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) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1997
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to_________________
Commission File Number 0-9992
KLA-TENCOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2564110
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
160 Rio Robles
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
(408) 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 [ ]
As of January 30, 1997 there were 84,030,319 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
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INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Interim Balance Sheets at
June 30, 1997 and December 31, 1997 .................................... 3
Condensed Consolidated Interim Statements of Operations for
the Three and Six Month Periods Ended December 31, 1996
and 1997 ............................................................... 4
Condensed Consolidated Interim Statements of Cash Flows
for the Six Months Ended December 31, 1996 and 1997 .................... 5
Notes to Condensed Consolidated Interim Financial Statements............ 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 8
PART II - OTHER INFORMATION
Item 1 Legal Proceedings........................................................... 12
Item 2 Changes in Securities....................................................... 12
Item 3 Defaults Upon Senior Securities............................................. 12
Item 4 Submission of Matters to a Vote of Security Holders......................... 12
Item 5 Other Events................................................................ 12
Item 6 Exhibits and Reports on Form 8-K............................................ 13
SIGNATURES 13
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3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(In thousands)
June 30, December 31,
1997 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 279,225 $ 191,133
Short-term investments 69,606 89,837
Accounts receivable, net 269,291 376,345
Inventories 174,634 195,045
Deferred income taxes 54,799 53,557
Other current assets 12,452 13,744
----------- -----------
Total current assets 860,007 919,661
Land, property and equipment, net 117,595 131,045
Marketable securities 338,418 403,596
Other assets 27,287 30,357
----------- -----------
Total assets $ 1,343,307 $ 1,484,659
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 25,113 $ 22,495
Accounts payable 41,155 54,034
Other current liabilities 258,483 266,130
----------- -----------
Total current liabilities 324,751 342,659
----------- -----------
Deferred income taxes and other 3,943 3,179
----------- -----------
Stockholders' equity:
Common stock and capital in excess of par value 458,308 476,112
Retained earnings 542,706 644,486
Net unrealized gain on investments 17,591 27,269
Cumulative translation adjustment (3,992) (9,046)
----------- -----------
Total stockholders' equity 1,014,613 1,138,821
----------- -----------
Total liabilities and stockholders' equity $ 1,343,307 $ 1,484,659
=========== ===========
See accompanying notes to unaudited condensed
consolidated interim financial statements.
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4
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Six months ended
December 31, December 31,
----------------------- -----------------------
1996 1997 1996 1997
-------- -------- -------- --------
Revenues $242,155 $326,361 $503,295 $638,781
Costs and operating expenses:
Costs of goods sold 114,874 150,235 230,238 290,999
Research and development 29,308 47,280 61,804 92,457
Selling, general and administrative 50,223 61,622 108,838 123,760
Merger, restructure and other charges -- -- 8,500 --
-------- -------- -------- --------
Total costs and operating expenses 194,405 259,137 409,380 507,216
-------- -------- -------- --------
Income from operations 47,750 67,224 93,915 131,565
Other income and other, net 5,353 9,331 11,010 18,116
-------- -------- -------- --------
Income before income taxes 53,103 76,555 104,925 149,681
Provision for income taxes 18,884 24,497 37,126 47,901
-------- -------- -------- --------
Net income $ 34,219 $ 52,058 $ 67,799 $101,780
======== ======== ======== ========
Earnings per share:
Basic $ 0.42 $ 0.61 $ 0.83 $ 1.20
======== ======== ======== ========
Diluted $ 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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5
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
December 31,
--------------------------
1996 1997
--------- ---------
Cash flows from operating activities:
Net income $ 67,799 $ 101,780
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 22,881 18,228
Changes in assets and liabilities:
Accounts receivable, net 92,873 (122,067)
Inventories 19,069 (26,791)
Other assets (12,584) (7,217)
Accounts payable (12,442) 14,007
Other current liabilities 4,616 16,300
--------- ---------
Net cash provided by (used in)
operating activities 182,212 (5,760)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (31,915) (33,701)
Net purchases of available for sale securities (54,304) (75,738)
--------- ---------
Net cash used in investing activities (86,219) (109,439)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 8,902 25,350
Stock repurchases -- (7,546)
Net payments under debt obligations (3,596) (1,222)
--------- ---------
Net cash provided by financing activities 5,306 16,582
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (415) 10,525
--------- ---------
Net increase (decrease) in cash and cash equivalents 100,884 (88,092)
Cash and cash equivalents at beginning of period 201,704 279,225
--------- ---------
Cash and cash equivalents at end of period $ 302,588 $ 191,133
--------- ---------
Supplemental cash flow disclosures:
Income taxes paid $ 42,480 $ 45,292
Interest paid $ 796 $ 1,307
See accompanying notes to unaudited condensed
consolidated interim financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
NOTE 1. In the opinion of the management of KLA-Tencor Corporation (the
Company), the unaudited condensed consolidated interim financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of results. The results for the quarter ended
December 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, 1997.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual amounts could differ materially from those amounts.
