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, 1997
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-TENCOR 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
95134
(Address of principal executive offices)
(Zip Code)
(408) 468-4200
(Registrant's telephone number, including area code)
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[ ]
As of October 31, 1997 there were 84,615,620 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
INDEX
Page
Number
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Interim Balance Sheets at
June 30, 1997 and September 30, 1997 ............................ 3
Condensed Consolidated Interim Statements of Operations for
the Three Month Periods Ended September 30, 1996
and September 30, 1997 .......................................... 4
Condensed Consolidated Interim Statements of Cash Flows
for the Three Months Ended September 30, 1996 and 1997 .......... 5
Notes to Condensed Consolidated Interim Financial Statements..... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8
PART II - OTHER INFORMATION 11
SIGNATURES 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(In thousands)
June 30, September 30,
1997 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 279,225 $ 249,378
Short-term investments 69,606 75,514
Accounts receivable, net 269,291 344,966
Inventories 174,634 187,521
Deferred income taxes 54,799 54,040
Other current assets 12,452 12,441
----------- -----------
Total current assets 860,007 923,860
Land, property and equipment, net 117,595 128,796
Marketable securities 338,418 361,716
Other assets 27,287 28,575
----------- -----------
Total assets $ 1,343,307 $ 1,442,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 25,113 $ 22,618
Accounts payable 41,155 47,818
Other current liabilities 258,483 276,802
----------- -----------
Total current liabilities 324,751 347,238
----------- -----------
Deferred income taxes and other 3,943 3,179
----------- -----------
Stockholders' equity:
Common stock and capital in excess of par value 458,308 478,684
Retained earnings 542,706 592,428
Net unrealized gain on investments 17,591 25,974
Cumulative translation adjustment (3,992) (4,556)
----------- -----------
Total stockholders' equity 1,014,613 1,092,530
----------- -----------
Total liabilities and stockholders' equity $ 1,343,307 $ 1,442,947
=========== ===========
See accompanying notes to unaudited condensed consolidated interim financial
statements.
3
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
September 30,
-------------------
1996 1997
-------- --------
Revenues $261,140 $312,420
-------- --------
Costs and expenses:
Cost of sales 115,364 140,764
Engineering, research and
development 32,496 45,177
Selling, general and administrative 58,615 62,138
Restructuring costs 8,500 --
-------- --------
Total costs and operating expenses 214,975 248,079
-------- --------
Income from operations 46,165 64,341
Interest income and other, net 5,657 8,785
-------- --------
Income before income taxes 51,822 73,126
Provision for income taxes 18,242 23,404
-------- --------
Net income $ 33,580 $ 49,722
======== ========
Net income per share $ 0.40 $ 0.56
Shares used in computing net income
per share 83,698 88,783
See accompanying notes to unaudited condensed consolidated interim financial
statements.
4
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
September 30,
----------------------
1996 1997
--------- ---------
Cash flows from operating activities:
Net income $ 33,580 $ 49,722
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 14,088 11,865
Changes in assets and liabilities:
Accounts receivable, net 27,527 (75,675)
Inventories (3,375) (12,887)
Other assets (7,772) (1,083)
Accounts payable (13,336) 6,663
Accrued compensation 556 14,402
Other current liabilities 6,434 3,493
Income taxes payable (1,221) (340)
--------- ---------
Net cash provided by (used in)
operating activities 56,481 (3,840)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (14,567) (22,501)
Net purchases of available for sale securities (30,867) (20,823)
--------- ---------
Net cash used in investing activities (45,434) (43,324)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 942 23,276
Stock repurchases -- (2,900)
Borrowings/(payments) under debt obligations 7,702 (2,495)
--------- ---------
Net cash provided by financing activities 8,644 17,881
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 41 (564)
--------- ---------
Net increase in cash and cash equivalents 19,732 (29,847)
Cash and cash equivalents at beginning of period 196,348 279,225
--------- ---------
Cash and cash equivalents at end of period $ 216,080 $ 249,378
========= =========
Supplemental cash flow disclosures:
Income taxes paid $ 18,645 $ 11,393
Interest paid $ 275 $ 770
See accompanying notes to unaudited condensed consolidated interim financial
statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
NOTE 1. In the opinion of the Company's management, the unaudited condensed
consolidated interim financial statements include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair statement of results.
