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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2000
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, including 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 Exchange 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 January 31, 2001, there were 184,457,114 shares outstanding of the
Registrant's Common Stock, $0.001 par value.
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INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 2000.............................. 3
Condensed Consolidated Statements of Operations
for the Three- and Six-Month Periods Ended December 31, 1999
and 2000 ........................................................ 4
Condensed Consolidated Statements of Cash Flows
for the Six-Month Periods Ended December 31, 1999 and 2000 ...... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......... 17
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................... 19
Item 4 Submission of Matters to a Vote of Security Holders................. 19
Item 6 Exhibits and Reports on Form 8-K.................................... 20
Signatures .................................................................... 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
(in thousands) 2000 2000
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 478,212 $ 301,999
Short-term investments 119,932 96,720
Accounts receivable, net 481,950 604,921
Inventories 282,489 386,834
Other current assets 189,171 194,705
---------- ----------
Total current assets 1,551,754 1,585,179
Land, property and equipment, net 199,719 248,438
Marketable securities 366,239 417,894
Other assets 85,791 92,888
---------- ----------
Total assets $2,203,503 $2,344,399
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 55,016 $ 61,185
Other current liabilities 439,811 492,332
---------- ----------
Total current liabilities 494,827 553,517
---------- ----------
Stockholders' equity:
Common stock and capital in excess of par value 718,165 596,152
Retained earnings 976,846 1,191,970
Accumulated other comprehensive income 13,665 2,760
---------- ----------
Total stockholders' equity 1,708,676 1,790,882
---------- ----------
Total liabilities and stockholders' equity $2,203,503 $2,344,399
========== ==========
See accompanying notes to condensed consolidated financial statements.
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KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
December 31, December 31,
---------------------- --------------------------
(In thousands, except per share data) 1999 2000 1999 2000
-------- -------- --------- ----------
Revenues $330,757 $573,056 $ 603,746 $1,107,646
Costs and operating expenses:
Costs of goods sold 153,373 244,436 289,490 472,512
Engineering, research and development 55,624 96,229 102,342 176,877
Selling, general and administrative 60,148 94,508 113,562 185,405
Non-recurring acquisition, restructuring
and other charges 62 -- (5,938) --
-------- -------- --------- ----------
Total costs and operating expenses 269,207 435,173 499,456 834,794
-------- -------- --------- ----------
Income from operations 61,550 137,883 104,290 272,852
Interest income and other, net 6,850 13,931 19,556 25,933
-------- -------- --------- ----------
Income before income taxes 68,400 151,814 123,846 298,785
Provision for income taxes 19,151 42,508 35,095 83,661
-------- -------- --------- ----------
Net income $ 49,249 $109,306 $ 88,751 $ 215,124
======== ======== ========= ==========
Earnings per share:
Basic $ 0.27 $ 0.59 $ 0.49 $ 1.16
======== ======== ========= ==========
Diluted $ 0.26 $ 0.57 $ 0.47 $ 1.11
======== ======== ========= ==========
Weighted average number of shares:
Basic 180,607 185,247 179,307 186,101
======== ======== ========= ==========
Diluted 190,780 190,893 189,352 193,449
======== ======== ========= ==========
See accompanying notes to condensed consolidated financial statements.
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KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
-------------------------
(in thousands) 1999 2000
--------- ---------
Cash flows from operating activities:
Net income $ 88,751 $ 215,124
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 28,525 29,224
Deferred income taxes (321) 2,378
Restructuring charges (7,838) --
Non-recurring acquisition charges 1,900 --
Net gain on sale of marketable securities (3,323) (3,880)
Changes in assets and liabilities:
Accounts receivable, net (15,778) (136,464)
Inventories (26,128) (107,787)
Other assets (61,350) (13,135)
Accounts payable 1,764 6,709
Other current liabilities 56,363 53,058
--------- ---------
Net cash provided by operating activities 62,565 45,227
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net (25,642) (75,903)
Acquisition of assets and technology (6,900) --
Purchase of available for sale securities (337,155) (415,143)
Proceeds from sale of available for sale securities 362,422 381,226
--------- ---------
Net cash used in investing activities (7,275) (109,820)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 54,690 30,694
Stock repurchases (7,565) (149,561)
Net borrowings (payments) under short term debt obligations (2,729) 1,070
--------- ---------
Net cash provided by (used in) financing activities 44,396 (117,797)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (16,256) 6,177
--------- ---------
Net increase (decrease) in cash and cash equivalents 83,430 (176,213)
Cash and cash equivalents at beginning of period 271,488 478,212
--------- ---------
Cash and cash equivalents at end of period $ 354,918 $ 301,999
========= =========
Supplemental cash flow disclosures:
Income taxes paid, net of refunds $ 2,039 $ 87,594
========= =========
Interest paid $ 166 $ 410
========= =========
See accompanying notes to condensed consolidated financial statements.
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KLA-TENCOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
KLA-Tencor Corporation ("KLA-Tencor" or the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the unaudited interim financial statements reflect all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods indicated. These financial statements and notes, however, should be
read in conjunction with the Company's audited consolidated financial statements
and notes included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2000, filed with the SEC on September 28, 2000.
The results of operations for the three- and six- month periods ended
December 31, 2000 are not necessarily indicative of the results that may be
expected for any other interim period or for the full fiscal year ending June
30, 2001.
Certain items previously reported in specific financial statement
captions have been reclassified to conform to the presentation of the three- and
six-month periods ended December 31, 2000.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market. The components of inventories are as follows:
June 30, December 31,
(in thousands) 2000 2000
-------- --------
Inventories
Customer service parts $ 54,442 $ 72,066
Raw materials 83,103 136,748
Work-in-process 82,922 101,713
Demonstration equipment 50,817 56,762
Finished goods 11,205 19,545
-------- --------
$282,489 $386,834
======== ========
NOTE 3 -- STOCK REPURCHASE PROGRAM
The Company has adopted a plan to repurchase shares of its Common Stock
on the open market for the purpose of partially offsetting dilution created by
employee stock options and stock purchase plans. During the six-month period
ended December 31, 2000, the Company repurchased 4,450,000 shares of its Common
Stock at a cost of approximately $150 million.
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NOTE 4 -- COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three months ended Six months ended
December 31, December 31,
------------------------ ------------------------
(in thousands) 1999 2000 1999 2000
-------- --------- -------- ---------
Net Income $ 49,249 $ 109,306 $ 88,751 $ 215,124
-------- --------- -------- ---------
Other comprehensive income (loss)
Change in unrealized gain
on investments, net (1,420) (1,556) (4,994) (5,058)
Currency translation adjustments 1,344 (3,986) 3,572 (5,847)
-------- --------- -------- ---------
Other comprehensive loss (76) (5,542) (1,422) (10,905)
-------- --------- -------- ---------
Total Comprehensive Income $ 49,173 $ 103,764 $ 87,329 $ 204,219
======== ========= ======== =========
NOTE 5 -- EARNINGS PER SHARE
Basic earnings per share has been determined using the weighted-average
number of shares of common stock outstanding during the period. Diluted earnings
per share has been determined in the same manner but also includes all dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consisted of stock options.
During the three- and six-month periods ended December 31, 1999, options
to purchase 94,900 and 83,430 shares at an average exercise price of $46.30 and
$44.60, respectively, were not included in the computation of diluted earnings
per share because the exercise price was greater than the average market price
of the common stock for the period. During the three- and six-month periods
ended December 31, 2000, options to purchase 10,875,333 and 4,580,198 shares at
an average exercise price of $43.22 and $46.32, respectively, were not included
in the computation of diluted earnings per share because the exercise price was
greater than the average market price of the common stock for the period.
The reconciling difference between the computation of basic and diluted
earnings per share for the periods presented is the inclusion of the dilutive
effect of stock options issued to employees under employee stock option plans.
NOTE 6 -- NONRECURRING ACQUISITION, RESTRUCTURING AND OTHER COSTS
ACQUISITIONS
On November 30, 1999, KLA-Tencor acquired software developer ACME
Systems, Inc. ("ACME"). ACME is a leading supplier of yield engineering analysis
software used to correlate parametric electrical test and wafer sort yield data
with in-line Work In Process (WIP) and Metrology data. The acquisition was
accounted for as a purchase. Accordingly, the estimated fair value of assets
acquired and liabilities assumed were in KLA-Tencor's condensed consolidated
balance sheet as of December 31, 1999 and the results of operations from
November 30, 1999 through December 31, 1999 were included in the Company's
condensed consolidated statement of operations.
KLA-Tencor acquired ACME for a total of $6.9 million in cash. The total
purchase price was allocated to the estimated fair value of assets acquired and
liabilities assumed based on management estimates.
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The in-process research and development charge of $1.9 million was
determined by KLA-Tencor management, utilizing valuation methodologies approved
by the SEC. However, there can be no assurance that the SEC will not take issue
with assumptions used in KLA-Tencor's valuation model and require KLA-Tencor to
revise the amount allocated to in-process research and development.
To determine the value of the in-process technology, the expected future
cash flow attributable to the in-process technology was discounted, taking into
account the percentage of completion, utilization of pre-existing technology,
risks related to the characteristics and applications of the technology,
existing and future markets, and technological risk associated with completing
the development of the technology. The valuation approach used was a form of
discounted cash flow approach commonly known as the "percentage of completion"
approach whereby the cash flows from the technology are multiplied by the
percentage of completion of the in-process technology.
