The unaudited Condensed Consolidated Financial Statements in this report include the financial results of Orbotech prospectively from the Acquisition Date. For additional details, refer to Note 6 “Business Combinations” of the Condensed Consolidated Financial Statements.

Management Estimates. The preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets and liabilities (and related disclosure of contingent assets and liabilities) at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Comparability. Effective July 1, 2019, we adopted ASC 842, Leases (“ASC 842”). Prior periods were not retrospectively restated, and accordingly, the Consolidated Balance Sheet as of June 30, 2019, and the Condensed Consolidated Statements of Operations for the three months ended September 30, 2018 were prepared using accounting standards that were different than those in effect for the three months ended September 30, 2019.

Significant Accounting Policies. We updated our accounting policies for Leases. There have been no other material changes to our significant accounting policies in Note 1 “Description of Business and Summary of Significant Accounting Policies,” 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.

Leases. Under ASC 842, a contract is or contains a lease when we have the right to control the use of an identified asset for a period of time. We determine if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to, and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for our use. On the commencement date leases are evaluated for classification and assets and liabilities are recognized based on the present value of lease payments over the lease term.

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The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The right-of-use (“ROU”) asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments and any lease incentives. Variable lease payments, consisting primarily of reimbursement of costs incurred by lessors for common area maintenance, real estate taxes, and insurance are not included in the lease liability and are recognized as they are incurred.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate at lease commencement to measure ROU assets and lease liabilities. The incremental borrowing rate used by us is based on baseline rates and adjusted by the credit spreads commensurate with our secured borrowing rate, over a similar term. We used the incremental borrowing rate on June 30, 2019 for all leases that commenced on or prior to that date. Operating lease expense is generally recognized on a straight-line basis over the lease term.

We have elected the practical expedient to account for the lease and non-lease components as a single lease component for the majority of our asset classes. For leases with a term of one year or less, we have elected not to record the ROU asset or liability.

Recent Accounting Pronouncements.

Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 842 which supersedes the lease recognition requirements in ASC 840, Leases, (“ASC 840”). The most prominent of the changes in ASC 842 is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases.

Consistent with ASC 840, leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. In July 2018, the FASB issued an accounting standard update which amended ASC 842 and offered an additional (and optional) transition method by which entities could elect not to recast the comparative periods presented in financial statements in the period of adoption.

KLA adopted the new standard on July 1, 2019, the first day of fiscal 2020, using the optional adoption method whereby we did not adjust comparative period financial statements. Consequently, prior period balances and disclosures have not been restated. KLA elected certain practical expedients, which among other things, allowed us to carry forward prior conclusions about lease identification and classification. The adoption of ASC 842 resulted in the balance sheet recognition of additional lease assets and lease liabilities of $110.7 million and $108.7 million, respectively, related primarily to facilities, vehicles and other equipment. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the Condensed Consolidated Statement of Operations, Cash Flows, or earnings per share. Additionally, the adoption of ASC 842 did not have a material impact on the Condensed Consolidated Financial Statements for arrangements in which KLA is the lessor. For additional information regarding KLA’s leases, see Note 9 “Leases” in the Condensed Consolidated Financial Statements.

Updates Not Yet Effective

In June 2016, the FASB issued an accounting standard update that changes the accounting for recognizing impairments of financial assets. Under the update, credit losses for certain types of financial instruments will be estimated based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, with early adoption permitted starting in the first quarter of fiscal year ending June 30, 2020. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.

In August 2018, the FASB issued an accounting standard update which modifies the existing accounting standards for fair value measurement disclosure. This update eliminates the disclosure of the amount of and reasons for transfers between level 1 and level 2 of the fair value hierarchy, and the policy for timing of transfers between levels. This standard update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.

In August 2018, the FASB issued an accounting standard update to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. Some of the changes include adding a disclosure requirement for significant gains and losses related to changes in the benefit obligation for the period and removing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This standard update is effective for us for the fiscal year ending June 30, 2021, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.

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In August 2018, the FASB issued an accounting standard update to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance clarifies which costs should be capitalized including the cost to acquire the license and the related implementation costs. This standard update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, with an option to be adopted either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.

NOTE 2 – REVENUE

Contract Balances

The following table represents the opening and closing balances of accounts receivables, contract assets and contract liabilities for the indicated periods.



	As of		As of
(In thousands, except for percentage)	September 30, 2019		July 1, 2019		$ Change			% Change
Accounts receivable, net	$	1,066,188	$	990,113	$	76,075		8	%
Contract assets	$	99,068	$	94,015	$	5,053		5	%
Contract liabilities	$	579,761	$	587,789	$	(8,028	)	(1	)%

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 three months ended September 30, 2019 was mainly due to $27.6 million of revenue recognized for which the payment is subject to conditions other than passage of time, partially offset by $22.8 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 three months ended September 30, 2019, we recognized revenue of $266.8 million that was included in contract liabilities as of July 1, 2019. 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 September 30, 2019, we had $2.08 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 18 “Segment Reporting and Geographic Information” of the Condensed Consolidated Financial Statements for information related to revenue by geographic region as well as significant product and service offerings.

NOTE 3 – FAIR VALUE MEASUREMENTS

Our financial assets and liabilities are measured and recorded at fair value, except for our debt and certain equity investments in privately-held companies. Equity investments without a readily available fair value are accounted for using the measurement alternative. The measurement alternative is calculated as cost minus impairment, if any, plus or minus changes resulting from observable price changes.

Our non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.

Fair Value of Financial Instruments. We have evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of our cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate their carrying amounts due to the relatively short maturity of these items.

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Fair Value Hierarchy. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:



Level 1		Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2		Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3		Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

As of September 30, 2019, the types of instruments valued based on quoted market prices in active markets included money market funds, certain U.S. Treasury securities and U.S. Government agency securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

The types of instruments valued based on other observable inputs included corporate debt securities, sovereign securities, municipal securities, certain U.S. Treasury and U.S. Government agency securities. The market inputs used to value these instruments generally consist of market yields, reported trades and broker / dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants generally are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

The fair value of deferred payments and contingent consideration payable, the majority of which were recorded in connection with recent business combinations, were classified as Level 3 and estimated using significant inputs that were not observable in the market. See Note 6 “Business Combinations” of the Condensed Consolidated Financial Statements for additional information.

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Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis, as of the date indicated below, were presented on our Condensed Consolidated Balance Sheets as follows:



As of September 30, 2019 (In thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Little or No Market Activity Inputs (Level 3)
Assets
Cash equivalents:
Corporate debt securities	$	3,903		$	—	$	3,903		$	—
Money market funds and other	399,036			399,036		—			—
U.S. Government agency securities	1,500			—		1,500			—
U.S. Treasury securities	5,995			—		5,995			—
Marketable securities:
Corporate debt securities	416,394			—		416,394			—
Municipal securities	1,906			—		1,906			—
Sovereign securities	6,014			—		6,014			—
U.S. Government agency securities	102,829			102,829		—			—
U.S. Treasury securities	224,519			212,705		11,814			—
Total cash equivalents and marketable securities⁽¹⁾	1,162,096			714,570		447,526			—
Other current assets:
Derivative assets	3,608			—		3,608			—
Other non-current assets:
Executive Deferred Savings Plan	206,235			158,411		47,824			—
Total financial assets⁽¹⁾	$	1,371,939		$	872,981	$	498,958		$	—
Liabilities
Derivative liabilities	$	(2,669	)	$	—	$	(2,669	)	$	—
Deferred payments	(8,800		)	—		—			(8,800		)
Contingent consideration payable	(19,292		)	—		—			(19,292		)
Total financial liabilities	$	(30,761	)	$	—	$	(2,669	)	$	(28,092	)

________________

(1) Excludes cash of $503.5 million held in operating accounts and time deposits of $85.9 million as of September 30, 2019.

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As of June 30, 2019 (In thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Little or No Market Activity Inputs (Level 3)
Assets
Cash equivalents:
Corporate debt securities	$	10,988		$	—	$	10,988		$	—
Money market funds and other	352,708			352,708		—			—
U.S. Government agency securities	27,994			—		27,994			—
U.S. Treasury securities	55,858			—		55,858			—
Marketable securities:
Corporate debt securities	422,089			—		422,089			—
Municipal securities	1,913			—		1,913			—
Sovereign securities	5,994			—		5,994			—
U.S. Government agency securities	131,224			131,224		—			—
U.S. Treasury securities	151,838			151,838		—			—
Total cash equivalents and marketable securities⁽¹⁾	1,160,606			635,770		524,836			—
Other current assets:
Derivative assets	2,557			—		2,557			—
Other non-current assets:
Executive Deferred Savings Plan	207,581			158,021		49,560			—
Total financial assets⁽¹⁾	$	1,370,744		$	793,791	$	576,953		$	—
Liabilities
Derivative liabilities	$	(3,334	)	$	—	$	(3,334	)	$	—
Deferred payments	(8,800		)	—		—			(8,800		)
Contingent consideration payable	(14,005		)	—		—			(14,005		)
Total financial liabilities	$	(26,139	)	$	—	$	(3,334	)	$	(22,805	)

________________

(1) Excludes cash of $479.8 million held in operating accounts and time deposits of $99.0 million as of June 30, 2019.

There were no transfers between Level 1, Level 2 and Level 3 fair value measurements during the three months ended September 30, 2019. See Note 8 “Debt” of the Condensed Consolidated Financial Statements for disclosure of the fair value of our Senior Notes.

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NOTE 4 – FINANCIAL STATEMENT COMPONENTS

Condensed Consolidated Balance Sheets



(In thousands)	As of September 30, 2019			As of June 30, 2019
Accounts receivable, net:
Accounts receivable, gross	$	1,078,051		$	1,002,114
Allowance for doubtful accounts	(11,863		)	(12,001		)
	$	1,066,188		$	990,113
Inventories:
Raw materials	$	449,075		$	444,627
Customer service parts	336,809			328,515
Work-in-process	287,951			285,191
Finished goods	180,405			204,167
	$	1,254,240		$	1,262,500
Other current assets:
Contract assets	$	99,068		$	94,015
Prepaid expenses	80,691			88,387
Deferred costs of revenue	65,197			70,721
Prepaid income and other taxes	15,858			51,889
Other current assets	22,985			18,065
	$	283,799		$	323,077
Land, property and equipment, net:
Land	$	67,876		$	67,