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: March 31, 1998
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) 875-3000
(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 April 30, 1998 there were 86,873,016 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 March 31, 1998 .................................. 3
Condensed Consolidated Interim Statements of Operations for
the Three and Nine Month Periods Ended March 31, 1997
and 1998 .......................................................... 4
Condensed Consolidated Interim Statements of Cash Flows
for the Nine Months Ended March 31, 1997 and 1998 ................. 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
Item 6 Exhibits and Reports on Form 8-K....................................... 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(In thousands)
June 30, March 31,
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 279,225 $ 191,692
Short-term investments 69,606 73,060
Accounts receivable, net 269,291 331,173
Inventories 174,634 214,010
Deferred income taxes 54,799 53,953
Other current assets 12,452 18,040
----------- -----------
Total current assets 860,007 881,928
Land, property and equipment, net 117,595 138,425
Marketable securities 338,418 449,815
Other assets 27,287 34,671
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Total assets $ 1,343,307 $ 1,504,839
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 25,113 $ 19,012
Accounts payable 41,155 48,757
Other current liabilities 262,426 262,436
----------- -----------
Total current liabilities 328,694 330,205
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Stockholders' equity:
Common stock and capital in excess of par value 458,308 483,674
Retained earnings 542,706 673,457
Net unrealized gain on investments 17,591 26,144
Cumulative translation adjustment (3,992) (8,641)
----------- -----------
Total stockholders' equity 1,014,613 1,174,634
----------- -----------
Total liabilities and stockholders' equity $ 1,343,307 $ 1,504,839
=========== ===========
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 Nine months ended
March 31, March 31,
1997 1998 1997 1998
-------- -------- -------- --------
Revenues $252,346 $274,164 $755,641 $912,945
-------- -------- -------- --------
Costs and operating expenses:
Costs of goods sold 117,105 134,224 347,343 425,223
Research and development 34,436 46,051 96,240 138,508
Selling, general and administrative 51,805 60,054 160,643 183,814
Non-recurring acquisition and
restructuring charges -- 3,127 8,500 3,127
-------- -------- -------- --------
Total costs and operating expenses 203,346 243,456 612,726 750,672
-------- -------- -------- --------
Income from operations 49,000 30,708 142,915 162,273
Interest income and other, net 7,683 11,899 18,693 30,015
-------- -------- -------- --------
Income before income taxes 56,683 42,607 161,608 192,288
Provision for income taxes 19,688 13,636 56,814 61,537
-------- -------- -------- --------
Net income $ 36,995 $ 28,971 $104,794 $130,751
======== ======== ======== ========
Earnings per share:
Basic $ 0.45 $ 0.34 $ 1.27 $ 1.55
======== ======== ======== ========
Diluted $ 0.43 $ 0.33 $ 1.23 $ 1.48
======== ======== ======== ========
Weighted average number of shares:
Basic 82,682 84,985 82,303 84,505
======== ======== ======== ========
Diluted 86,480 87,785 85,188 88,246
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated interim financial
statements.
4
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
March 31,
1997 1998
--------- ---------
Cash flows from operating activities:
Net income $ 104,794 $ 130,751
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 30,481 27,929
Changes in assets and liabilities:
Accounts receivable, net 82,846 (79,042)
Inventories 31,370 (45,385)
Other assets 351 (15,736)
Accounts payable (14,765) 8,706
Other current liabilities 8,393 9,243
--------- ---------
Net cash provided by operating activities 243,470 36,466
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (40,766) (50,880)
Net purchases of available for sale securities (92,018) (106,309)
--------- ---------
Net cash used in investing activities (132,784) (157,189)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 16,284 36,554
Stock repurchases (2,900) (11,188)
Net payments under debt obligations (5,735) (4,524)
--------- ---------
Net cash provided by financing activities 7,649 20,842
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (1,670) 12,348
--------- ---------
Net increase (decrease) in cash and cash equivalents 116,665 (87,533)
Cash and cash equivalents at beginning of period 201,704 279,225
--------- ---------
Cash and cash equivalents at end of period $ 318,369 $ 191,692
--------- ---------
Supplemental cash flow disclosures:
Income taxes paid $ 56,524 $ 54,251
Interest paid $ 1,028 $ 790
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 management of KLA-Tencor Corporation (the
Company), the unaudited condensed consolidated interim financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of results of operations. The results of
operations for the quarter ended March 31, 1998 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.