RESTRUCTURING AND OTHER CHARGES
During the three- and six-month periods ended December 31, 1999,
KLA-Tencor management determined that $1.8 million and $7.8 million of a $35.0
million restructuring reserve established in November 1998 would not be utilized
because of a change in management's plans for utilization of certain facilities
resulting from an increase in demand for the Company's products. Accordingly,
the restructuring reserve reversal was included in the determination of income
from operations for the three- and six-month periods ended December 31, 1999.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Company is currently party to various legal proceedings, including
those outlined in Part II, Item 1, "Legal Proceedings," in this Quarterly Report
on Form 10-Q. While management currently believes the ultimate outcome of these
proceedings, both individually and in the aggregate, will not have a material
adverse effect on the Company's financial position or operating results, the
results of complex legal proceedings are difficult to predict. However, the
Company believes that it has defenses in each of the pending claims and is
vigorously contesting each of these matters.
NOTE 8 -- DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138 "Accounting for Certain Derivative
Instruments and Hedging Activities -- An Amendment of FASB Statement No. 133."
SFAS No. 133 requires that all derivatives, including foreign currency exchange
contracts, be recognized on the balance sheet at fair value. Derivatives that
are not hedges must be recorded at fair value through earnings. If a derivative
is a qualifying hedge, depending on the nature of the hedge, changes in the fair
value of the derivative are either offset against the change in fair value of
the underlying assets or liabilities through earnings or recognized in
Accumulated other comprehensive income until the underlying hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value is to be immediately recognized in earnings.
Currently, the Company only uses fair value hedges. In accordance with
the transition provisions of SFAS No. 133, the Company recorded the fair value
of derivatives designated as fair value hedges on the balance sheet with an
offset to earnings. The Company also recorded the change in the fair value of
the hedged firm commitments on the balance sheet with an offset to earnings. The
net impact on the Company's financial statements of the adjustment for fair
value hedges was not material.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company's activities expose it
to a variety of market risks, including the effects of changes in foreign
currency exchange rates and interest rates. The financial exposures are
monitored and managed by the Company as an integral part of its
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overall risk management program. The Company's risk management program seeks to
reduce the potentially adverse effects that the volatility of the markets may
have on its operating results.
The Company maintains a foreign currency risk management strategy that
uses derivative instruments to protect its interests from unanticipated
fluctuations in earnings and cash flows caused by volatility in currency
exchange rates.
By using derivative financial instruments to hedge exposures to changes
in exchange rates, the Company exposes itself to credit risk and market risk.
The Company manages exposure to counterparty credit risk by entering into
derivative financial instruments with highly rated institutions that can be
expected to fully perform under the terms of the agreement. Market risk is the
adverse effect on the value of a financial instrument that results from a change
in currency exchange rates. The Company manages exposure to market risk
associated with foreign exchange contracts by establishing and monitoring
parameters that limit the types and degree of market risk that may be
undertaken.
The Company enters into foreign currency forward exchange contracts to
hedge against certain future movements in foreign exchange rates that affect
certain foreign currency denominated sales and purchase transactions. The
Company attempts to match the forward contracts with the underlying items being
hedged in terms of currency, amount and maturity. These forward contracts have a
duration of no longer than one year.
ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES All derivatives are
recognized on the balance sheet at their fair value. Changes in the fair value
of a derivative that is highly effective as a fair value hedge, along with the
gain or loss on the hedged asset or liability are recorded in current period
Interest income and other, net.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge items. This process includes linking all
derivatives that are designated as fair value to specific assets and liabilities
on the balance sheet. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in the fair
value of hedged items.
The Company discontinues hedge accounting prospectively when (1) it is
determined that a derivative is no longer effective in offsetting changes in the
fair value of a hedged item; (2) the derivative expires or is sold, terminated,
or exercised or (3) the derivative is discontinued as a hedge instrument,
because it is unlikely that a transaction will occur. For the three- and
six-month periods ending December 31, 2000, the amount of hedge ineffectiveness
and the gain on hedged commitments no longer qualifying as fair value hedges was
immaterial.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried on the balance sheet at its fair value. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the derivative will continue to be carried on the balance sheet
at its fair value, and gains and losses that were accumulated in other
comprehensive earnings are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the derivative will be
carried at its fair value on the balance sheet, with changes in its fair value
recognized in current period earnings.
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NOTE 9 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the SEC issued Staff Accounting Bulletin ("SAB") No. 101B,
"Second Amendment: Revenue Recognition in Financial Statements." SAB No. 101B
amends SAB No. 101 "Revenue Recognition in Financial Statements," to defer the
implementation date of SAB No. 101 for registrants until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB No.
