UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 1994 OR / / 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 0-9992 KLA INSTRUMENTS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-2564110 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 160 Rio Robles San Jose, California (Address of principal executive offices) 95134 (Zip Code) Registrant's telephone number, including area code: (408) 434-4200 ________________________________________________________________ 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 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 /X/ No / / SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $0.001 par value Common Stock Purchase Rights Common shares outstanding at September 30, 1994: 23,054,000 This report, including all exhibits and attachments, contains 13 pages. Page 1 of 13 KLA INSTRUMENTS CORPORATION INDEX
Page PART I FINANCIAL INFORMATION Number - - ------ --------------------- ------ Item 1 Financial Statements: Condensed Consolidated Statement of Operations Three Months Ended September, 1993 and 1994 . . . . . . . . . . . . . 3 Condensed Consolidated Balance Sheet . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statement of Cash Flows . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . . . . . 6 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . 7-8 PART II OTHER INFORMATION - - ------- ----------------- Items 1-6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-10 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13
Page 2 of 13 KLA INSTRUMENTS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, (In thousands except per share amounts) (Unaudited)
1993 1994 ---- ---- Net sales $51,904 $83,179 ------- ------- Costs and expenses: Cost of sales 31,161 40,602 Engineering, research and development 4,929 8,182 Selling, general and administrative 9,933 16,450 ------- ------- 46,023 65,234 ------- ------- Income from operations 5,881 17,945 Interest income and other, net 173 1,497 Interest expense (496) (474) ------- ------- Income before income taxes 5,558 18,968 Provision for income taxes 1,392 6,070 ------- ------- Net income $ 4,166 $12,898 ======= ======= Net income per share $ 0.20 $ 0.54 ======= ======= Weighted average number of common and dilutive common equivalent shares outstanding 20,798 23,880
See accompanying notes to condensed consolidated financial information. Page 3 of 13 KLA INSTRUMENTS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In thousands except per share amounts) (Unaudited)
June 30, September 30, 1994 1994 -------- ------------- ASSETS Current assets: Cash and cash equivalents $139,126 $144,073 Accounts receivable, net of allowances of $1,754 and $1,787 74,226 84,006 Inventories 53,265 59,955 Deferred income taxes 7,495 7,495 Other current assets 4,343 4,723 -------- -------- Total current assets 278,455 300,252 -------- -------- Land, property and equipment, net 37,149 38,266 Other assets 5,966 6,101 -------- -------- Total assets $321,570 $344,619 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 4,673 $ 2,193 Current portion of long term debt - 20,000 Accounts payable 11,890 13,787 Income taxes payable 12,466 15,333 Other current liabilities 36,553 42,741 -------- -------- Total current liabilities 65,582 94,054 -------- -------- Deferred income taxes 8,606 8,606 Long-term debt 20,000 - Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value, 1,000 shares authorized, none outstanding - - Common stock, $0.001 par value, 75,000 shares authorized, 22,864 and 23,054 shares issued and outstanding 23 23 Capital in excess of par value 147,358 148,901 Retained earnings 80,275 93,173 Treasury stock (581) (581) Cumulative translation adjustment 307 443 -------- -------- Total stockholders' equity 227,382 241,959 -------- -------- Total liabilities and stockholders' equity $321,570 $344,619 ======== ========
See accompanying notes to condensed consolidated financial information. Page 4 of 13 KLA INSTRUMENTS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED SEPTEMBER 30, (In thousands) (Unaudited)
1993 1994 ---- ---- Cash flows from operating activities: Net income $ 4,166 $ 12,898 Adjustments required to reconcile net income to cash provided by operations: Depreciation and amortization 2,408 2,105 Changes in assets and liabilities: Accounts receivable, net (16,841) (9,780) Inventories, net (171) (6,690) Other current assets (37) (380) Accounts payable 428 1,897 Income taxes payable and deferred income taxes 295 2,867 Other current liabilities (1,868) 6,188 Other assets (42) (767) -------- -------- Cash provided by (used for) operating activities (11,662) 8,338 -------- -------- Cash flows from investing activities: Capital expenditures (756) (2,590) Capitalization of software development costs (248) - -------- -------- Cash (used for) investing activities (1,004) (2,590) -------- -------- Cash flows from financing activities: Short-term borrowings and current portion of long-term debt, net (3,931) (2,480) Sales of common stock 1,679 1,543 -------- -------- Cash (used for) financing activities (2,252) (937) -------- -------- Effect of exchange rate changes on cash 125 136 -------- -------- Increase/(decrease) in cash and cash equivalents (14,793) 4,947 Cash and cash equivalents at beginning of period 52,362 139,126 -------- -------- Cash and cash equivalents at end of period $ 37,569 $144,073 ======== ======== Supplemental disclosure to cash flow information CASH PAID DURING THE PERIOD FOR: INTEREST $ 440 $ 470 INCOME TAXES 781 2,955
See accompanying notes to condensed consolidated financial information. Page 5 of 13 KLA INSTRUMENTS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (IN '000'S) UNAUDITED 1) This information is unaudited but, in the opinion of Registrant's management, all adjustments (consisting only of adjustments that are of a normal recurring nature) necessary for a fair statement of results have been included. The results for the quarter ended September 30, 1994, are not necessarily indicative of results to be expected for the entire year. This financial information should be read in conjunction with the Registrant's Annual Report on Form 10-K (including items incorporated by reference therein) for the year ended June 30, 1994. 2) Details of certain balance sheet components:
June 30, September 30, 1994 1994 -------- ------------- Inventories: Systems raw materials $12,597 $12,548 Customer service spares 12,220 12,380 Work-In-Process 13,348 21,387 Demonstration Equipment 15,100 13,640 ------- ------- $53,265 $59,955 ======= ======= Other Current Liabilities: Accrued compensation and benefits $16,328 $19,176 Accrued warranty and installation 14,367 14,514 Unearned service contract revenue 3,054 3,355 Other 2,804 5,696 ------- ------- $36,553 $42,741 ======= =======
Page 6 of 13 KLA INSTRUMENTS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations First Quarter of Fiscal 1995 Compared with First Quarter of Fiscal 1994 Net Sales Net sales increased $31.3 million or 60.3% for the three month period ended September 30, 1994 as compared to the prior fiscal year. The WISARD business unit was predominantly responsible for the dollar increase in net sales. The Company attributes the continuing increases of WISARD's sales primarily to the continuing adoption by customers of KLA's methodology of in-line monitoring, and secondarily to the fact that KLA's most sophisticated users are continuing to add to the number of systems they employ in a single fab line. During the quarter, the Metrology division, the ATS division and the RAPID division also recorded increases in net sales. In particular, the Metrology division's net sales rose by more than 50% versus the year-earlier comparable period and the Company believes that it now has over 50% of the worldwide market. Gross Margin Gross margins were 51.2% for the three month period ended September 30, 1994 compared to 40.0% for the prior fiscal year. Most of the improvement in the gross margin percentage was due to a favorable mix effect as the WISARD business unit's share of total revenues rose substantially. The WISARD business unit's gross margin was also favorably impacted by learning curve effects, volume efficiencies and the use of lower cost components. The Customer Service division's return to profitability also improved gross margins. Engineering, Research and Development Engineering, research and development expenses were 9.8% of net sales for the three month period ended September 30, 1994, compared to 9.5% in the first quarter of the prior fiscal year. Net engineering expenditures rose $3.3 million during the three month period of fiscal 1995 compared to the prior fiscal year. Engineering headcount additions in the WISARD business unit were the primary contributor to the dollar increase in net engineering expenses. However, the rate at which the WISARD business unit added engineering headcount was lower than the rate at which the business unit sales increased. The newly formed PRISM division also contributed to the increase in net engineering expense. Page 7 of 13 KLA INSTRUMENTS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Selling, General and Administrative Selling, general and administrative expenses increased 0.7% to 19.8% of sales for the three month period ended September 30, 1994 as compared to the prior fiscal year. Sales and administration expenses increased at a rate slower than sales while profit sharing and representative commissions increased at a rate higher than sales. The profit sharing increase reflected the improvement in the Company's financial performance. Representative commissions grew slightly as a percentage of sales primarily due to the increase in the share of revenues from the Asia-Pacific region. Interest Income and Other, net Interest income and other, net increased $1.3 million for the three month period ended September 30, 1994 as