⚠ A Fixed Claim in a Cyclical BusinessLow threat

KLA (KLAC) — threat to the moat

KLA's notes are fixed claims on a cyclical business, and the board has chosen to keep them rather than retire them.

KLA's lenders get paid whatever the cycle does. The notes carry fixed coupons, and KLA has swapped $2.00 billion of them to floating rates1, so part of the interest bill now moves with short-term rates.

KLA debt structure, June 2026Senior notes, principal$5.95bnMaturitiesFY2029 to FY2063Swapped fixed to floating$2.00bnRevolving credit, undrawn$1.5bn to July 2030Interest expense, FY2026$284.4MKLA Form 10-K FY2026; Form 8-K, 3 July 2025
Long-dated, partly floating, easily covered.

A downturn would test the structure more than the debt. KLA's returns to shareholders were $3,347.6 million in fiscal 20262, 88.9% of free cash flow3. In a year when free cash flow fell by half, KLA would have to choose between cutting returns and borrowing to maintain them.

The 10-K lists the leveraged capital structure among its risk factors4. That is unusual candour for a company with net debt under $1 billion, and it reflects the gross figure.

The notes carry a change-of-control clause: holders can require KLA to buy them back at 101% if control changes5. That clause matters only in a takeover, but it adds $5.95 billion of cash to the price any acquirer would have to find, which makes KLA harder to buy.

Managing the notes has its own costs. In fiscal 2020 KLA recorded a pre-tax loss of $22.5 million on the early redemption of its $500.0 million of notes due 20216. A ladder of fixed notes stretching to fiscal 20637 needs refinancing decisions in every kind of year, good or bad.

The fixed claim becomes a problem only if returns are defended with new borrowing. An increase in gross debt in a year of falling revenue would show it.