The results for the quarter ended September 30, 1997, are not necessarily
indicative of results to be expected for the entire year. This financial
information should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended June 30, 1997.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual amounts could differ materially from those amounts.
NOTE 2. Inventories (in thousands):
June 30, September 30,
1997 1997
-------- --------
Customer service parts $ 31,387 $ 27,644
Raw materials 36,829 33,810
Work-in-process 71,998 78,704
Demonstration equipment 20,580 31,079
Finished goods 13,840 16,284
-------- --------
$174,634 $187,521
======== ========
NOTE 3. In July 1997, the Company adopted a plan to repurchase, at its
discretion, up to 150,000 shares of its own Common Stock on the open market.
During the quarter ended September 30, 1997, the Company repurchased 40,500
shares of its Common Stock at a cost of $2.9 million.
NOTE 4. Net income per share is computed using the weighted average number of
common and common equivalent shares (weighted average shares) outstanding during
the respective period, which includes net shares issuable upon the exercise of
stock options, when dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The Statement
redefines earnings per share under generally accepted accounting principles, and
is effective for the Company's quarter ending December 31, 1997. Under the new
standard, primary earnings per share will be replaced by basic earnings per
share and fully diluted earnings per share is replaced by diluted earnings per
share. If the Company had adopted this Statement for the three months ended
September 30, 1997, the Company's earnings per share for the periods ended
September 30, 1996 and 1997 would have been as follows:
Three Months Ended
September 30,
1996 1997
------------------
Earnings per share:
Basic $ 0.41 $ 0.59
Diluted $ 0.40 $ 0.56
6
NOTE 5. The Company recorded charges totaling $60.6 million for merger,
restructuring and other non-recurring events which occurred during the year
ended June 30, 1997. Of this amount approximately $46.0 million was the result
of the merger between KLA Instruments and Tencor Instruments on April 30, 1997,
$6.1 million was a result of the write-off of a bad debt for shipments made to a
Thailand company in fiscal 1997 and additional restructuring charges of $8.5
million primarily related to lease exit costs incurred in fiscal 1997. As of
September 30, 1997, approximately $13.4 million of the accrued balance remains
relating primarily to lease exit costs, and is expected to be utilized ratably
during fiscal 1998.
NOTE 6. The Company has foreign subsidiaries which operate and sell the
Company's products in various global markets. As a result, the Company is
exposed to changes in foreign currency exchange rates and interest rates. The
Company utilizes various hedge instruments, primarily forward exchange
contracts, to manage its exposure associated with firm intercompany and
third-party transactions denominated in local currencies. At September 30, 1997,
the Company had forward exchange contracts maturing throughout fiscal 1998 and
early fiscal 1999 to sell and purchase approximately $280 million and $40
million, respectively, in foreign currency, primarily Japanese yen. Deferred
foreign exchange gains and losses were not considered material at September 30,
1997.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis may contain forward-looking statements
that reflect the Company's current judgment regarding the matters addressed by
such statements. Because such statements apply to future events, they are
subject to risks and uncertainties that could cause actual results to differ.
Important factors that could cause actual results to differ are described in the
following discussion and under "Risk Factors" on page 9.
RESULTS OF OPERATIONS
Revenues were $312 million for the three months ended September 30, 1997,
compared to $261 million for the same period of the prior fiscal year,
representing an increase of 19.5%. The increase in revenues is primarily
attributed to an increase in demand in the Company's products compared to the
same period of the prior year when the semiconductor manufacturing industry was
experiencing a slowdown in its capital spending levels. While overall average
selling prices remained relatively consistent compared to the prior year's
quarter, revenues increased primarily because of increased sales of the CD SEM
metrology, wafer inspection including Surfscan SP1(R) and Wisard 2135 and data
analysis systems.