compared to the prior fiscal year. This increase is primarily attributable to higher average cash balances of approximately $97 million. Provision for Income Taxes The 32% estimated effective tax rate for the three month period ended September 30, 1994 is lower than the U.S. statutory rate as a result of income in foreign jurisdictions having a lower than U.S. tax rate and from the realization of net deferred tax assets previously reserved including tax credit carryforwards. Future Operating Results The Company's future results will depend on its ability to continuously introduce new products and enhancements to its customers as demands for higher performance yield management and process control systems change or increase. Due to the risks inherent in transitioning to new products, the Company must accurately forecast demand in both volume and configuration and also manage the transition from older products. The Company's results could be affected by the ability of competitors to introduce new products which have technological and/or pricing advantages. The Company's results also will be affected by strategic decisions made by management regarding whether to continue particular product lines, and by volume, mix and timing of orders received during a period, fluctuations in foreign exchange rates, and changing conditions in both the semiconductor industry and key semiconductor markets around the world. As a result, the Company's operating results may fluctuate, especially when measured on a quarterly basis. Liquidity and Capital Resources Cash generated by operations was $8.3 million. Due to the ongoing sales ramp, the Company invested $9.8 million in accounts receivable, $6.7 million in inventories, and $2.6 million in new capital equipment. KLA's capital spending rate is expected to increase modestly over the next two years as the Company adds manufacturing capacity and office space at its San Jose Campus site. The Company is confident that its current level of liquid assets, credit facilities and cash generated from operations are sufficient to fund growth through the foreseeable future. Page 8 of 13 KLA INSTRUMENTS CORPORATION FORM 10-Q PART II: OTHER INFORMATION Item 1 - Legal Proceedings Page 11 Item 2 - Changes in Securities Not Applicable Item 3 - Defaults Upon Senior Securities Not Applicable Item 4 - Submission of Matters to a Vote of Security Holders Not Applicable Item 5 - Other Events Not Applicable Item 6 - Exhibits and Reports on Form 8-K Page 12 - 13
Page 9 of 13 ITEM 1 LEGAL PROCEEDINGS The Company had no significant changes in legal proceedings during the quarter ended September 30, 1994. For further information, refer to the Company's Form 10-K for the fiscal year ended June 30, 1994. Page 10 of 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KLA INSTRUMENTS CORPORATION November 13, 1994 KENNETH LEVY - - ----------------- ---------------------------- [Date] Kenneth Levy Chairman of the Board November 13, 1994 KENNETH L. SCHROEDER - - ----------------- ---------------------------- [Date] Kenneth L. Schroeder President November 13, 1994 ROBERT J. BOEHLKE - - ----------------- ---------------------------- [Date] Robert J. Boehlke V.P. Finance and Administration Chief Financial Officer Page 11 of 13 INDEX TO EXHIBITS (i) EXHIBITS INCORPORATED BY REFERENCE: 4.1 1982 Stock Option Plan(1) 4.2 1981 Employee Stock Purchase Plan(1) 4.3 Rights Agreement dated as of March 15, 1989, between the Company and First National Bank of Boston, as Rights Agent. The Rights Agreement includes as Exhibit A, the form of Right Certificate, and as Exhibit B, the form of Summary of Rights to Purchase Common Stock(2) 4.4 1982 Stock Option Plan, as amended by the Board of Directors on July 20, 1990(7) 4.5 1981 Employee Stock Purchase Plan, as amended by the Board of Directors on July 20, 1990(7) 4.6 1990 Outside Directors Stock Option Plan(8) 4.7 1993 Employee Stock Purchase Plan, as amended by the Board of Directors on September 14, 1992(10) 10.15 Statement of Partnership to Triangle Partners dated April 12, 1983(3) 10.16 Lease Agreement and Addendum thereto dated January 10, 1983, between BBK Partnership and the Company(3) 10.18 Purchase and Sale Agreement dated January 10, 1983, between BBK Partnership, Triangle Partners and the Company(3) 10.23 Research and Development Agreement, Cross License and Technology Transfer Agreement and Agreement for Option to License and Purchase Resulting Technology, all dated February 21, 1985, by and between KLA Development No. 3, Ltd., and the Company(4) 10.24 Research and Development Agreement dated February 21, 1985, by and between KLA Development No. 3, Ltd., and the Company(4) 10.25 Agreement for Option to License and Purchase Resulting Technology dated February 21, 1985, by and between KLA Development No. 3, Ltd., and the Company(4) 10.33 (Research and Development) Agreement dated as of February 1, 1987, by and between IBM Corporation and the