1
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)15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MarchDecember 31, 1997
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________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(STATE OR OTHER JURISDICTION OF (I.R.S. Employer
incorporation or organization) Identification No.EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
160 Rio Robles
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
468-4200(408) 434-4200
(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_____[X] No [ ]
As of April 29,January 30, 1997 there were 51,711,80984,030,319 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
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KLA-TENCOR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 Financial Statements (unaudited)
Condensed Consolidated Interim Balance Sheets at
MarchJune 30, 1997 and December 31, 1997 and June 30, 1996 . . . . . . . . . . . . . . . . . . . ..................................... 3
Condensed Consolidated Interim Statements of Operations for
the Three and NineSix Month Periods Ended March 31, 1997
and MarchDecember 31, 1996
. . . . . . . . . . . . . . . . . . . . . . . . . . .and 1997 ............................................................... 4
Condensed Consolidated Interim Statements of Cash Flows
for the NineSix Months Ended MarchDecember 31, 1996 and 1997 and 1996 . . . . . . . . . . ..................... 5
Notes to Condensed Consolidated Interim Financial Statements . . . . . .Statements............ 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . .Operations.................................................. 8
PART II - OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceedings........................................................... 12
Item 2 Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .Securities....................................................... 12
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . .Securities............................................. 12
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . .Holders......................... 12
Item 5 Other Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Events................................................................ 12
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 128-K............................................ 13
SIGNATURES 13
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PART II. FINANCIAL INFORMATION
ITEM 11. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(Unaudited)(In thousands)
March 31, June 30, (In thousands)December 31,
1997 1996
--------- ---------1997
----------- -----------
ASSETS
Current assetsassets:
Cash and cash equivalents $ 149,573279,225 $ 109,404191,133
Short-term investments 11,003 14,27969,606 89,837
Accounts receivable, net 122,027 203,470269,291 376,345
Inventories 118,289 132,377174,634 195,045
Deferred income taxes 27,909 27,24654,799 53,557
Other current assets 14,756 6,783
--------- ---------12,452 13,744
----------- -----------
Total current assets 443,557 493,559860,007 919,661
Land, property and equipment, net 73,428 71,825117,595 131,045
Marketable securities 257,795 137,728338,418 403,596
Other assets 13,512 9,660
--------- ---------27,287 30,357
----------- -----------
Total assets $ 788,2921,343,307 $ 712,772
========= =========1,484,659
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilitiesliabilities:
Notes payable $ 2,11525,113 $ 3,11122,495
Accounts payable 19,732 27,330
Income taxes payable 34,762 34,59541,155 54,034
Other current liabilities 113,725 104,167
--------- ---------258,483 266,130
----------- -----------
Total current liabilities 170,334 169,203
--------- ---------324,751 342,659
----------- -----------
Deferred income taxes 6,316 6,320
--------- ---------
Commitments and contingenciesother 3,943 3,179
----------- -----------
Stockholders' equity:
Common stock and additional paid-in capital 285,377 277,943in excess of par value 458,308 476,112
Retained earnings 328,789 259,777
Treasury stock (581) (581)542,706 644,486
Net unrealized lossgain on investments (1,181) (131)17,591 27,269
Cumulative translation adjustment (762) 241
--------- ---------(3,992) (9,046)
----------- -----------
Total stockholders' equity 611,642 537,249
--------- ---------1,014,613 1,138,821
----------- -----------
Total liabilities and stockholders' equity $ 788,2921,343,307 $ 712,772
========= =========1,484,659
=========== ===========
See accompanying notes to unaudited condensed
consolidated interim financial statements.
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CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)(In thousands, except per share data)
Three Months Ended Nine Months Ended
Marchmonths ended Six months ended
December 31, MarchDecember 31,
(In thousands, except per share amounts)----------------------- -----------------------
1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
Net sales $157,761 $187,494 $473,586 $502,320
-------- -------- -------- --------
Revenues $242,155 $326,361 $503,295 $638,781
Costs and operating expenses:
CostCosts of sales 75,322 85,215 224,508 227,239
Engineering, researchgoods sold 114,874 150,235 230,238 290,999
Research and development 22,046 20,942 62,212 54,59929,308 47,280 61,804 92,457
Selling, general and administrative 29,622 33,655 94,368 90,95750,223 61,622 108,838 123,760
Merger, restructure and other charges -- -- 8,500 --
-------- -------- -------- --------
126,990 139,812 381,088 372,795Total costs and operating expenses 194,405 259,137 409,380 507,216
-------- -------- -------- --------
Income from operations 30,771 47,682 92,498 129,525
Interest47,750 67,224 93,915 131,565
Other income and other, net 5,144 2,033 12,065 9,5045,353 9,331 11,010 18,116
-------- -------- -------- --------
Income before income taxes 35,915 49,715 104,563 139,02953,103 76,555 104,925 149,681
Provision for income taxes 12,211 17,898 35,551 50,05118,884 24,497 37,126 47,901
-------- -------- -------- --------
Net income $ 23,70434,219 $ 31,81752,058 $ 69,012 $ 88,97867,799 $101,780
======== ======== ======== ========
Net incomeEarnings per shareshare:
Basic $ 0.440.42 $ 0.61 $ 1.300.83 $ 1.701.20
======== ======== ======== ========
Shares used in computing net income
per share 53,830 52,170 53,014 52,321Diluted $ 0.40 $ 0.59 $ 0.80 $ 1.15
======== ======== ======== ========
Weighted average number of shares:
Basic 82,114 84,657 81,961 84,470
======== ======== ======== ========
Diluted 84,907 88,105 84,230 88,343
======== ======== ======== ========
See accompanying notes to unaudited condensed
consolidated interim financial statements.
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CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)(In thousands)
NineSix Months Ended
MarchDecember 31,
(In thousands)--------------------------
1996 1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 69,01267,799 $ 88,978101,780
Adjustments required to reconcile net income to net
cash provided by/(usedby (used in) operations:operating activities:
Depreciation and amortization 16,385 10,700
Deferred income taxes (667) --22,881 18,228
Changes in assets and liabilities:
Accounts receivable, 81,443 (97,958)net 92,873 (122,067)
Inventories 14,088 (51,205)19,069 (26,791)
Other assets (11,825) 4,718(12,584) (7,217)
Accounts payable (7,598) 16,954
Income taxes payable 167 6,869(12,442) 14,007
Other current liabilities 9,558 34,7574,616 16,300
--------- ---------
CashNet cash provided by (used in)
operating activities 170,563 13,813182,212 (5,760)
--------- ---------
Cash flows from investing activities:
Capital expenditures (17,988) (27,321)
Purchases of shortproperty and long-termequipment (31,915) (33,701)
Net purchases of available for sale securities (391,890) (374,289)
Sales and maturities of short and long-term
available for sale securities 274,049 361,085(54,304) (75,738)
--------- ---------
CashNet cash used forin investing activities (135,829) (40,525)(86,219) (109,439)
--------- ---------
Cash flows from financing activities:
Short-term borrowings, net (996) (2,487)
Payment of current portion of long-term debt -- (20,000)
Issuance of common stock, net 7,434 4,7868,902 25,350
Stock repurchases -- (7,546)
Net payments under debt obligations (3,596) (1,222)
--------- ---------
CashNet cash provided by/(used in)by financing activities 6,438 (17,701)5,306 16,582
--------- ---------
Effect of exchange rate changes (1,003) (1,020)on cash and cash equivalents (415) 10,525
--------- ---------
Increase/Net increase (decrease) in cash and cash equivalents 40,169 (45,433)100,884 (88,092)
Cash and cash equivalents at beginning of period 109,404 92,059201,704 279,225
--------- ---------
Cash and cash equivalents at end of period $ 149,573302,588 $ 46,626
========= =========
Cash paid during the period for:
Interest $ 365 $ 841191,133
--------- ---------
Supplemental cash flow disclosures:
Income taxes paid $ 34,59942,480 $ 43,92445,292
Interest paid $ 796 $ 1,307
See accompanying notes to unaudited condensed
consolidated interim financial statements.
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KLA-TENCOR CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
Note 1NOTE 1. In the opinion of the Company's management of KLA-Tencor Corporation (the
Company), the unaudited condensed consolidated interim financial statements
include all adjustments (consisting only of adjustments that are of a normal recurring nature)adjustments)
necessary for a fair statement of results. The results for the quarter ended
MarchDecember 31, 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, 1996. The1997.
Preparation of financial statements presented in this Form 10-Q
representconformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial results of KLA Instruments Corporation on a
historical basis only, without giving effect to the merger (see
Note 2).
Note 2 On April 30, 1997, a wholly-owned subsidiary of the Company merged
into Tencor Instruments, a manufacturer of wafer defect
inspection, software-based yield management, film measurement,statements and metrology systems used in semiconductor manufacturing. In
connection with the merger, the Company changed its name to
KLA-Tencor Corporation and increased its number of authorized
shares to 251,000,000. The Company issued approximately 32
million shares of Common Stock for all the outstanding Common
Stock and options of Tencor Instruments on the basis of one share
of the Company's Common Stock for one share of Tencor Instruments.
The merger will be accounted for as a pooling of interests.
The following summary, prepared on a pro forma basis, combines the
results of operations of the Company and Tencor Instruments as if
the merger had been effective as of the beginning of each of the
periods presented (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
-----------------------------------------------------------------------
Sales $252,346 $293,777 $755,641 $792,528
Net income $ 36,995 $ 52,068 $104,794 $146,182
Net income per share $ 0.43 $ 0.62 $ 1.23 $ 1.73
Weighted average shares
outstanding 86,643 83,891 85,149 84,264
The pro forma combined results are presented for illustrative
purposes only and are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the
entire periods presented. In addition, the pro forma results are
not intended to be a projection of future results.
Note 3accompanying notes.
Actual amounts could differ materially from those amounts.
NOTE 2. Inventories (in thousands):
March 31, June 30, December 31,
1997 19961997
-------- --------
Systems raw materials $ 17,559 $ 33,521
Customer service spares 22,529 13,614parts $ 31,387 $ 30,680
Raw materials 36,829 30,984
Work-in-process 53,033 47,01271,998 75,433
Demonstration equipment 25,167 38,23020,580 40,258
Finished goods 13,840 17,690
-------- --------
$118,289 $132,377$174,634 $195,045
======== ========
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Note 4 In August 1996,NOTE 3. During the Compensation Committee ofsix months ended December 31, 1997, the Board of
DirectorsCompany authorized
the Companyrepurchase, at its discretion, of up to re-price stock options issued
during the period August 1994 through August 1996, which had
exercise prices well above the August 1996 trading prices350,000 shares of the
Company's Common Stock. This re-pricing was done in the form of
an exchange, whereby eligible optionees could cancel their current
options in exchange for new options with exercise prices at the
fair market valueStock on
the date of grant.
Note 5 Theopen market for issuance under its employee stock purchase plans. During the
six month period ended December 31, 1997, the Company has entered into an agreement with a bank to sell,
with recourse, certainrepurchased 136,500 shares
of its trade receivables. The amountCommon Stock at a cost of proceeds received was approximately $35 million and $80 million,
respectively, for$7.5 million.
NOTE 4. During the three and nine month periodsquarter ended March 31,
1997. As of MarchDecember 31, 1997, approximately $41 million of the
factored trade receivables remains uncollected by the bank.
Note 6 Engineering, research and development expenditures were net of
external funding of $3.3 million and $11.0 million for the three
and nine month periods ended March 31, 1997, respectively.
Note 7 Net income per share is computed using the weighted average number
of common and common equivalent shares outstanding during the
respective periods, including the assumed net shares issuable upon
exercise of stock options.
In February 1997, the Financial Accounting Standards Board issuedCompany adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The Statement redefinesSFAS 128 requires
presentation of both Basic and Diluted earnings per share under
generally accepted accounting principles,(EPS) on the face of
the statement of operations. Basic EPS, which replaces primary EPS, is computed
by dividing net income available to common stockholders by the weighted average
number of common share outstanding during the period. Diluted EPS replaces fully
diluted EPS and will be effectivegives effect to all dilutive potential common shares outstanding
during a period. In computing Diluted EPS, the average stock price as reported
on the Nasdaq National Market System for the Company's fiscal yearperiod is used in determining the
number of shares assumed to be purchased from the exercise of stock options
rather than the higher of the average or ending June 30, 1998. Understock price as used in the
new
standard, primary earnings per share will be replaced by basic
earnings per share andcomputation of fully diluted earnings per share willEPS.
The difference between the computation of Basic EPS and Diluted EPS, 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 six month periods ended December 31, 1997, options to purchase approximately
900,000 and 779,000 shares, respectively, at prices ranging from $48.06 to
$69.88 were outstanding but not included in the computation of Diluted EPS
because the exercise price was greater than the average market price of common
shares.
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NOTE 5. The Company recorded charges totaling $60.6 million for merger,
restructuring and other non-recurring events which occurred during forth quarter
of fiscal 1997. Of this amount approximately $46 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 by Tencor Instruments in
fiscal 1997. As of December 31, 1997, approximately $10.6 million of the accrued
balance remains relating primarily to lease exit costs, and is expected to be
replaced by diluted earnings per share. Ifutilized ratably during the remainder of 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 December 31, 1997,
the Company had adopted this Statement forforeign exchange forward contracts maturing throughout fiscal
1998 and early fiscal 1999 to sell and purchase approximately $282 million and
$16 million, respectively, in foreign currency, primarily Japanese yen. Net
gains on these contracts were approximately $11 million at December 31, 1997.
The Company's foreign exchange forward contracts do not subject the threeCompany to
risk due to exchange rate movements because net gains and nine month periods ended
March 31, 1997losses on these
contracts as previously noted, are offset by net losses on the assets,
liabilities and March 31, 1996, the Company's earnings per
share would have been as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
------------------------------------------------------------------
Earnings per share:
Basic $ 0.46 $ 0.63 $ 1.35 $ 1.76
Diluted $ 0.44 $ 0.61 $ 1.30 $ 1.70
transactions being hedged.
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ITEM 22. 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 are particularly noted under "Risk Factors" on
page 10.
RECENT DEVELOPMENTS
On April 30, 1997, a wholly-owned subsidiary of the Company merged into Tencor
Instruments, a manufacturer of wafer defect inspection, software-based yield
management, film measurement, and metrology systems used in semiconductor
manufacturing. In connection with the merger, the Company changed its name to
KLA-Tencor Corporation and increased its number of authorized shares to
251,000,000. The Company issued approximately 32 million shares of Common
Stock for all the outstanding Common Stock and options of Tencor Instruments on
the basis of one share of the Company's Common Stock for one share of Tencor
Instruments. The merger will be accounted for as a pooling of interests.below.
RESULTS OF OPERATIONS
Net Sales Net salesRevenues were $157.8$326.4 million and $473.6$638.8 million for the three and ninesix month
periods ended MarchDecember 31, 1997, respectively, compared to $187.5$242.2 million and $502.3$503.3 million
for the same periods of the prior fiscal year, which
represents a decreaserepresenting an increase of 15.9%34.8%
and 5.7%26.9% for the respective periods. The decreaseincrease in net sales, both on a quarter on quarter and year on year basis,revenues is primarily
attributedattributable to increased demand for the slowdown in the semiconductor manufacturing
industry's capital spending levels. While average selling prices remained
relatively consistent during the three and nine month periods ended March 31,
1997,Company's products when compared to the
same periods ofin the prior fiscal year overall unit
shipment volumes decreased,in which the semiconductor industry was
primarily associated with theexperiencing a slowdown resulting from lower memory device prices caused by
excess production capacity. Higher revenue levels were driven by increases in
wafer inspection, products.
Gross Marginmetrology and reticle inspection system sales. E-Beam
Metrology divisional sales continue to grow the Company's overall market share
of this technology.
Gross margins were 52.3%54.0% and 52.6%54.4% of net sales, respectively,revenues for the three and ninesix month
periods ended MarchDecember 31, 1997, compared to 54.6%52.6% and 54.8%54.3% of net salesrevenues for the
same periods of the prior fiscal year. Gross margins decreasedfor system products
increased during the current quarter when compared to the prior year quarter
primarily as a result of a changeshift in product mix toward Wisard and Surfscan which
have relatively higher gross margins than other product lines as well as
improved margins in the product mixCompany's E-Beam Metrology division which realized some
manufacturing efficiencies as wafer
inspection productsit ramped production during the period. These
increases were offset in part by increased costs in the Company's field support
organization. Gross margins for the six months ended December 31, 1997 remained
relatively consistent with higher relative gross margins decreased as a
percentagethe same period of total Company revenues. Additionally, wafer inspection gross
margins decreased as a result of unit volume inefficiencies and new product
introduction costs. These effects were partially offset by rising gross
margins in reticle inspection and metrology products as a result of higher unit
volume efficiencies and lower installation and warranty costs.
Engineering, Research and Developmentthe prior fiscal year.
Engineering, research and development (R&D) expenses were $22.0$47.3 million and
$62.2$92.5 million for the three and ninesix month periods ended MarchDecember 31, 1997
respectively, compared to $20.9$29.3 million and $54.6$61.8 million for the same periods of the prior
fiscal year. As a percentage of net
sales, engineering, research and developmentrevenues, R&D expenses increased to 14.0% and
13.1%14.5% for
the three and ninesix month periods ended MarchDecember 31, 1997, compared to 11.2%12.1% and
10.9%12.3% for the same periods of the prior fiscal year. Engineering,
researchThe increase is primarily
attributable to increases in headcount and development expenses consist primarily of employee
compensation-related costs, project material and other costs associated
with the Company's ongoing efforts for product development in new market
segments and enhancements to existing products. The increase is attributable to increases in headcount, as
well as increases in other new product spendingproducts including expenses related in
part to the next generation reticle300mm
products and inspection products. Engineering, researchenhancements for 0.25-micron technology and development expenditures were
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net of external funding of $3.3 million and $11.0 million for the three and
nine month periods ended March 31, 1997, respectively.
Selling, General and Administrativebelow.
Selling, general and administrative (SG&A) expenses were $29.6$61.6 million and
$94.4$123.8 million for the three and ninesix month periods ended MarchDecember 31, 1997,
respectively, compared to $33.7$50.2 million and $91.0$108.8 million for the same periods of the prior
fiscal year. As a percentage of net
sales,revenues, SG&A increased to 18.8%decreased to18.9% and 19.9%, respectively,19.4% for
the three and ninesix month periodsperiod ended MarchDecember 31, 1997, compared to 17.9%20.7% and
18.1%21.6% for the same periods of the prior fiscal year. The dollar increase during
both comparativethe periods is due in partprimarily to increases inadditions to headcount, and increasesinvestment in the
Company's investment in itsworldwide information systems and customer group sales and applications
resources worldwide.
SG&A also included sales representative commissionsIn the first quarter of approximately $3fiscal 1997, the Company incurred restructuring charges
of $8.5 million and $12 million, respectively, for the three and nine month periods ended March
31, 1997, whichcosts related to orders previously taken by the Company's former
representative in Japan but which shipped during the respective periods.
Interest Income and Otherdownsizing its operations as well as
exiting certain leased facilities.
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Interest income and other, net, increased $3.1$4.0 million and $2.6$7.1 million respectively, for the
three and ninesix month periods ended MarchDecember 31, 1997, compared to the same
periods of the prior fiscal year. These increases areThe increase is due primarily to slightly higher
yields on higher cash andaverage investment balances.
Provision for Income Taxesbalances when compared to the same periods a year ago.
The Company's effective tax rate decreased to 34%32% for the nine monthsthree and six month
periods ended MarchDecember 31, 1997, compared to 36%35.6% and 35.4% for the same
periodperiods of the prior fiscal year. This decrease is due primarily to the
realization of tax attributes related to a prior acquisition and benefits associated with reinstatement of the federal research and developmentfrom
R&D tax credit.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. The Companyyears and filed a tax protest letter with the IRS on
June 10, 1996, in response to thethat 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 Cash,LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended December 31, 1997, cash, cash equivalents,
short-term investments and marketable securities balances increased $157declined $2.7 million
to $418 million
during the nine month period ended March 31, 1997.$684.6 million. Cash generated fromused in operations for the ninesix month period was $170.6$5.8
million, derivedresulting primarily from net income and reductions in accounts receivable. The decreaseincreases in accounts receivable is dueand inventory
and offset in part to an agreement the Company has with a bank to factor
certain of its accounts receivable.by net income, which includes non-cash charges for
depreciation. During the ninesix months ended MarchDecember 31, 1997, approximately $80$81.0
million of the Company's accounts receivable were factored.
The Company's capitalsold.
Capital expenditures of $33.7 million during the nine month period ended March 31,
1997first six months of fiscal 1998
were primarily infor computer equipment and facilities improvements new computers, manufacturing
tooling to improve production efficiencies, and engineering equipment to support the
Company's expanding researchgrowth.
Cash and development efforts.cash equivalents provided by financing activities during the first six
months of fiscal 1998 were $16.6 million compared to $5.3 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 $577.0 million at December 31, 1997 compared to $535.3
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.
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 or convertible debt securities could
result in additional dilution to the Company's stockholders.
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RISK FACTORS
Fluctuations in Quarterly Operating Results
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,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 the introduction(which includes its ability to attract, hire and assimilate an
adequate number of new products by its
competitors, changes in average selling prices and product mix, and exchange
rate fluctuations,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.
Current Slowdown and Volatility in the Semiconductor Equipment Industry
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. The semiconductor
industry is presently experiencing a slowdown in terms of product demand and
volatility in terms of product pricing. This slowdown and volatility has
caused the semiconductor industry to reduce purchases of semiconductor
manufacturing equipment and construction of new fabrication facilities. There
can be no assurance that this slowdown will not continue. 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.
Dependence on New Products and Processes; Rapid Technological Change
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. 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-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 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.
In addition, theThe 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.
Highly Competitive Industry10
11
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
10
11 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.
Importance of International Sales International salesrevenues accounted for 65%, 69%66% and 68%65% of the Company's net
salesrevenues for fiscal years 1994, 1995, 1996 and 1996,1997, respectively. International sales
were 63% for the three and six month periods ended December 31, 1997. The
Company expects that international salesrevenues will continue to represent a
significant percentage of its net sales. 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.revenues. International salesrevenues 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 salesfuture 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 income
fromprocess monitoring equipment. Countries in the Asia Pacific region,
including Japan, Korea and Taiwan, have recently experienced weaknesses in their
currency, banking and equity markets. These weaknesses could adversely affect
consumer demand for the Company's international business may be affected by fluctuations inproducts, the U.S. dollar value of the
Company's foreign currency exchange rates.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 could have a
material adverse effect on the Company's future business and financial results.
11
12
PART IIII. OTHER INFORMATION
ITEM 11. LEGAL PROCEEDINGS
None.Not applicable.
ITEM 22. CHANGES IN SECURITIES
Not Applicable.applicable.
ITEM 33. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.applicable.
ITEM 44. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of KLA-Tencor Corporation was held
on November 18, 1997 at the Company's offices in Milpitas, California.
Of the 84,408,077 shares outstanding as of the record date, 73,423,716
shares (87%) were present or represented by proxy at the meeting.
1. The table below presents the results of the election to the
Company's board of directors.
Votes
Votes For Withheld
---------- -------
Leo J. Chamberlain 73,273,387 150,329
Richard J. Elkus, Jr 73,254,489 169,227
Dag Tellefsen 73,272,733 150,983
2. The stockholders approved an amendment to the 1981 Employee Stock
Purchase Plan to increase the number of shares reserved thereunder by
800,000 shares of Common Stock. This proposal was approved by the
stockholders and received 54,252,652 votes for, 18,327,997 votes
against, with 117,748 votes abstaining, and 725,319 broker non-votes.
3. The stockholders approved the new 1997 Employee Stock Purchase Plan
and reserved for issuance thereunder 200,000 shares of Common Stock.
This proposal was approved by the stockholders and received 53,675,977
votes for, 18,268,699 votes against, with 115,921 votes abstaining, and
1,363,119 broker non-votes.
4. The stockholders ratified the appointment of Price Waterhouse LLP as
the Company's independent accountants for the fiscal year ended June
30, 1998. This proposal received 73,321,250 votes for, 19,566 votes
against, with 82,900 votes abstaining.
ITEM 5. OTHER INFORMATION
Not Applicable.
12
13
ITEM 5 OTHER EVENTS
Not Applicable.
ITEM 66. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended10.12 Participation Agreement dated as of November 12,
1997, including exhibits, schedules and Restated Articles of Incorporation
3.2 Bylaws
11.1 Calculation of Earnings Per Share
27related
agreements thereto, by and between KLA-Tencor
Corporation, Lease Plan U.S.A., Inc., certain
financial institutions, ABN AMRO Bank N.V. and Banque
Nationale De Paris.
27.1 Financial Data ScheduleSchedule.
(b) Reports on Form 8-K
The Company filed aThere were no reports on Form 8-K on January 22, 1997 announcingfiled during the signing on January 14, 1997 of an Agreement and Plan of
Reorganization with Tencor Instruments.
12
13period
ended December 31, 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)
May 13, 1997 JON D. TOMPKINSFebruary 11, 1998 Fredrick A. Ball
- ------------------------ ------------------------
Date Jon D. Tompkins
Chief Executive Officer-------------------------- -------------------------------
(Date) Fredrick A. Ball
Vice President Finance and Accounting
13
14
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION.Exhibit
Number Description
- ------- ------------
3.1 Amended------ -----------
10.12 Participation Agreement dated as of November 12, 1997
including exhibits, schedules and Restated Articles of Incorporation
3.2 Bylaws
11.1 Calculation of Earnings Per Share
27related agreements
thereto, by and between KLA-Tencor Corporation, Lease
Plan U.S.A., Inc., certain financial institutions, ABN
AMRO Bank N.V. and Banque Nationale De Paris.
27.1 Financial Data ScheduleSchedule.