Gross margins were 54.9% of net sales for the three month period ended September
30, 1997, compared to 55.8% of net sales for the same period of the prior fiscal
year. Gross margins for system products remained relatively unchanged during the
current quarter when compared to the prior year quarter. During the current
quarter gross margins declined as a result of the Company's continued investment
in its customer support infrastructure. This decrease was offset by improved
warranty and installation costs.
Engineering, research and development (R&D) expenses were $45 million for the
three month period ended September 30, 1997 compared to $32 million for the same
period of the prior fiscal year. As a percentage of net sales, R&D expenses
increased to 14.5% for the three month period ended September 30, 1997, compared
to 12.4% for the same period of the prior fiscal year. The increase is primarily
attributable to increases in headcount and project material and other costs
associated with the Company's ongoing efforts for product development in new
market segments and enhancements to existing products including the next
generation 300mm products and inspection enhancements for 0.25-micron and below.
Selling, general and administrative (SG&A) expenses were $62 million for the
three month period ended September 30, 1997, compared to $59 million for the
same period of the prior fiscal year. As a percentage of net sales, SG&A
decreased from 19.9% for the three month period ended September 30, 1997,
compared to 22.5% for the same period of the prior fiscal year. The increase in
dollars during the period is due in part to increases in headcount, continued
investment in the Company's worldwide information systems and increased
investment in its customer group sales and applications resources worldwide.
In the first quarter of fiscal 1997, Tencor Instruments incurred restructuring
charges of $8.5 million for costs related to downsizing its operations as well
as exiting certain leased facilities.
Interest income and other, net, increased $3 million for the three month period
ended September 30, 1997, compared to the same period of the prior fiscal year.
The increase is due primarily to higher cash and investment balances when
compared to the same period a year ago.
The Company's effective tax rate decreased to 32% for the three month period
ended September 30, 1997, compared to 35.2% for the same period of the prior
fiscal year. This decrease is due
8
primarily to the realization of tax attributes related to a prior acquisition
and greater rate reduction from R&D tax credits.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1985 through 1992. The Company has received a notice of proposed
tax deficiency for such years and filed a tax protest letter with the IRS on
June 10, 1996, in response to that IRS notice. Management believes sufficient
taxes have been provided in prior years and that the ultimate outcome of the IRS
audit will not have a material adverse impact on the Company's financial
position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended September 30, 1997, cash, cash equivalents,
short-term investments and marketable securities balances were unchanged at $687
million. Cash used in operations for the three month period was $4 million,
resulting primarily from increases in accounts receivable and inventory and
offset in part by net income (which includes non-cash charges for depreciation)
and accrued compensation. During the three months ended September 30, 1997,
approximately $53 million of the Company's accounts receivable were sold.
Capital expenditures of $23 million during the first quarter of fiscal 1997 were
primarily for facilities improvements and computers to support the Company's
growth. Cash and cash equivalents provided by financing activities during the
first quarter of fiscal 1997 were $18 million compared to $9 million provided in
the same period of the prior year. The increase is primarily attributed to
issuance of the Company's Common Stock in connection with employee benefit
plans.
The Company believes that existing liquid resources and funds generated from
operations combined with its ability to borrow funds will be adequate to meet
its operating and capital requirements and obligations through the foreseeable
future. The Company believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of opportunities
as they may arise. Accordingly, the Company may, from time to time, as market
and business conditions warrant, invest in or acquire businesses, products, or
technologies which it believes complement its overall business strategy.
Borrowings under the Company's credit facilities, or public offerings of equity
or debt securities, are available if the need arises. The sale of additional
equity securities could result in additional dilution to the Company's
stockholders.