Company(5) 10.35 Research and Development Agreement, Cross License and Technology Transfer Agreement and Agreement for Option to License and Purchase Resulting Technology, all dated October 1, 1986, by and between KLA Development No. 4, Ltd., and the Company(5) 10.36 Agreement for Option to License and Purchase Resulting Technology dated October 1, 1986, by and between KLA Development No. 4, Ltd., and the Company(5) 10.43 Amendment to the Exclusive Marketing Agreement dated February 23, 1989, by and between Micrion Limited Partnership and the Company(6) 10.44 Bank Loan Guarantee dated June 29, 1989, by the Company in favor of The First National Bank of Boston for the Micrion Limited Partnership(6) 10.45 Distribution Agreement, Manufacturing License Agreement, and Technical Marketing Assistance Agreement, all dated July 1990, by and between Tokyo Electron Limited, a Japanese Corporation, and the Company(7) 10.46 Principle facility Purchase Agreement dated July 1990, including all exhibits and amendments; Lease Agreement, Termination of Lease, Lot line adjustment, rights of first refusal, Deeds of Trust(7) 10.47 Joint Venture Agreement between the Company and Nippon Mining Company, Limited, dated September 18, 1990(8) 10.48 Exercise of Option to Purchase Technology made effective as of September 30, 1989, by and between KLA Development No. 3, and the Company(8) 10.49 Exercise of Option to Purchase Technology made effective as of January 1, 1990, by and between KLA Development No. 4, and the Company(8)
Page 12 of 13 10.51 Guarantee Agreement between First National Bank of Boston and the Company, dated June 29,1989(8) 10.52 Amendment to the Guarantee Agreement between First National Bank of Boston and the Company, dated April 19, 1991(8) 10.53 Secured Installment Note between Micrion and First National Bank of Boston, dated April 19, 1991(8) 10.54 Micrion Corporation Series E Preferred Stock Purchase Agreement, dated September 13, 1991(8) 10.55 Micrion Corporation Guaranty and Warrant Agreement, dated December 8, 1989(8) 10.57 Stock repurchase and option grant agreement between Bob Boehlke and the Company, dated April 22, 1991(8) 10.58 Purchase Agreement between the Company and Ono Sokki Co., Ltd., dated October 18, 1991 with certain portions for which confidential treatment has been requested, excised(9) 10.59 Credit Agreement between Bank of America NT & SA and the Company, dated November 15, 1991, as amended July 29, 1992(9) 10.60 Employment agreement between the Company and Kenneth L. Schroeder dated October 4, 1991(9) 10.61 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated October 28, 1992(10) 10.62 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated December 31, 1992(10) 10.63 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated February 28, 1993(10) 10.64 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated March 31, 1993(10) 10.65 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated June 1, 1993(10) 10.66 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated December 31, 1993(16) 10.67 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated March 31, 1994(16) 10.68 Credit Agreement between Bank of America NT & SA and the Company, dated April 30, 1994(16) 10.69 1982 Stock Option Plan, as amended by the Board of Directors on July 20, 1990(12) 10.70 1981 Employee Stock Purchase Plan, as amended by the Board of Directors on July 20, 1990(13) 10.71 1990 Outside Directors Stock Option Plan(14) 10.72 1993 Employee Stock Purchase Plan, as amended by the Board of Directors on September 14, 1992(15) - - ----------------- (1) Filed as the same exhibit number as set forth herein to Form S-8, File No. 33-15784, effective August 2, 1987 (2) Filed as exhibit number 1 to Form 8-A, filed effective March 23, 1989 (3) Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1983 (4) Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1985 (5) Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1987 (6) Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1989 (7) Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1990 (8) Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1991 (9) Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1992 (10) Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1993 (11)Filed as the same exhibit number to Registrant's registration statement no. 33-51819 on Form S-3, dated February 2, 1994 (12)Filed as exhibit number 4.4 as set forth herein to Registrant's Form 10-K for the year ended June 30, 1990 (13)Filed as exhibit number 4.5 as set forth herein to Registrant's Form 10-K for the year ended June 30, 1990 (14)Filed as exhibit number 4.6 as set forth herein to Registrant's Form 10-K for the year ended June 30, 1991 (15)Filed as exhibit number 4.7 as set forth herein to Registrant's Form 10-K for the year ended June 30, 1993 (16)Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1994
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