References
  1. ReportedThe notes carry fixed coupons, and KLA has swapped $2.00 billion of them to floating rates, so part of the interest bill now moves with short-term rates.
    KLA Corporation Form 10-K for fiscal 2026 (year ended 30 June 2026) - financial statements and notes: backlog, contract liabilities, receivables, cash flow, capital returns and debt. — FY2026 · publ. 6 August 2026 · source ↗
  2. ReportedKLA's returns to shareholders were $3,347.6 million in fiscal 2026, 88.9% of free cash flow.
    KLA fourth-quarter fiscal 2026 results release, Form 8-K exhibit 99.1 - revenue, product and service revenue, segment revenue, net income, cash flow, capital returns and September 2026 quarter guidance. — Q4 FY2026 · publ. 28 July 2026 · source ↗
  3. Moat Explorer calcKLA's returns to shareholders were $3,347.6 million in fiscal 2026, 88.9% of free cash flow.
    Moat Explorer calculation from KLA's reported figures ($ millions unless stated; fiscal years end on 30 June; per-share figures adjusted for the ten-for-one split of June 2026). Revenue growth: FY2022 9,211.9 / 6,918.7 - 1 = +33.1%; FY2023 10,496.1 / 9,211.9 - 1 = +13.9%; FY2024 9,812.2 / 10,496.1 - 1 = -6.5%, the only decline FY2015-FY2026; FY2025 12,156.2 / 9,812.2 - 1 = +23.9%; FY2026 13,579.5 / 12,156.2 - 1 = +11.7%; FY2015-FY2026 13,579.5 / 2,814.0 = 4.8 times, 15.4% a year; FY2026 against FY2023 13,579.5 / 10,496.1 - 1 = +29%. Net income FY2024 2,761.9 / 3,387.3 - 1 = -18.5%, a fall of 625.4, of which the 289.5 impairment is 46%; net margin 4,830.8 / 13,579.5 = 35.6%; Other FY2023 381.1 / 259.4 - 1 = +46.9%; gross margin 1,598.8 / 2,814.0 = 56.8% (FY2015), 2,699.5 / 4,568.9 = 59.1% (FY2019); FY2026 4,830.8 / 4,061.6 - 1 = +18.9%; FY2015-FY2026 4,830.8 / 366.2 = 13.2 times; EPS 3.66 / 0.224 = 16.3 times. Operating income (no line reported): gross profit 8,324.4 - R&D 1,532.1 - SG&A 1,131.5 = 5,660.8 (FY2026), 5,660.8 / 13,579.5 = 41.7%; interest cover 5,660.8 / 284.4 = about 20 times. Segments FY2026: Semiconductor Process Control 12,244.7 / 13,579.5 = 90.2% of revenue; segment gross profit 12,244.7 - 4,453.6 = 7,791.1, 7,791.1 / 12,244.7 = 63.6%; segment profit 5,482.8 / 12,244.7 = 44.8%; 5,482.8 / 5,655.4 = 96.9% of segment profit; Specialty Semiconductor Process 64.6 / 584.1 = 11.1%, gross 278.8 / 584.1 = 47.7% (FY2021 206.7 / 369.2 = 56.0%); PCB and Component Inspection 108.0 / 750.4 = 14.4%, gross 385.3 / 750.4 = 51.3% (FY2024 159.0 / 552.5 = 28.8%); smaller segments 64.6 + 108.0 = 172.6; SSP segment gross margin FY2022 242.5 / 456.6 = 53.1%, FY2023 281.9 / 543.4 = 51.9%, FY2024 282.9 / 528.7 = 53.5%, FY2025 303.9 / 587.1 = 51.8%; Orbotech segments revenue less product categories 1,334.5 - (502.5 + 460.3) = 371.7; process control share of research 1,341.3 / 1,532.1 = 87.5%, almost nine-tenths; SG&A 1,131.5 / 13,579.5 = 8.3%; segment revenue 584.1 + 750.4 = 1,334.5. Process control segment research 1,341.3 / 12,244.7 = 11%; segment revenue growth 12,244.7 / 10,947.4 - 1 = +11.9%; SSP products 502.5 / 584.1 = 86% of segment revenue, research 59.4 / 584.1 = 10%; PCI Q4 241.1 / 750.4 = 32% of the year; process control lines FY2019 (1,630.9 + 1,161.3) / 4,568.9 = 61.1%; patterning within process control lines 2,791.1 / (4,336.7 + 2,791.1) = 39.2% (FY2023), 2,706.8 / (6,630.8 + 2,706.8) = 29.0% (FY2026); services share FY2019 1,176.7 / 4,568.9 = 25.8%; capital spending 375.9 / 45.8 = 8.2 times; peers 656.33 + 393.13 + 383.87 = 1,433.3, 1,433.3 / 245.24 = 5.8 times; FY2015 customers 15 + 12 + 11 = 38%. Process control segment gross margin FY2018 2,554.2 / 3,944.0 = 64.8%; FY2019 2,590.4 / 4,080.8 = 63.5%; FY2020 3,028.2 / 4,745.4 = 63.8%; FY2021 3,705.2 / 5,734.8 = 64.6%; FY2022 5,167.7 / 7,924.8 = 65.2%; FY2023 5,957.6 / 9,324.2 = 63.9%; FY2024 5,629.3 / 8,733.6 = 64.5%; FY2025 7,024.6 / 10,947.4 = 64.2%. Process control revenue FY2024 8,733.6 / 9,324.2 - 1 = -6.3%. Orbotech-related goodwill impairments 256.6 + 289.5 + 239.1 = 785.2. Research: 1,532.1 / 530.6 = 2.9 times; 530.6 / 2,814.0 = 18.9% (FY2015); 526.7 / 3,480.0 = 15.1% (FY2017); 711.0 / 4,568.9 = 15.6% (FY2019); 928.5 / 6,918.7 = 13.4% (FY2021); 1,296.7 / 10,496.1 = 12.4% (FY2023); 1,279.0 / 9,812.2 = 13.0% (FY2024); 1,532.1 / 13,579.5 = 11.3% (FY2026); FY2016 481.3 against 530.6 and FY2024 1,279.0 / 1,296.7 - 1 = -1.4%; research staff 27% x 17,000 = about 4,600. Product categories (FY2019-FY2026): wafer inspection 6,630.8 / 1,630.9 = 4.1 times, 22.2% a year; FY2025 6,198.8 / 4,333.3 - 1 = +43.1%; FY2026 6,630.8 / 6,198.8 - 1 = +7.0%; share 1,630.9 / 4,568.9 = 35.7% (FY2019), 6,198.8 / 12,156.2 = 51.0% (FY2025), 6,630.8 / 13,579.5 = 48.8% (FY2026). Patterning 2,706.8 / 1,161.3 = 2.3 times, 12.9% a year; FY2022 2,050.0 / 1,506.0 - 1 = +36.1%; FY2023 2,791.1 / 2,050.0 - 1 = +36.2%; FY2024 2,054.4 / 2,791.1 - 1 = -26.4%; FY2025 2,196.3 / 2,054.4 - 1 = +6.9%; FY2026 2,706.8 / 2,196.3 - 1 = +23.2%; share 2,791.1 / 10,496.1 = 26.6% (FY2023), 2,196.3 / 12,156.2 = 18.1% (FY2025), 2,706.8 / 13,579.5 = 19.9% (FY2026); process control lines 48.8 + 19.9 = 68.7%. SSP products 502.5 / 13,579.5 = 3.7%. PCI products 460.3 / 13,579.5 = 3.4%; FY2025 355.9 / 291.2 - 1 = +22.2%; FY2026 460.3 / 355.9 - 1 = +29.3%. Services 3,125.9 / 1,176.7 = 2.7 times, (3,125.9 / 1,176.7) ^ (1/7) - 1 = 15.0% a year; growth FY2020 +25.6%, FY2021 +13.6%, FY2022 +13.8%, FY2023 +10.8%, FY2024 2,329.6 / 2,117.0 - 1 = +10.0%, FY2025 +15.2%, FY2026 3,125.9 / 2,683.3 - 1 = +16.5%; FY2024 increase 2,329.6 - 2,117.0 = 212.6; share 2,117.0 / 10,496.1 = 20.2% (FY2023), 2,329.6 / 9,812.2 = 23.7% (FY2024), 3,125.9 / 13,579.5 = 23.0% (FY2026). Product revenue FY2023 10,496.1 - 2,117.0 = 8,379.1; FY2024 fall 8,379.1 - 7,482.7 = 896.4. A one-third fall in product revenue 10,453.5 / 3 = 3,484.5 against a year of 15% service growth 3,125.9 x 0.15 = 469, less than a seventh. Other 153.1 / 381.1 - 1 = -60%; 153.1 / 13,579.5 = 1.1%; FY2024 333.2 / 381.1 - 1 = -12.6%; FY2025 204.6 / 333.2 - 1 = -38.6%; FY2026 153.1 / 204.6 - 1 = -25.2%. Deferred system and service revenue 932.9 + 604.1 + 238.1 = 1,775.1, about $1.8 billion. Unrecognised contract price 1,775.1 / 3,125.9 x 12 = about 7 months of service revenue. Region: Taiwan FY2024 1,738.1 / 2,493.4 - 1 = -30.3%; FY2026 against FY2024 3,643.7 / 1,738.1 - 1 = +110%; FY2025 3,205.4 / 1,738.1 - 1 = +84.4%; FY2023 2,493.4 / 2,528.5 - 1 = -1.4%. Korea FY2019 584.1 / 1,178.6 - 1 = -50%; FY2024 906.9 / 1,895.7 - 1 = -52%; share 1,178.6 / 4,036.7 = 29.2% (FY2018), 584.1 / 4,568.9 = 12.8% (FY2019), 1,895.7 / 10,496.1 = 18.1% (FY2023), 906.9 / 9,812.2 = 9.2% (FY2024), 1,833.8 / 13,579.5 = 13.5% (FY2026). China FY2025 4,042.6 / 4,196.7 - 1 = -3.7%; FY2026 4,048.4 / 4,042.6 - 1 = +0.1%; China plus Taiwan 29.8% + 26.8% = 56.6%; Q4 FY2026 China 4,048.4 - 3,091.6 = 956.7, 956.7 / 3,657.6 = 26.2%. Backlog 12,570 / 7,860 - 1 = +59.9%; 12,570 / 13,579.5 = 93% of revenue; unrecognised contract price 1,775.1 / 12,570 = 14% of backlog. Advanced packaging about 1,000 / 13,579.5 = about 7% of revenue. Quarter: Q4 FY2026 revenue 3,657.6 / 3,174.7 - 1 = +15.2%; 3,657.6 / 3,415.1 - 1 = +7.1%; service 820.4 / 702.6 - 1 = +16.8%; process control 3,256.8 / 2,877.6 - 1 = +13.2%; PCB and Component Inspection 241.1 / 154.1 - 1 = +56.5%; GAAP gross margin (3,657.6 - 1,413.1) / 3,657.6 = 61.4%. Guidance midpoint 4,000 / 3,209.7 - 1 = +24.6%; 4,000 / 3,657.6 - 1 = +9.4%. Consensus fiscal 2027 18,110 / 13,579.5 - 1 = +33.4%; EPS 5.45 / 3.66 - 1 = +49%. The 2030 model at 13% a year: 13,579.5 x 1.13 ^ 2 = 17,340 (FY2028); 13,579.5 x 1.13 ^ 5 = about 25,000 (FY2031). Cash and capital: free cash flow 4,143.1 - 375.9 = 3,767.1; capital returns 2,289.8 + 1,057.8 = 3,347.6, 3,347.6 / 3,767.1 = 88.9%; dividends 1,057.8 / 4,830.8 = 21.9% of net income; buybacks 2,289.8 / 1,057.8 = 2.2 times dividends; capital spending 375.9 / 13,579.5 = 2.8% of revenue; operating cash flow 3,308.6 / 2,761.9 = 120% (FY2024), 4,081.9 / 4,061.6 = 100% (FY2025), 4,143.1 / 4,830.8 = 86% (FY2026); operating cash flow growth 4,143.1 / 4,081.9 - 1 = +1.5%; net income less operating cash flow 4,830.8 - 4,143.1 = 687.7; receivables 2,889.2 / 2,263.9 - 1 = +27.6%, an increase of 625.3; inventories 3,648.5 - 3,212.1 = 436.4; together 1,061.7. FY2015 dividends paid 3,041.1 / 366.2 = 8.3 times net income. Buybacks FY2015-FY2026 602.9 + 181.7 + 25.0 + 203.2 + 1,095.2 + 829.1 + 938.6 + 3,967.8 + 1,311.9 + 1,735.7 + 2,149.9 + 2,289.8 = 15,330.8; dividends paid 3,041.1 + 346.3 + 344.0 + 402.1 + 472.3 + 522.4 + 559.4 + 638.5 + 732.6 + 773.0 + 904.6 + 1,057.8 = 9,794.1. Diluted shares 1,319.6 / 1,637.0 - 1 = -19.4%. Net debt 5,887.4 - 1,649.8 - 3,252.6 = 985.0 (FY2026); 5,884.3 - 2,078.9 - 2,415.7 = 1,389.7 (FY2025); 6,630.1 - 1,977.1 - 2,526.9 = 2,126.1 (FY2024); 985.0 / 3,767.1 = 26% of free cash flow. Return on equity 4,830.8 / ((4,692.5 + 6,349.8) / 2 = 5,521.2) = 87.5%; FY2025 4,061.6 / ((3,368.3 + 4,692.5) / 2) = 100.8%; FY2024 2,761.9 / ((2,919.8 + 3,368.3) / 2) = 87.9%. Buyback authorisation 9,740 / 245,240 = 4%; 9,740 / (0.9 x 3,767.1) = 2.9 years; 9,740 / 571.0 = 17 quarters. Valuation: market value 245,240 / 383,870 = 0.64 (Applied Materials); 656,330 / 245,240 = 2.7 (ASML); 245,240 / 14,050 = 17.5 (Onto Innovation); 393,130 / 245,240 = 1.6 (Lam Research); 245,240 / 394,116 - 1 = -38% (June to September 2026); 394,116 / 118,454 = 3.3 times (June 2025 to June 2026); price 187.92 / 307.37 - 1 = -38.9%; 187.92 / 227.35 - 1 = -17% (June buyback price); 227.35 / 187.92 = 1.21 (21% more shares); free cash flow yield 3,767.1 / 245,240 = 1.5%; research 1,532.1 / 245,240 = 0.6% of KLA market value and 1,532.1 / 14,050 = 10.9%, about a ninth, of Onto Innovation's; revenue 13,579.5 / Lam Research 23,232.7 = 58%; market value 245,240 / 393,130 = 62%; buybacks 2,289.8 / 187.92 = 12.2 million shares at the September price, 12.2 / 1,319.6 = 0.9%; authorisation 9,740 / 2,289.8 = 4.3 years at the fiscal 2026 pace; P/E 245,240 / 4,830.8 = 50.8; P/S 245,240 / 13,579.5 = 18.1. Gross margin gap 61.3% less Lam Research about 50% = about 11 points - cash flow, capital returns, balance sheet, per-share figures and valuation. — FY2015-FY2026 · publ. September 2026 · source ↗
    Method: Arithmetic on figures reported in KLA's Forms 10-K and 10-Q, quarterly results releases, XBRL filings and market data; operands shown in the source line.
  4. ReportedThe 10-K lists the leveraged capital structure among its risk factors.
    KLA Corporation Form 10-K for fiscal 2026 (year ended 30 June 2026) - Item 1A risk factors: export controls, tariffs, suppliers, leverage and cyclicality. — FY2026 · publ. 6 August 2026 · source ↗
  5. ReportedThe notes carry a change-of-control clause: holders can require KLA to buy them back at 101% if control changes.
    KLA Corporation Form 10-K for fiscal 2026 (year ended 30 June 2026) - financial statements and notes: backlog, contract liabilities, receivables, cash flow, capital returns and debt. — FY2026 · publ. 6 August 2026 · source ↗
  6. ReportedIn fiscal 2020 KLA recorded a pre-tax loss of $22.5 million on the early redemption of its $500.0 million of notes due 2021.
    KLA Corporation Form 10-K for fiscal 2020 - segment revenue and gross margin for fiscal 2018-2020, the goodwill impairment of $256.6 million, and customer concentration. — FY2020 · publ. August 2020 · source ↗
  7. ReportedA ladder of fixed notes stretching to fiscal 2063 needs refinancing decisions in every kind of year, good or bad.
    KLA Corporation Form 10-K for fiscal 2026 (year ended 30 June 2026) - financial statements and notes: backlog, contract liabilities, receivables, cash flow, capital returns and debt. — FY2026 · publ. 6 August 2026 · source ↗
Sources
Generated September 28, 2026