NOTE 2. Inventories (in thousands):
June 30, March 31,
1997 1998
--------------------------
Customer service parts $ 31,387 $ 35,095
Raw materials 36,829 40,201
Work-in-process 71,998 84,598
Demonstration equipment 20,580 40,977
Finished goods 13,840 13,139
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$174,634 $214,010
======== ========
NOTE 3. During the nine months ended March 31, 1998, the Company authorized the
repurchase, at its discretion, of up to 200,000 shares of Common Stock on the
open market for issuance under its 1997 employee stock purchase plan and an
additional 150,000 shares of Common Stock as a continuing systematic plan to
offset, in part, the dilutive effects of employee stock option and stock
purchase plans. During the nine month period ended March 31, 1998, the Company
repurchased 228,000 shares of its Common Stock at a cost of approximately $11
million.
NOTE 4. In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share (EPS)." Under the provisions of this
statement, basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by using
the weighted average number of common shares outstanding during the period and
gives effect to all dilutive potential common shares outstanding during the
period. The difference between the computation of basic and diluted earnings per
share for all periods presented, is the inclusion of the dilutive effect of
stock options issued to employees under employee stock option plans.
During the three month and nine month periods ended March 31, 1998, options to
purchase approximately 5,026,000 and 1,058,000 shares, respectively, at prices
ranging from $39.75 to $69.88 were not included in the computation of diluted
EPS because the exercise price was greater than the average market price of
common shares.
6
NOTE 5. During the quarter ended March 31, 1998, the Company incurred a
non-recurring charge of approximately $3 million primarily consisting of the
write-off of in-process technology related to the acquisition of Nanopro GmbH, a
privately held company. The acquisition has been accounted for as a purchase.
Nanopro is now a wholly owned subsidiary of the Company.
During the fourth quarter of fiscal 1997, the Company recorded charges totaling
$61 million for merger, restructuring and other non-recurring events. Of this
amount approximately $46 million was the result of the merger between KLA
Instruments and Tencor Instruments on April 30, 1997, $6 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 $9 million primarily related to
lease exit costs incurred by Tencor Instruments in fiscal 1997. During the nine
month period ended March 31, 1998 approximately $16 million of the accrued
balance was used. As of March 31, 1998, approximately $8 million of the accrued
balance remains relating primarily to lease exit and other employee related
costs, and is expected to be utilized ratably during the remainder of fiscal
1998.
NOTE 6. On April 7, 1998, the Company completed its acquisition of Amray, Inc.
(Amray), a privately owned provider of scanning electron microscope systems.
Amray's historical operations, net assets, and cash flows are not material to
the Company's consolidated financial results and, therefore, will not be
reflected in the Company's consolidated financial results prior to the
acquisition. Beginning in the fourth quarter of fiscal 1998, the book value of
the acquired assets and assumed liabilities as well as the results of Amray's
operations and cash flows will be combined with those of the Company and
recorded under the pooling of interests method of accounting.
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" below.
RESULTS OF OPERATIONS
Revenues were $274 million and $913 million for the three and nine month periods
ended March 31, 1998, compared to $252 million and $756 million for the same
periods of the prior fiscal year, representing an increase of 9% and 21% for the
respective periods. The increase in revenues is primarily attributable to
continued increases in E-Beam Metrology divisional sales and growth in the Yield
Management Systems Group revenues.
Gross margins were 51% and 53% of revenues for the three and nine month periods
ended March 31, 1998, compared to 54% of revenues for the same periods of the
prior fiscal year. Gross margins decreased during the current quarter and the
nine month period ended March 31, 1998, when compared to the same prior year
periods primarily as a result of higher service and support costs and due to a
shift in product mix from products which have relatively higher gross margins.
These declines were offset in part by improved margins in the Company's E-Beam
Metrology and Yield Management Systems Group divisions.
Research and development (R&D) expenses were $46 million and $139 million for
the three and nine month periods ended March 31, 1998 compared to $34 million
and $96 million for the same periods of the prior fiscal year. As a percentage
of revenues, R&D expenses increased to 17% and 15% for the three and nine month
periods ended March 31, 1998, compared to 14% and 13% for the same periods of
the prior fiscal year. The increase is associated with the Company's ongoing
efforts for product development in new markets and enhancements to existing
products including next generation 300mm products and inspection enhancements
for .25-micron and below technology.
Selling, general and administrative (SG&A) expenses were $60 million and $184
million for the three and nine month periods ended March 31, 1998, compared to
$52 million and $161 million for the same periods of the prior fiscal year. As a
percentage of revenues, SG&A expenses were 22% and 20% for the three and nine
month periods ended March 31, 1998, compared to 21% for the same periods of the
prior fiscal year. The dollar increase during the periods is due primarily to
headcount additions within the sales and applications groups worldwide.
During the three month period ended March 31, 1998 the Company incurred
approximately $3 million in non-recurring acquisition costs primarily for
in-process research and development costs associated with the purchase of
Nanopro GmbH, a privately held developer of wafer measurement tools.
Restructuring charges of approximately $9 million incurred in the first quarter
of fiscal 1997 related to downsizing of Tencor's operations as well as exiting
certain leased facilities.
8
Interest income and other, net, increased approximately $4 million and $11
million for the three and nine month periods ended March 31, 1998, compared to
the same periods of the prior fiscal year. The increase is due to income
recognized upon settlement of certain foreign currency contracts and higher
average investment balances when compared to the same periods a year ago.
The Company's effective tax rate decreased to 32% for the three and nine month
periods ended March 31, 1998, compared to 35% for the same periods of the prior
fiscal year. This decrease is due primarily to the realization of tax attributes
related to a prior acquisition and benefits 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 nine month period ended March 31, 1998, cash, cash equivalents,
short-term investments and marketable securities balances increased $27 million
to $715 million. Cash provided by operations for the nine month period was $37
million, resulting primarily from net income offset by increases in accounts
receivable and inventory. During the nine months ended March 31, 1998,
approximately $129 million of the Company's accounts receivable were sold and
approximately $59 million remains uncollected at the end of the period.
Capital expenditures of approximately $51 million during the first nine months
of fiscal 1998 were primarily for software licenses, computer equipment and
facilities improvements to support the Company's growth.
Cash and cash equivalents provided by financing activities during the first nine
months of fiscal 1998 were $21 million compared to $8 million provided in the
same period of the prior year. The increase is primarily attributed to issuance
of the Company's stock in connection with employee benefit plans offset by stock
repurchases.
Working capital was $552 million at March 31, 1998 compared to $531 million at
the end of fiscal 1997. A major component of working capital continues to be
cash and short-term investments. 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 and sustain its operations
during downturns in the market. 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.
9
RISK FACTORS
The Company's quarterly operating results have fluctuated in the past and may
fluctuate in the future. During the last three months results have been
adversely affected as the Company experienced declines in revenues and margins
during this period due to the semiconductor industry's reaction to the Asian
financial crisis, low DRAM pricing and DRAM overcapacity. The Company's
operating results are dependent on many factors, including the economic
conditions in the semiconductor and related industries, 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, among others.
The Company has experienced reductions in orders, cancellations and delays in
shipments which may continue to adversely affect sales and margins in future
periods. The Company expects unfavorable effects on orders, sales and margins to
persist at least through the remainder of the fiscal year and possibly beyond.
The Company's expense levels are based, in part, on expectations of future
revenues. If revenue levels in a particular period do not meet expectations of
increased revenues, operating results will be adversely affected.
The Company's business depends and will continue to 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 current industry downturn has had an
adverse effect on the semiconductor industry's level of capital expenditures.
The Company believes that it is relatively well positioned for this downturn
because of its array of products, its focus on yield improvement and process
development rather than pure capacity, its sales of metrology products to
non-semiconductor industries and its strong balance sheet. Nevertheless, there
can be no assurance that the Company's current position will be able to
withstand the effects of a industry downturn.
Rapid technological changes in semiconductor manufacturing processes subject the
semiconductor manufacturing equipment industry to increased pressure to maintain
technological parity with deep submicron process technology. While focused on
controlling expenses to address the downturn in the semiconductor industry, the
Company continues to believe 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 .25-micron 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 forecast demand for new products while managing the transition from
older products. There can be no assurance that the Company will successfully and
timely develop and manufacture new hardware and software products or that new
hardware and software products introduced by the Company will be accepted in the
marketplace. If new products have reliability or quality problems then reduced
orders, higher manufacturing costs, delays in collecting accounts receivable and
additional service and warranty expense may result. Additionally, there can be
no assurance that future technologies, processes or product developments will
not render the Company's current product offerings obsolete. However, if the
Company does not continue to successfully introduce new products, its results of
operations will be adversely affected. The Company expects to continue to make
significant investments in research and development and to sustain its current
spending levels for customer support in fiscal year 1998 to meet current
customer requirements and effectively position the Company for growth when the
business cycle turns favorable.
10
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 sales were 55% and 54% for the three and nine month periods ended
March 31, 1998. The Company expects that international revenues will continue to
represent a significant percentage of its net revenues. 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 economic conditions in each country. 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. Countries in the Asia Pacific region,
including Japan, Korea and Taiwan, have experienced weaknesses in their
currency, banking and equity markets in recent periods. These weaknesses may
continue to adversely affect demand for the Company's products, the U.S. dollar
value of the Company's foreign currency denominated sales, the availability and
supply of resources, and the Company's consolidated results of operations.
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 may have a material adverse effect on the Company's future business and
financial results.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
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)
May 11, 1998 Robert J. Boehlke
- ---------------------- ----------------------------------------
(Date) Robert J. Boehlke
Executive Vice President and
Chief Financial Officer
12
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule