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Business Combinations | 9 Months Ended
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Mar. 31, 2020
Business Combinations [Abstract] |
BUSINESS COMBINATIONS | BUSINESS COMBINATIONS Fiscal 2020 Acquisition On August 22, 2019, we acquired the outstanding shares of a privately-held company, primarily to expand our products and services offerings, for a total purchase consideration of $93.9 million inclusive of a post-closing working capital adjustment payment made in the quarter ended March 31, 2020 as well as the fair value of the promise to pay an additional consideration up to $60.0 million contingent on the achievement of certain milestones. As of March 31, 2020, the estimated fair value of the additional consideration was $9.7 million, which was classified as a non-current liability on the Condensed Consolidated Balance Sheets. We have included the financial results of the acquisition completed during the first quarter of the fiscal year 2020 in our Condensed Consolidated Financial Statements from the date of acquisition. These results were not material to our Condensed Consolidated Financial Statements. The purchase price of the fiscal 2020 acquisition was allocated on a preliminary basis as follows:
(In thousands) | Fair Value
Net tangible assets (including cash and cash equivalents of $6.6 million) | $ | 7,196 |
Deferred tax liabilities | (15,265 | )
Intangible assets | 47,931 |
Goodwill | 54,071 |
Total | $ | 93,933 |
The purchase price allocation is preliminary and as additional information becomes available, we may further revise the preliminary purchase price allocation during the remainder of the measurement period, which will not exceed 12 months from the closing of the acquisition. The $54.0 million of goodwill was assigned to the Wafer Inspection and Patterning reporting units. No ne of the goodwill recognized is deductible for income tax purposes. Fiscal 2019 Acquisitions Orbotech Acquisition On February 20, 2019, we completed the acquisition of Orbotech for total purchase consideration of approximately $3.26 billion. Orbotech is a global supplier of yield-enhancing and process-enabling solutions for the manufactures of electronics products. KLA acquired Orbotech to extend and enhance its portfolio of products to address market opportunities in the printed circuit board, flat panel display, advanced packaging and semiconductor manufacturing areas. Purchase Price Allocation The total purchase consideration was allocated as follows (in thousands):
Purchase Price |
Cash for outstanding Orbotech shares(1) | $ | 1,901,948 |
Fair value of KLA common stock issued for outstanding Orbotech shares(2) | 1,324,657 |
Cash for Orbotech equity awards(3) | 9,543 |
Fair value of KLA common stock issued to settle Orbotech equity awards(4) | 6,129 |
Stock options and RSUs assumed(5) | 13,281 |
Total purchase consideration | 3,255,558 |
Less: cash acquired | (215,640 | )
Total purchase consideration, net of cash acquired | $ | 3,039,918 |
Allocation |
Accounts receivable, net | $ | 197,873 |
Inventories | 330,325 |
Contract assets | 63,181 |
Other current assets | 70,622 |
Property, plant and equipment, net | 97,664 |
Goodwill | 1,845,728 |
Intangible assets | 1,553,570 |
Other non-current assets | 73,179 |
Accounts payable | (53,015 | )
Accrued liabilities | (173,507 | )
Other current liabilities(6) | (73,057 | )
Deferred tax liabilities(7) | (786,671 | )
Other non-current liabilities(6) | (86,789 | )
Non-controlling interest | (19,185 | )
| $ | 3,039,918 |
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(1) | Represents the total cash paid to settle 48.9 million outstanding Orbotech shares as of February 20, 2019 at $38.86 per Orbotech share.
(2) | Represents the fair value of 12.2 million shares of our common stock issued to settle 48.9 million outstanding Orbotech shares. KLA issued 0.25 shares for each Orbotech share. The fair value of KLA’s common stock was $108.26 per share on the Acquisition Date.
(3) | Represents primarily cash consideration for the settlement of the vested stock options and restricted stock units for which services were rendered by the employees of Orbotech prior to the closing, and a small portion for the settlement of fractional shares.
(4) | Represents the fair value of 56,614 shares of KLA common stock issued to settle the vested Orbotech stock options. The fair value of KLA’s common stock was $108.26 per share on the Acquisition Date.
(5) | Represents the fair value of the assumed stock options and RSUs to the extent those related to services provided by the employees of Orbotech prior to closing. Also refer to Note 10 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” of the Notes to the Condensed Consolidated Financial Statements for additional information about assumed stock options and RSUs.
(6) | On December 24, 2018, Orbotech, as part of its strategy to invest in the high growth area of the software business within the Printed Circuit Boards (“PCB”) industry, acquired the remaining 50% of the shares of Frontline not already owned by it from Mentor Graphics Development Services (Israel) Ltd. Prior to the acquisition, Frontline was an equity investee. Orbotech acquired the shares for $85.0 million in cash on hand and agreed to pay an additional $10.0 million in cash over four years plus a cash earn-out of not less than $5.0 million and up to $20.0 million. The earn out amounts are based on revenues from a Frontline product currently under development. As of February 20, 2019, the estimated fair market values of the four-year cash payment and the earn-out were $8.8 million and $7.1 million, respectively. As of March 31, 2020, the estimated fair market values of the four-year cash payment and the earn-out were $6.6 million and $3.2 million, respectively, and these amounts have been included in current and non-current liabilities at $2.4 million and $7.4 million respectively.
(7) | Primarily related to tax impact on the future amortization of intangible assets acquired and inventory fair value adjustments.
The purchase price was allocated to tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values, which were determined using generally accepted valuation techniques on the basis of inputs and assumptions made by management at the time of the Orbotech Acquisition. The operating results of Orbotech have been included in our Condensed Consolidated Financial Statements since the date of the acquisition. The goodwill was primarily attributable to the assembled workforce of Orbotech, planned growth in new markets and synergies expected to be achieved from the combined operations of KLA and Orbotech. None of the goodwill is deductible for income tax purposes. Goodwill arising from the Orbotech Acquisition was allocated to the Specialty Semiconductor Process and the PCB and Display reporting units during the fiscal year ended June 30, 2019. For additional details, refer to Note 7 “Goodwill and Purchased Intangible Assets” of the Notes to the Consolidated Financial Statements included in our Annual Report Form 10-K for the fiscal year ended June 30, 2019, as well as Note 7 "Goodwill and Purchased Intangible Assets" of the Notes to the Consolidated Financial Statements in this Form 10-Q. Intangible Assets The estimated fair value and weighted average useful life of the Orbotech intangible assets were as follows:
(In thousands) | Fair Value |  | Weighted Average Useful Lives (in years)
Existing technology(1) | $ | 1,008,000 |  |  | 8
Customer-related assets(2) | 227,000 |  |  | 8
Backlog(3) | 37,500 |  |  | 1
Trade name(4) | 91,500 |  |  | 7
Off market leases(5) | 2,070 |  |  | 7
Total identified finite-lived intangible assets | 1,366,070 |  |  |
In-process research and development(6) | 187,500 |  |  | N/A
Total identified intangible assets | $ | 1,553,570 |  |  |
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(1) | Existing technology was identified from the products of Orbotech and its fair value was determined using the Relief-from-Royalty Method under the income approach, which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset. The discount rate used was determined at the time of measurement based on an analysis of the implied internal rate of return of the transaction, weighted average cost of capital and weighted average return on assets. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.
(2) | Customer contracts and related relationships represent the fair value of the existing relationships with the Orbotech customers and its fair value was determined using the Multi-Period Excess Earning Method which involves isolating the net earnings attributable to the asset being measured based on present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. The economic useful life was determined based on historical customer attrition rates.
(3) | Backlog primarily relates to the dollar value of purchase arrangements with customers, effective as of a given point in time, that are based on mutually agreed terms which, in some cases, may still be subject to completion of written documentation and may be changed or canceled by the customer, often without penalty. Orbotech’s backlog consists of these arrangements with assigned shipment dates expected, in most cases, within three to twelve months. The fair value was determined using the Multi-Period Excess Earning Method. The economic useful life is based on the time to fulfill the outstanding order backlog obligation.
(4) | Trade name primarily relates to the “Orbotech” trade name. The fair value was determined by applying the Relief-from-Royalty Method under the income approach. The economic useful life was determined based on the expected life of the trade name.
(5) | The favorable / unfavorable components of the acquired leases were determined using the income approach which involves present valuing the difference in future cash flows between the contracted lease payments and the rent payable to a market participant over the lease terms. The economic useful life is based on the remaining lease term.
(6) | The fair value of in-process research and development (“IPR&D”) was determined using the relief-from-royalty method under the income approach, which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset.
We believe the amounts of purchased intangible assets recorded above represent the fair values of and approximate the amounts a market participant would pay for these intangible assets as of the Acquisition Date. Our Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2019 included revenue of $161.3 million and a net loss of $28.7 million from Orbotech. Other Fiscal 2019 Acquisitions During the three months ended March 31, 2019 we acquired three privately-held companies primarily to expand our products and services offerings for an aggregate purchase price of $118.3 million, including a post-closing working capital adjustment, and the fair value of the promise to pay additional consideration of up to $13.0 million contingent on the achievement of certain milestones. As of March 31, 2020, the estimated fair value of the additional consideration was $2.6 million, of which $2.4 million was classified as a non-current liability and $0.2 million was classified as a current liability on the Condensed Consolidated Balance Sheets. During the three months ended September 30, 2018 we acquired two privately-held companies for an aggregate purchase price of $15.4 million, including the fair value of the promise to pay total additional consideration of up to $6.0 million contingent on the achievement of certain milestones. As of March 31, 2020, the estimated fair value of the additional consideration was $0.7 million, which is classified as a non-current liability on the Condensed Consolidated Balance Sheets. None of these acquisitions were individually material to our Condensed Consolidated Financial Statements. The aggregate purchase price of the other fiscal 2019 acquisitions was allocated on a basis as follows:
(In thousands) | Fair Value
Net tangible assets (including cash and cash equivalents of $2.6 million) | $ | 13,214 |
Identifiable intangible assets | 75,130 |
Goodwill | 45,380 |
Total | $ | 133,724 |
The goodwill was primarily assigned to the Wafer Inspection and Patterning, and GSS reporting units, and mainly attributable to the assembled workforce, and planned growth in new markets. A portion of the goodwill is deductible for income tax purposes. Our Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2019 included revenues of $2.3 million and $3.1 million, respectively, and net losses of $2.8 million and $3.5 million, respectively, from these privately-held companies. KLA, in the aggregate for the Orbotech and other fiscal 2019 acquisitions, incurred approximately $37.2 million of acquisition-related costs, which are primarily included within selling, general and administrative expenses in our Condensed Consolidated Statements of Operations. Supplemental Unaudited Pro Forma Information: The following unaudited pro forma financial information summarizes the combined results of operations for KLA, Orbotech, and the three acquisitions completed in the third quarter of fiscal 2019 as if the companies were combined as of the beginning of fiscal 2018. The unaudited pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, the purchase accounting effect on inventory acquired, the purchase accounting effect on deferred revenue, interest expense and amortization of debt issuance costs associated with the Senior Notes financing, and transaction costs. The table below reflects the impact of material and nonrecurring adjustments to the unaudited pro forma results for the indicated periods that are directly attributable to the acquisitions:
| Three Months Ended |  | Nine Months Ended
Non-recurring Adjustments (In thousands) | March 31, 2019
Decrease / (increase) to revenue as a result of deferred revenue fair value adjustment | — |  |  | — |
(Decrease) / increase to expense as a result of inventory fair value adjustment | 78 |  |  | 1,029 |
(Decrease) / increase to expense as a result of transaction costs | (53,342 | ) |  | (61,378 | )
(Decrease) / increase to expense as a result of compensation costs | 1,724 |  |  | 7,918 |
The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisitions actually occurred at the beginning of fiscal year 2018 or of the results of our future operations of the combined businesses.
| Three Months Ended |  | Nine Months Ended
(In thousands) | March 31, 2019
Revenues | 1,160,678 |  |  | 4,165,268 |
Net income attributable to KLA | 192,577 |  |  | 1,033,653 |
We have not included pro forma results of operations for the acquisition of privately-held companies completed in the first quarter of fiscal 2019 or the first quarter of fiscal 2020 herein as they were not material to us either individually or in aggregate. We included the results of operations of each acquisition in our Condensed Consolidated Statements of Operations from the date of each acquisition.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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