101 summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements of all
public companies. The Company is required to adopt SAB No. 101 in the fourth
quarter of its fiscal year ending June 30, 2001. Accordingly, any shipments
previously reported as revenue, including revenue reported for the first three
quarters of fiscal 2001, that do not meet SAB No. 101's guidance will be
recorded as revenue in future periods. Changes in the Company's revenue
recognition policy resulting from the interpretation of SAB No. 101 would not
involve the restatement of prior fiscal year statements but would, to the extent
applicable, be reported as a change in accounting principle in the fiscal year
ending June 30, 2001, with the appropriate restatement of interim periods as
required by SFAS No. 3 "Reporting Accounting Changes in Interim Financial
Statements." The Company's reported results of operations for the 12 months
ending June 30, 2001 will include a cumulative adjustment for all prior annual
and interim periods as if SAB No. 101 had been adopted on July 1, 2000.
Management believes that SAB Nos. 101 and 101B, to the extent that they impact
the Company, will not affect the underlying strength or weakness of the
Company's business operations as measured by the dollar value of the Company's
product shipments and cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements. All statements
included in or incorporated by reference in this Quarterly Report on Form 10-Q,
other than statements of historical fact, are forward-looking statements. Such
forward-looking statements include, among others, those statements regarding our
future financial results; the future results of our operations; technological
trends in the semiconductor industry; our future product offerings and product
features; anticipated revenue from various domestic and international regions;
success of our product offerings; completion of backlog; creation of development
and engineering programs for research and development; the completion of any
acquisitions of third parties, or the technology or assets thereof; benefits
received from any acquisitions; the outcome of any litigation to which we are a
party; results of our investment in leading edge technologies, enhancements of
current products and strategic acquisitions; our future income tax rate;
sufficiency of our existing cash balance, investments and cash generated from
operations to meet our liquidity and working capital requirements; and the
effects of hedging transactions.
Our actual results may differ significantly from those projected in the
forward-looking statements in this report. The following discussion and analysis
should be read in conjunction with the section entitled "Factors Affecting
Results, Including Risks and Uncertainties," as well as the condensed
consolidated financial statements and the notes thereto included in Item 1 in
this Quarterly Report, our most recent Annual Report on Form 10-K filed by the
Company with the SEC, and our other filings with the SEC made from time to time.
RESULTS OF OPERATIONS
KLA-Tencor Corporation is the world's leading supplier of process
control and yield management solutions for the semiconductor and related
microelectronics industries. Our comprehensive portfolio of products, software,
analysis, services and expertise is designed to help integrated circuit
manufacturers manage yield throughout the entire wafer fabrication process --
from research and development to final mass production yield analysis.
Revenues were $573 million and $1,108 million for the three- and
six-month periods ended December 31, 2000, compared to $331 million and $604
million for the same periods of the prior fiscal year, representing an increase
of 73% and 83% for the respective periods. We experienced increased revenues
across nearly all product lines as a result of the increased capital spending by
major semiconductor manufacturers.
Gross margins as a percentage of revenues were 57% for both the three-
and six-month periods ended December 31, 2000, compared to 54% and 52% for the
same periods in the prior fiscal year. Gross margins increased primarily due to
increased capacity utilization resulting from higher unit volume, as well as
faster growth of higher margin product revenue compared to lower margin service
revenue.
Engineering, research and development ("R&D") expenses were $96 million
and $177 million for the three- and six-month periods ended December 31, 2000,
compared to $56 million and $102 million for the same periods in the prior
fiscal year. As a percentage of revenues, R&D expenses were 17% and 16% for the
three- and six-month periods ended December 31, 2000, compared to 17% for the
same periods in the prior fiscal year. The aggregate amount for R&D investment
increased, representing our continued commitment to product development in new
and emerging market segments and enhancements to existing products for 0.13
micron, copper development and 300mm wafers.
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Selling, general and administrative expenses were $95 million and $185
million for the three- and six-month periods ended December 31, 2000, compared
to $60 million and $114 million for the same periods in the prior fiscal year.
As a percentage of revenues, selling, general and administrative expenses were
16% and 17% for the three- and six-month periods ended December 31, 2000,
compared to 18% and 19% for the same periods in the prior fiscal year. Aggregate
selling, general and administrative expenses increased, but at a slower rate
than the increase in revenues. The aggregate increase was primarily due to
increases in our sales and marketing infrastructure and the high level of new
product activity during the last six months.
During the three- and six-month periods ended December 31, 1999, we
determined that $1.8 million and $7.8 million of a $35 million restructuring
reserve established in November 1998 would not be utilized because of a change
in management's plans for utilization of certain facilities resulting from an
increase in demand for our products. Accordingly, the restructuring reserve
reversal was included in the determination of income from operations for the
three- and six-month periods ended December 31, 1999.
Non-recurring acquisition charges were $1.9 million for the three-month
period ended December 31, 1999, as a result of the acquisition of ACME Systems,
Inc. Accordingly, the non-recurring acquisition charge was included in the
determination of income from operations for the three- and six-month periods
ended December 31, 1999.
Interest income and other, net, was $14 million and $26 million for the
three- and six-month periods ended December 31, 2000, compared to $7 million and
$20 million in the same periods in the prior fiscal year. The increase was due
to gains realized on sales of marketable securities and settlements of certain
foreign currency contracts.
Our effective tax rate for the three- and six-month periods ended
December 31, 2000 was 28% on pretax income. This rate is consistent with the
effective rate applied to income from operations excluding the impact of
non-recurring acquisition, restructuring and other charges during the same
periods in the prior fiscal year. The tax rate on the restructuring reserve
reversal in the three- and six-month periods ended December 31, 1999 was 35%,
which is consistent with the tax rate applied when the restructuring reserve was
recorded during the three-month period ended December 31, 1998. We anticipate an
overall tax rate of approximately 28% for the balance of the fiscal year ending
June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended December 30, 2000, cash, cash
equivalents, short-term investments and marketable securities balances decreased
to $817 million from $964 million at June 30, 2000. Net cash provided by
operating activities for the six-month period ended December 31, 2000 was $45
million, compared to $63 million of net cash provided by operating activities
for the same period of the prior fiscal year. This change primarily resulted
from increased net income before non-cash charges offset by increases in
accounts receivable and inventory. We increased our net purchases of
available-for-sale securities and our net purchases of property and equipment in
the six-month period ended December 31, 2000 as compared to the same period of
the prior fiscal year. Capital expenditures for the six-month period ended
December 31, 2000 of $76 million included $15 million for the purchase of 31
acres of land in Livermore, California to build a new campus and $7 million in
construction costs. The remaining capital expenditures were for manufacturing
and engineering equipment and leasehold improvements necessary for our
operations. We received $31 million through common stock issued through our
employee stock purchase program and through stock option exercises during the
six-month period ended December 31, 2000, and we repurchased $150 million of our
common stock under our stock repurchase program during the same period.
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Working capital was $1,032 million as of December 31, 2000, compared to
$1,057 million at June 30, 2000. We believe that existing liquid capital
resources and funds generated from operations combined with the ability, if
necessary, to borrow funds will be adequate to meet our business requirements
for the foreseeable future, including potential acquisitions or strategic
investments, capital expenditures for the expansion or upgrading of
manufacturing capacity and working capital requirements. However, we can give no
assurances that we will continue to generate sufficient funds from operations or
that we will be able to borrow funds on reasonable terms in the future, if
necessary.
FACTORS AFFECTING RESULTS, INCLUDING RISKS AND UNCERTAINTIES
Fluctuations in Operating Results and Stock Price
Our operating results have varied widely in the past, and our future
operating results will continue to be subject to quarterly variations based upon
a wide variety of factors including those listed in this section and throughout
this Quarterly Report on Form 10-Q for the period ending December 31, 2000. In
addition, future operating results may not follow any past trends. We believe
the factors that make our results fluctuate and difficult to predict include:
- the cyclical nature of the semiconductor industry;
- the reduction in the price and the profitability of our products;
- our timing of new product introductions;
- our ability to develop and implement new technologies;
- the change in customers' schedules for fulfillment of orders;
- the cancellation of contracts by major customers;
- the shortage of qualified workers in the areas we operate; and
- our ability to manage our manufacturing requirements.
Operating results also could be affected by sudden changes in customer
requirements, currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or more of the
global markets in which we do business. As a result of these or other factors,
we could fail to achieve our expectations as to future revenues, gross profit
and income from operations. Our failure to meet the performance expectations set
and published by external sources could result in a sudden and significant drop
in the price of our stock, particularly on a short-term basis, and could
negatively affect the value of any investment in our stock.
Semiconductor Equipment Industry Volatility
The semiconductor equipment industry is highly cyclical. The purchasing
decisions of our customers are highly dependent on the economies of both the
local markets in which they are located and the semiconductor industry
worldwide. The timing, length and severity of the up-and-down cycles in the
semiconductor equipment industry are difficult to predict. This cyclical nature
of the industry in which we operate affects our ability to accurately predict
future revenues and, thus, future expense levels. When cyclical fluctuations
result in lower than expected revenue levels, operating results may be adversely
affected and cost reduction measures may be necessary in order for us to remain
competitive and financially sound. During a down cycle, we must be in a position
to adjust our cost and expense structure to prevailing market conditions and to
continue to motivate and retain our key employees. In addition, during periods
of rapid growth, we must be able to increase manufacturing capacity and
personnel to meet customer demand. We can provide no assurance that these
objectives can be met in a timely manner in response to industry cycles. If we
fail to respond to industry cycles, our business could be seriously harmed.
During industry down cycles, the semiconductor industry typically
experiences excess production capacity that causes semiconductor manufacturers
to decrease capital spending. We generally
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do not have long-term volume production contracts with our customers, and we do
not control the timing or volume of orders placed by our customers. Whether and
to what extent our customers place orders for any specific products, as well as
the mix and quantities of products included in those orders, are factors beyond
our control. Insufficient orders, especially in our down cycles, will result in
under-utilization of our manufacturing facilities and infrastructure and will
negatively affect our operating results and financial condition.
International Trade and Economic Conditions
Ours is an increasingly global market. A majority of our revenues are
derived from outside the United States, and we expect that international
revenues will continue to represent a substantial percentage of our revenues.
Our international revenues and operations are affected by economic conditions
specific to each country and region. Because of our significant dependence on
international revenues, a decline in the economies of any of the countries or
regions in which we do business could negatively affect our operating results.
Managing global operations and sites located throughout the world
presents challenges associated with, among other things, cultural diversity and
organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic local or international economic downturns, trade balance issues,
political instability and fluctuations in interest and currency exchange rates
could negatively affect our business and results of operations. Although we
attempt to manage near-term currency risks through the use of hedging
instruments, there can be no assurance that such efforts will be adequate.
Competition
Our industry includes large manufacturers with substantial resources to
support customers worldwide. Our future performance depends, in part, upon our
ability to continue to compete successfully worldwide. Some of our competitors
are diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products and services, some of which
compete with the products and services that we offer. These competitors may
bundle their products in a manner that may discourage customers from purchasing
our products. In addition, we face competition from smaller emerging
semiconductor equipment companies whose strategy is to provide a portion of the
products and services which we offer, using innovative technology to sell
products into specialized markets. Loss of competitive position could negatively
impact our prices, customer orders, revenues, gross margins, and market share,
any of which would negatively affect our operating results and financial
condition. Our failure to compete successfully with these other companies would
seriously harm our business.
Technological Change and Customer Requirements
Success in the semiconductor equipment industry depends, in part, on
continual improvement of existing technologies and rapid innovation of new
solutions. For example, the semiconductor industry continues to shrink the size
of semiconductor devices and has begun to commercialize the process of
copper-based interconnects. These and other evolving customer needs require us
to respond with continued development programs and to cut back or discontinue
older programs which may no longer have industry-wide support. Technical
innovations are inherently complex and require long development cycles and
appropriate professional staffing. Our competitive advantage and future business
success depend on our ability to accurately predict evolving industry standards,
to develop and introduce new products which successfully address changing
customer needs, to win market acceptance of these new products and to
manufacture these new products in a timely and cost-effective manner. If we do
not
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develop and introduce new products and technologies in a timely manner in
response to changing market conditions or customer requirements, our business
could be seriously harmed.
In this environment, we must continue to make significant investments in
research and development in order to enhance the performance and functionality
of our products, to keep pace with competitive products and to satisfy customer
demands for improved performance, features and functionality. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements or that we will be able to secure the financial resources necessary
to fund future development. Substantial research and development costs typically
are incurred before we confirm the technical feasibility and commercial
viability of a product, and not all development activities result in
commercially viable products. In addition, we cannot ensure that these products
or enhancements will receive market acceptance or that we will be able to sell
these products at prices that are favorable to us. Our business will be
seriously harmed if we are unable to sell our products at favorable prices or if
our products are not accepted by the market in which we operate.
Key Suppliers
We use a wide range of materials in the production of our products,
including custom electronic and mechanical components, and we use numerous
suppliers to supply materials. We generally do not have guaranteed supply
arrangements with our suppliers. Because of the variability and uniqueness of
customers' orders, we do not maintain an extensive inventory of materials for
manufacturing. We seek to minimize the risk of production and service
interruptions and/or shortages of key parts by selecting and qualifying
alternative suppliers for key parts, monitoring the financial stability of key
suppliers and maintaining appropriate inventories of key parts. Although we make
reasonable efforts to ensure that parts are available from multiple suppliers,
key parts may be available only from a single supplier or a limited group of
suppliers. There can be no assurance that our business will not be harmed if we
do not receive sufficient parts to meet our production requirements in a timely
and cost-effective manner.
Operations at our primary manufacturing facilities and our assembly
subcontractors are subject to disruption for a variety of reasons, including
work stoppages, fire, earthquake, flooding or other natural disasters. Such
disruption could cause delays in shipments of products to our customers. We
cannot ensure that alternate production capacity would be available if a major
disruption were to occur or that, if it were available, it could be obtained on
favorable terms. Such a disruption could result in cancellation of orders or
loss of customers and could seriously harm our business.
Intellectual Property Obsolescence and Infringement
Our success is dependent in part on our technology and other proprietary
rights. We own various United States and international patents and have
additional pending patent applications relating to some of our products and
technologies. The process of seeking patent protection is lengthy and expensive,
and we cannot be certain that pending or future applications will actually
result in issued patents or that issued patents will be of sufficient scope or
strength to provide meaningful protection or commercial advantage to us. Other
companies and individuals, including our larger competitors, may develop
technologies that are similar or superior to our technology or may design around
the patents we own.
We also maintain trademarks on certain of our products and services and
claim copyright protection for certain proprietary software and documentation.
However, we can give no assurance that our trademarks and copyrights will be
upheld or successfully deter infringement by third parties.
While patent, copyright and trademark protection for our intellectual
property is important, we believe our future success in highly dynamic markets
is most dependent upon the technical competence and creative skills of our
personnel. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, suppliers, employees and
consultants and through
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other security measures. We also rely on trade secret protection for our
technology, in part through confidentiality agreements with our employees,
consultants and third parties. We also maintain exclusive and non-exclusive
licenses with third parties for strategic technology used in certain products.
However, these employees, consultants and third parties may breach these
agreements, and we may not have adequate remedies for wrongdoing. In addition,
the laws of certain territories in which we develop, manufacture or sell our
products may not protect our intellectual property rights to the same extent as
do the laws of the United States.
As is typical in the semiconductor equipment industry, from time to time
we have received communications from other parties asserting the existence of
patent rights, copyrights, trademark rights or other intellectual property
rights which they believe cover certain of our products, processes, technologies
or information. Our customary practice is to evaluate such assertions and to
consider whether to seek licenses where appropriate. However, we cannot ensure
that licenses can be obtained or, if obtained, will be on acceptable terms or
that litigation or other administrative proceedings will not occur. The
inability to obtain necessary licenses or other rights on reasonable terms could
seriously harm our operating results and financial condition.
Key Employees
Our employees are vital to our success, and our key management,
engineering and other employees are difficult to replace. We generally do not
have employment contracts with our key employees. Further, we do not maintain
key person life insurance on any of our employees. The expansion of high
technology companies worldwide has increased demand and competition for
qualified personnel. We may not be able to attract, assimilate or retain
additional highly qualified employees in the future. These factors could
seriously harm our business.
Acquisitions
We seek to develop new technologies from both internal and external
sources. As part of this effort, we may make acquisitions of, or significant
investments in, businesses with complementary products, services and/or
technologies. Acquisitions involve numerous risks, including management issues
and costs in connection with the integration of the operations, technologies and
products of the acquired companies, the possible write-downs of impaired assets,
and the potential loss of key employees of the acquired companies. The inability
to manage these risks effectively could seriously harm our business.
Litigation
From time to time we are involved in litigation of various types,
including litigation that alleges infringement of intellectual property rights
and other claims. Litigation tends to be expensive and requires significant
management time and attention. If we lose in a dispute concerning intellectual
property, a court could require us to pay substantial damages and/or royalties
or could issue an injunction prohibiting us from using essential technologies.
For these and other reasons, this type of litigation could have a material
adverse effect on our business, financial condition and results of operations.
Also, although we may seek to obtain a license under a third party's
intellectual property rights in order to bring an end to certain claims or
actions asserted against us, we may not be able to obtain such a license on
reasonable terms or at all.
Regional Electric Shortages
Recently, California has been experiencing a shortage of electric power
supply that has resulted in intermittent loss of power in some areas in the form
of rolling blackouts. While the Company has not experienced any power failures
to date, a blackout may affect our ability to manufacture products and
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meet scheduled deliveries. If blackouts were to interrupt our power supply, we
would be temporarily unable to continue operations at some of our facilities.
Any such interruption in our ability to continue operations at our facilities
could damage our reputation, harm our ability to retain existing customers and
to obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations.
Euro Conversion
A new European currency was implemented commencing in January 1999 to
replace the separate currencies of eleven western European countries. This
requires changes in our operations as we modify systems and commercial
arrangements to deal with the new currency. Modifications are necessary in
operations such as payroll, benefits and pension systems, contracts with
suppliers and customers, and internal financial reporting systems. During the
three-year transition period in which transactions may also be made in the old
currencies, we must maintain dual currency processes for our operations. We have
identified the issues created by this problem, and the cost of this effort is
not expected to have a material effect on our business or results of operations.
We cannot be certain, however, that all problems will be foreseen and corrected
or that no material disruption of our business will occur as a result of this
currency change.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the SEC issued Staff Accounting Bulletin ("SAB") No. 101B,
"Second Amendment: Revenue Recognition in Financial Statements." SAB No. 101B
amends SAB No. 101 "Revenue Recognition in Financial Statements," to defer the
implementation date of SAB 101 for registrants until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. SAB No. 101
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements of all public
companies. The Company is required to adopt SAB No. 101 in the fourth quarter of
its fiscal year ending June 30, 2001. Accordingly, any shipments previously
reported as revenue, including revenue reported for the first three quarters of
fiscal 2001, that do not meet SAB No. 101's guidance will be recorded as revenue
in future periods. Changes in the Company's revenue recognition policy resulting
from the interpretation of SAB No. 101 would not involve the restatement of
prior fiscal year statements but would, to the extent applicable, be reported as
a change in accounting principle in the fiscal year ending June 30, 2001, with
the appropriate restatement of interim periods as required by SFAS No. 3
"Reporting Accounting Changes in Interim Financial Statements." The Company's
reported results of operations for the 12 months ending June 30, 2001 will
include a cumulative adjustment for all prior annual and interim periods as if
SAB No. 101 had been adopted on July 1, 2000. Management believes that SAB Nos.
101 and 101B, to the extent that they impact the Company, will not affect the
underlying strength or weakness of the Company's business operations as measured
by the dollar value of the Company's product shipments and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates and in foreign currency exchange rates. To mitigate these risks, we
utilize derivative financial instruments. We do not use derivative financial
instruments for speculative or trading purposes. All of the potential changes
noted below are based on sensitivity analyses performed on our financial
position at June 30, 2000 and at December 31, 2000. Actual results may differ
materially.
As of June 30 and December 31, 2000, we had an investment portfolio of
fixed income securities of $446 million and $465 million, respectively,
excluding those classified as cash equivalents. These securities, as with all
fixed income instruments, are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by
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10% from levels as of June 30 and December 31, 2000, the fair market value of
our portfolio would decline by $5 million and $4 million, respectively.
As of June 30, and December 31, 2000, we had forward contracts to sell
$204 million and $267 million, respectively, in foreign currency in order to
hedge currency exposures. The fair market value of these contracts on June 30
and December 31, 2000, based on prevailing exchange rates on those dates, was
$199 million and $252 million, respectively. A 10% adverse move in currency
exchange rates affecting the contracts from their June 30 and December 31, 2000
levels would decrease the fair market value of the contracts by $20 million and
$28 million, respectively. However, if this occurred, the fair market value of
the underlying exposures hedged by the contracts would increase by similar
amounts which we believe would result in little or no material impact on our
income or cash flows.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A discussion regarding certain pending legal proceedings is included in
Part I, Item 3, "Legal Proceedings," included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2000. While the information
provided therein has not changed materially as to the lawsuits addressed, the
Company has been named as a party in the following additional matter:
ADE Corporation
On October 11, 2000, ADE Corporation ("ADE"), a competitor, filed a
patent infringement lawsuit against the Company in the U.S. District Court in
Delaware. ADE seeks damages and an injunction under a wafer inspection patent it
holds. The Company filed a counterclaim in the same court alleging that ADE has
infringed three of its patents. The Company seeks damages and a permanent
injunction. In addition, the Company is seeking a declaration from the District
Court that ADE's patent is invalid and not infringed by the Company. While these
matters remain at a preliminary stage and we cannot predict the outcome, the
Company believes it has valid defenses and further believes that its
counterclaims have merit.
Although we cannot predict the outcome of these claims, management does
not believe that any of these legal matters will have a material adverse effect
on the Company. Were an unfavorable ruling to occur in one or more of the
pending claims, there exists the possibility of a material impact on the
Company's operating results for the period in which the ruling occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of KLA-Tencor Corporation was held on
November 10, 2000 at the Company's offices in Milpitas, California. Of the
187,435,070 shares of Common Stock outstanding as of September 27, 2000 (the
record date) 162,202,069 shares (86%) 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
--------- --------
H. Raymond Bingham 160,618,607 1,583,462
Robert T. Bond 160,655,412 1,546,657
Richard J. Elkus, Jr. 160,599,990 1,602,079
The terms of Kenneth Levy, Edward W. Barnholt, Dean O. Morton, Jon D. Tompkins
and Lida Urbanek, as directors of the Company, continued after the meeting.
2. The stockholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock reserved for
issuance thereunder by 250,000,000 shares to 500,000,000 shares. This proposal
received 150,186,916 votes for and 11,514,879 votes against, with 500,274 shares
abstaining.
3. The stockholders ratified the appointment of PricewaterhouseCoopers LLP as
the Company's independent accountants for the fiscal year ended June 30, 2001.
This proposal received 159,676,528 votes for and 2,525,541 votes against.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation, dated
January 12, 2000
10.1 2000 Nonstatutory Stock Option Plan
27.1 Financial Data Schedule.
(b) Form 8-K
On December 20, 2000, the Company filed a current report on Form
8-K, dated December 15, 2000, to report a press release
announcing the continuation of the Company's systematic plan to
repurchase its shares.
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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)
February 14, 2000 /s/ JOHN H. KISPERT
- ----------------- -------------------------------------
(Date) John H. Kispert
Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No. Description
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3.1 Amended and Restated Certificate of Incorporation, dated
January 12, 2001
10.1 2000 Nonstatutory Stock Option Plan
27.1 Financial Data Schedule.