RISK FACTORS
The Company's quarterly operating results have fluctuated in the past and may
fluctuate in the future. The Company's operating results are dependent on many
factors, including the economic conditions in the semiconductor industry, both
in the US and abroad, the size and timing of the receipt of orders from
customers, customer cancellations or delays of shipments, the Company's ability
to develop, introduce, and market new and enhanced products on a timely basis
(which includes its ability to attract, hire and assimilate an adequate number
of qualified people), among others. There can be no assurance that one or more
of these factors will not adversely impact the Company's quarterly operating
results.
The Company's business depends and will depend in the future upon the capital
equipment expenditures of semiconductor manufacturers, which in turn depend on
the current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. The semiconductor industry has been cyclical in
nature and historically has experienced periodic downturns. Even during periods
of reduced revenues, in order to remain competitive, the Company will be
required to continue to invest in research and development and to maintain
extensive ongoing worldwide customer service and support capability which could
adversely affect its financial results.
Rapid technological changes in semiconductor manufacturing processes subject the
semiconductor manufacturing equipment industry to increased pressure to maintain
technological
9
parity with deep submicron process technology. The Company believes that its
future success will depend in part upon its ability to develop, manufacture and
successfully introduce new products with improved capabilities including those
for 300mm wafers and devices with critical dimensions at 0.25-m and below and to
continue to enhance existing products. Due to the risks inherent in
transitioning to new products, the Company will be required to accurately
forecast demand for new products while managing the transition from older
products. If new products have reliability or quality problems, reduced orders,
higher manufacturing costs, delays in acceptance of and payment for new products
and additional service and warranty expense may result. In the past, the Company
has experienced some delays as well as reliability and quality problems in
connection with product introductions, resulting in some of these consequences.
There can be no assurance that the Company will successfully develop and
manufacture new products, or that new products introduced by the Company will be
accepted in the marketplace. If the Company does not successfully introduce new
products, the Company's results of operations will be materially adversely
affected.
The Company expects to continue to make significant investments in research and
development. There can be no assurance that future technologies, processes or
product developments will not render the Company's current product offerings
obsolete or that the Company will be able to develop and introduce new products
or enhancements to its existing products which satisfy customer needs in a
timely manner or achieve market acceptance. The failure to do so could adversely
affect the Company's business.
The semiconductor equipment industry is highly competitive. The Company has
experienced and expects to continue to face substantial competition throughout
the world. The Company believes that to remain competitive, it will require
significant financial resources in order to offer a broad range of products, to
maintain customer service and support centers worldwide, and to invest in
product and process research and development. The Company believes that the
semiconductor equipment industry is becoming increasingly dominated by large
manufacturers, who have the resources to support customers on a worldwide basis.
Many of these competitors have substantially greater financial resources and
more extensive engineering, manufacturing, marketing and customer service and
support capabilities than the Company. In addition, there are smaller emerging
semiconductor equipment companies which provide innovative technology. No
assurance can be given that the Company will be able to compete successfully
worldwide.
International revenues accounted for 65%, 66% and 65% of the Company's net
revenues for fiscal years 1995, 1996 and 1997, respectively. International sales
were 57% for the three months ended September 30, 1997. The Company expects that
international revenues will continue to represent a significant percentage of
its net revenues. The future performance of the Company will be dependent, in
part, upon its ability to continue to compete successfully in Asia, one of the
largest areas for the sale of yield management and process monitoring equipment.
International revenues and operations may be adversely affected by imposition of
governmental controls, restrictions on export technology, political instability,
trade restrictions, changes in tariffs and the difficulties associated with
staffing and managing international operations. In addition, international sales
may be adversely affected by the economic conditions in each country. The net
revenues and income from the Company's international business may be affected by
fluctuations in currency exchange rates. Although the Company attempts to manage
near term currency risks through "hedging," there can be no assurance that such
efforts will be adequate. These factors could have a material adverse effect on
the Company's future business and financial results.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period
ended September 30, 1997.
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-TENCOR CORPORATION
(Registrant)
November 11, 1997 Robert J. Boehlke
- ------------------------------- -------------------------------
(Date) Robert J. Boehlke
Executive Vice President
and Chief Financial Officer
11
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule