KLA Corporation (KLAC) FY2026 10-K and 10-Q Summary: Business, Risk Factors, MD&A

Business

From the fiscal 2026 Form 10-K (period ended June 30, 2026), accession 0000319201-26-000027.

KLA sells process control and yield management equipment, software and services to companies that make semiconductors and electronics. Its inspection and metrology systems find, measure and analyse defects at nanometre scale on wafers, reticles (photomasks), integrated circuits and packages. This helps chipmakers bring new process nodes into volume production faster and get more good chips per wafer. Most of KLA's revenue comes from selling these systems to the largest foundry/logic and memory chipmakers. Services make up the rest of the base: maintenance and support on the installed tools, mostly under recurring "subscription-like" contracts. Services were about 23% of fiscal 2026 revenue ($3.13 billion of $13.58 billion).

Segments. KLA reports three segments. The fiscal 2026 revenue figures below exclude corporate allocations and currency effects:

• Semiconductor Process Control: $12.24 billion, about 90% of the total. Inspection, review, metrology, chemistry process control, in-situ sensor wafers and software for chip, wafer, reticle and advanced-packaging manufacturing, plus the related services. Product families include the 39xx, 29xx, Puma and Voyager inspection series, eDR review tools, Surfscan, Archer, ATL, SpectraShape and SpectraFilm metrology and inspection systems, Teron and TeraScan reticle inspection, and the Klarity and 5D Analyzer software. The segment also includes KLA Pro, a line of certified remanufactured tools for larger-design-node chips and wafers of 200mm or smaller.
• Specialty Semiconductor Process: $584.1 million. Vacuum deposition, etch and plasma-dicing tools (the SPTS Omega, Sigma, Delta and Mosaic lines, among others). Customers include makers of MEMS, RF communication chips and power semiconductors for automotive and industrial uses.
• PCB and Component Inspection: $750.4 million. Direct imaging, inspection, optical shaping and inkjet/additive printing for printed circuit boards and IC substrates (the Orbotech product lines), plus inspection and metrology for semiconductor packaging (ICOS, Zeta). In March 2024 KLA announced the end of manufacturing for most flat-panel Display products. It continues to service the Display installed base.

By product category, Wafer Inspection was 49% of fiscal 2026 revenue ($6.63 billion), Patterning 20% ($2.71 billion) and Services 23%. Specialty Semiconductor Process, PCB and Component Inspection, and Other made up the remainder.

Customers and geography. The customer base is highly concentrated. Taiwan Semiconductor Manufacturing Company Limited accounted for more than 10% of total revenue in each of fiscal 2024, 2025 and 2026. About 87% of fiscal 2026 revenue came from outside the U.S., by ship-to location:

China's share was 42.8% in fiscal 2024 and 33.3% in fiscal 2025. Sales go mainly through a direct sales force in Asia, the U.S. and Europe.

Industry position and demand drivers. The company describes its business as cyclical, tied to customers' capital spending, but not seasonal. A leading-edge fab now costs well above $10 billion. Management names these as the drivers for fiscal 2027 and beyond:

• AI- and high-performance-computing-driven investment at the leading edge
• EUV adoption in high-volume manufacturing for logic and DRAM, including high-bandwidth memory
• Rising process-control intensity at the 2-nanometre node
• Rapid growth in advanced packaging

Named competitors include Applied Materials, ASML, Hitachi High-Tech, Lasertec and Onto Innovation.

Backlog. Backlog rose from $7.86 billion at June 30, 2025 to $12.57 billion at June 30, 2026. The company attributes the increase to strong demand from the AI infrastructure buildout. It cautions that backlog does not reliably indicate when revenue will be recognised.

Operations. KLA designs, assembles and tests its systems in-house and outsources components and major subassemblies. Some parts are available only from single or limited sources. Manufacturing is principally in the U.S., Singapore, Israel, China and Europe. R&D centres are in the U.S., U.K., India, China, Singapore and Israel. Headquarters is in Milpitas, California.

At June 30, 2026 KLA had:

• about 17,000 regular full-time employees: 50% in Asia, 31% in the U.S. and 19% in Europe and the Middle East; 27% in R&D and 27% in customer service
• over 9,100 active patents, with terms running through 2045

Singapore tax holidays, renewed as of July 1, 2025 and running through December 2032, cut tax expense by $120.9 million in fiscal 2026.

Background. KLA was formed as KLA-Tencor in April 1997 through the merger of KLA Instruments and Tencor Instruments. The PCB and Display businesses have weakened. KLA recorded goodwill impairments on them of $192.6 million in the second quarter of fiscal 2024 and $230.4 million in the second quarter of fiscal 2025, after the long-term forecasts for those businesses deteriorated. A further $70.5 million Display charge in the third quarter of fiscal 2024 followed the March 2024 decision to end manufacturing of most Display products. The annual goodwill test as of December 31, 2025 found no impairment.

Risk factors

From the fiscal 2026 Form 10-K, accession 0000319201-26-000027, Item 1A. These are condensed to the risks most specific to KLA.

China export controls. China was 30% of fiscal 2026 revenue (33% in fiscal 2025, 43% in fiscal 2024). U.S. Commerce Department rules restrict sales and service to Chinese advanced-node logic and advanced-DRAM fabs and to Entity List parties:

• BIS rules issued in October 2022, October 2023, December 2024 and January 2025
• the September 2025 "Affiliates Rule", which reaches entities 50%-or-more owned by listed parties; it was suspended in November 2025 for one year, until November 2026

Failure to get licences has harmed backlog and has required KLA to return substantial customer deposits. Some China-bound shipments have been held by U.S. Customs and Border Protection. The restrictions may also help Chinese competitors take share.

Tariffs. U.S. tariffs have raised KLA's cost of revenues because the company imports foreign components into its U.S. factories. Retaliatory tariffs can cause customers to push out or cancel orders. A Section 232 investigation covering semiconductors and semiconductor equipment, opened in April 2025, is still unresolved.

In February 2026 the U.S. Supreme Court held that tariffs imposed under the International Emergency Economic Powers Act were not authorised. KLA is pursuing refunds of duties it paid through the U.S. Customs and Border Protection process and has begun receiving them. It does not expect the effect to be material.

Customer concentration and cyclicality. A small number of chipmakers account for a large share of orders, and foundry/logic has dominated recent orders. Consolidated customers have more negotiating leverage and increasingly qualify second-source suppliers. Spending tied to AI has lifted customers' capital budgets, but the company says it cannot be sure these levels will last. The higher backlog also raises the risk of order changes, reschedules or cancellations that customers may not report promptly.

Technology shifts, including AI. Specific risks named:

• the cost per transistor could stop falling
• memory customers adopt less process control than foundry/logic customers
• customers may reuse installed tools
• larger rivals may integrate inspection into their process tools
• AI-driven design and process development could shorten development cycles, lower barriers to entry, encourage customers to build tools in-house, or make product lines obsolete

KLA also faces risks from its own use of AI, including flawed outputs, leakage of intellectual property and evolving regulation.

Supply chain. Supply risks include:

• single-source parts
• Chinese export controls on rare earth elements (imposed April 2025 and widened October–November 2025). China controls an estimated 70% of rare-earth mining, 90% of processing and 93% of magnet production.
• a shortage of DRAM chips used in KLA's products after several large suppliers stopped making them. Procurement of these chips raised purchase commitments in fiscal 2026. KLA expects the added cost to keep hurting gross margin in fiscal 2027.

Geopolitical and operational. KLA has significant operations in Israel, exposed to the regional conflicts involving Iran and Iran-backed groups and to Red Sea shipping disruption. Some Israeli employees can be called up for military reserve duty. The company is largely uninsured for war and terrorism. It does not carry earthquake insurance, although a significant portion of its manufacturing and much of its R&D are in California. Other operational risks:

• cybersecurity, including threats generated with AI
• an ERP system upgrade due to finish in the first quarter of fiscal 2027
• reliance on outsourced service providers
• acquisition integration

Capital structure. KLA has $5.95 billion of senior unsecured notes. A change of control followed by a ratings downgrade would trigger a 101% repurchase offer. Covenants apply under the $1.50 billion revolving credit facility, and $2.00 billion of the fixed-rate notes have been swapped to floating rates. Part of the remaining $9.74 billion buyback authorisation may be funded with new debt. Dividends are not guaranteed.

Tax. Most non-U.S. profit is earned in Singapore and Israel. Effective-tax-rate exposure includes:

• the One Big Beautiful Bill Act changes to the GILTI/FDII regimes, renamed NCTI and FDDEI
• possible future exposure to the 15% corporate alternative minimum tax
• Pillar Two global minimum taxes
• the expiry of tax holidays

Other risks. These include:

• indemnification obligations to customers and other parties
• volume-purchase agreements that defer revenue
• audits of government funding
• further impairments, restructuring charges or inventory write-offs
• the soundness of factoring and banking counterparties
• compliance conditions in past settlements over historical stock-option practices
• an exclusive-forum bylaw naming the Delaware Court of Chancery

Management's discussion, fiscal 2026

From the fiscal 2026 Form 10-K, accession 0000319201-26-000027, Item 7. Per-share amounts are post-split.

Results.

Management attributes the revenue growth to leading-edge investment by foundry/logic, memory and advanced-packaging customers, supported by AI and high-performance-computing demand. Service growth came from a larger installed base.

The gross margin bridge from 60.9% to 61.3%:

• higher volume: +0.5 points
• mix: −0.2 points
• manufacturing efficiency: +0.2 points
• other service and manufacturing costs: −0.1 points

The last item netted higher installation, warranty and tariff costs against lower inventory charges.

The fiscal 2025 comparison includes a $239.1 million goodwill and intangible-asset impairment in the PCB business, of which the goodwill portion was $230.4 million and not tax-deductible. There was no impairment in fiscal 2026.

Segments.

• Semiconductor Process Control rose 12%, driven by foundry/logic and memory, advanced packaging and services.
• Specialty Semiconductor Process fell 1%, on lower customer investment and weaker product sales in China.
• PCB and Component Inspection rose 21%, on advanced-packaging demand and a stronger PCB business, partly offset by the absence of revenue from the exited Display business.

Regions. China revenue was flat ($4.05 billion versus $4.04 billion). Domestic legacy-node investment was largely offset by export-control restrictions. Taiwan rose 13.7%, Korea 26.2% (memory, including high-bandwidth memory and advanced DRAM) and North America 29.0%.

Expenses and tax.

• R&D rose 13% to $1.53 billion, about 11% of revenue. Most of the increase was $124.8 million of employee costs and $36.0 million of engineering materials.
• SG&A rose 10% to $1.13 billion. The drivers were employee costs ($35.9 million), facilities ($23.9 million) and a $22.7 million increase in the provision for credit losses.
• Interest expense fell to $284.4 million because KLA repaid $750.0 million of notes in fiscal 2025.
• Other income rose to $229.6 million, including a $28.0 million gain on an equity security, a $19.2 million favourable currency swing and an $11.6 million tax-reserve release.
• The effective tax rate rose to 13.8% from 12.5%. A smaller share of earnings came from low-tax jurisdictions and less U.S. income qualified for the FDDEI deduction. This was partly offset by lower NCTI and by the fiscal 2025 base, which included the non-deductible impairment.

Cash flow and capital returns.

• Operating cash flow was $4.14 billion versus $4.08 billion. Higher customer collections (about $1.2 billion more) were largely offset by about $1.1 billion more in supplier payments.
• Capital expenditures were $375.9 million.
• The July 28, 2026 earnings release (accession 0000319201-26-000024) puts free cash flow, a non-GAAP measure, at $3.77 billion.
• Investing outflows rose to $1.19 billion, mainly from net purchases of marketable securities.
• KLA bought back $2.29 billion of stock and paid $1.06 billion in dividends.
• On March 11, 2026 the board added a $7.00 billion repurchase authorisation. $9.74 billion remained at June 30, 2026.
• The quarterly dividend went from $0.17 to $0.19 per share in the fourth quarter of fiscal 2025. The increase from $0.19 to $0.23 per share (post-split; $2.30 pre-split) was announced in the third quarter of fiscal 2026 (March 2026) and first declared at that level in May 2026. That was KLA's 17th consecutive annual increase.

Balance sheet and liquidity at June 30, 2026.

• Cash, cash equivalents and marketable securities: $4.90 billion, of which $735.1 million was held abroad
• Senior notes: $5.95 billion principal, maturing fiscal 2029–2063
• Revolving credit facility: $1.50 billion, undrawn, entered July 3, 2025 and maturing July 3, 2030
• Net leverage ratio: 0.53x, against a 3.25x covenant maximum
• Credit ratings: A (Fitch), A2 (Moody's) and A- (S&P)
• Working capital: $8.08 billion
• Purchase commitments: $5.97 billion, most due within 12 months; the company says it increased commitments partly to secure key components
• Receivables sold under factoring agreements during the year: $515.5 million (versus $230.6 million in fiscal 2025)

Outlook in the annual report. Management expects revenue to keep growing in fiscal 2027 as customer engagement and demand signals strengthen. It flags variable customer timing, regulation and tariffs, and higher component costs as headwinds.

Current quarter

This section covers the third and fourth quarters of fiscal 2026.

Third quarter (three months ended March 31, 2026)

From the Form 10-Q for the quarter ended March 31, 2026, accession 0000319201-26-000016. Per-share amounts in this filing are pre-split.

The July 28, 2026 earnings release restates the third-quarter EPS as $0.91 on the post-split basis.

Revenue drivers. Revenue growth came mainly from memory customers, particularly DRAM led by high-bandwidth memory, plus steady foundry/logic growth.

• Semiconductor Process Control rose 13% to $3.08 billion.
• Specialty Semiconductor Process rose 5%, which the company attributes to shipment timing.
• PCB and Component Inspection fell 1% because the year-ago quarter still included Display revenue.
• Korea revenue rose 80%, North America 40% and China 5%.
• Taiwan fell 12% on shipment timing and Japan fell 47%.

Margin and expenses. The 0.5-point drop in gross margin reflected:

• mix: −0.5 points
• manufacturing labor, overhead and efficiencies: −0.1 points
• other service and manufacturing costs (higher installation, warranty and tariff costs, partly offset by lower inventory-related charges): −0.4 points
• volume: +0.5 points

R&D rose 15% and SG&A rose 17%. The SG&A increase included a $23.1 million rise in the provision for credit losses.

Management said it expected revenue growth to continue through calendar 2026. It also said escalating costs for DRAM chips used in KLA's image computers would keep weighing on gross margin, an effect it expected to be transitory.

Nine-month cash flow and capital actions. For the nine months, operating cash flow was $3.24 billion versus $2.92 billion. The 10-Q presents cash flows only on a year-to-date basis.

In the quarter, KLA repurchased $626.0 million of stock and paid $248.8 million in dividends ($1.90 per share, pre-split). On March 11, 2026 the board:

• raised the quarterly dividend level to $2.30 pre-split ($0.23 post-split), a 21% increase
• authorised a further $7 billion of repurchases on top of the April 2025 program, which had $3.94 billion left at December 31, 2025

These actions are in the 10-Q and in the Form 8-K, accession 0001193125-26-102999. KLA held an investor day on March 12, 2026.

Fourth quarter (three months ended June 30, 2026)

Fourth-quarter figures come from the full year in the 10-K (accession 0000319201-26-000027) minus the nine months in the 10-Q (accession 0000319201-26-000016). They match the quarterly figures in the July 28, 2026 earnings release (Form 8-K, accession 0000319201-26-000024). Per-share amounts are post-split, from the release.

By segment:

• Semiconductor Process Control: $3.26 billion
• PCB and Component Inspection: $241.1 million, up from $154.1 million
• Specialty Semiconductor Process: $159.7 million

Fourth-quarter operating cash flow was $906.4 million, versus $1.16 billion a year earlier. This also equals the full-year figure minus the nine-month figure. The release's quarterly cash flow statement shows that a $586.5 million increase in accounts receivable held down operating cash flow.

The release says revenue was above the midpoint of the guidance range and GAAP EPS was at the upper end of its range. The revenue guidance, given on April 29, 2026, was $3.575 billion ± $200 million (Form 8-K, accession 0000319201-26-000014).

Guidance for the first quarter of fiscal 2027 (ending September 30, 2026)

From the July 28, 2026 earnings release, accession 0000319201-26-000024.

• Revenue: $4.0 billion ± $200 million
• GAAP gross margin: 61.6% ± 1.0 point (non-GAAP 62.5% ± 1.0 point)
• GAAP diluted EPS: $1.14 ± $0.10 (non-GAAP $1.16 ± $0.10), post-split

CEO Rick Wallace said the company sees "momentum across our business accelerating in the second half of calendar 2026 and continuing through 2027." He cited process-control demand from leading-edge foundry/logic and memory and new opportunities in advanced packaging.

Subsequent events

From the fiscal 2026 Form 10-K, accession 0000319201-26-000027, Note 19 and Item 5, and the August 6, 2026 Form 8-K, accession 0001193125-26-338242.

• Dividend. On August 6, 2026 the board declared a quarterly cash dividend of $0.23 per share on the post-split basis, payable September 1, 2026 to holders of record on August 17, 2026. This is the only subsequent event in the annual report's subsequent-events note.
• No deals or financings disclosed. The annual report discloses no acquisition, divestiture, debt issuance or borrowing after June 30, 2026. The revolving credit facility was undrawn at year-end.
• Fourth-quarter results and guidance. On July 28, 2026, after the fiscal year ended, KLA reported fourth-quarter and full-year results and gave first-quarter fiscal 2027 guidance (summarised above).

One major event fell inside fiscal 2026 but after the March-quarter 10-Q was filed. KLA announced the ten-for-one stock split on May 7, 2026 (accession 0001193125-26-212093), and it took effect on June 11, 2026.