NOTE 2. Inventories (in thousands):
June 30, December 31,
1997 1997
-------- --------
Customer service parts $ 31,387 $ 30,680
Raw materials 36,829 30,984
Work-in-process 71,998 75,433
Demonstration equipment 20,580 40,258
Finished goods 13,840 17,690
-------- --------
$174,634 $195,045
======== ========
NOTE 3. During the six months ended December 31, 1997, the Company authorized
the repurchase, at its discretion, of up to 350,000 shares of Common Stock on
the open market for issuance under its employee stock purchase plans. During the
six month period ended December 31, 1997, the Company repurchased 136,500 shares
of its Common Stock at a cost of $7.5 million.
NOTE 4. During the quarter ended December 31, 1997, Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share." SFAS 128 requires
presentation of both Basic and Diluted earnings per share (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 gives 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 period 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 stock price as used in the
computation of fully diluted EPS.
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
utilized 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 foreign 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 Company to
risk due to exchange rate movements because net gains and losses on these
contracts as previously noted, are offset by net losses on the assets,
liabilities and transactions being hedged.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis may contain forward-looking statements
that reflect the Company's current judgment regarding the matters addressed by
such statements. Because such statements apply to future events, they are
subject to risks and uncertainties that could cause actual results to differ.
Important factors that could cause actual results to differ are described in the
following discussion and under "Risk Factors" below.
RESULTS OF OPERATIONS
Revenues were $326.4 million and $638.8 million for the three and six month
periods ended December 31, 1997, compared to $242.2 million and $503.3 million
for the same periods of the prior fiscal year, representing an increase of 34.8%
and 26.9% for the respective periods. The increase in revenues is primarily
attributable to increased demand for the Company's products when compared to the
same periods in the prior fiscal year in which the semiconductor industry was
experiencing a slowdown resulting from lower memory device prices caused by
excess production capacity. Higher revenue levels were driven by increases in
wafer inspection, metrology 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 54.0% and 54.4% of revenues for the three and six month
periods ended December 31, 1997, compared to 52.6% and 54.3% of revenues for the
same periods of the prior fiscal year. Gross margins for system products
increased during the current quarter when compared to the prior year quarter
primarily as a result of a shift in product mix toward Wisard and Surfscan which
have relatively higher gross margins than other product lines as well as
improved margins in the Company's E-Beam Metrology division which realized some
manufacturing efficiencies as it 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 the same period of the prior fiscal year.
Engineering, research and development (R&D) expenses were $47.3 million and
$92.5 million for the three and six month periods ended December 31, 1997
compared to $29.3 million and $61.8 million for the same periods of the prior
fiscal year. As a percentage of revenues, R&D expenses increased to 14.5% for
the three and six month periods ended December 31, 1997, compared to 12.1% and
12.3% for the same periods of the prior fiscal year. The increase is primarily
attributable to increases in headcount and project material costs associated
with the Company's ongoing efforts for product development in new market
segments and enhancements to existing products including next generation 300mm
products and inspection enhancements for 0.25-micron technology and below.
Selling, general and administrative (SG&A) expenses were $61.6 million and
$123.8 million for the three and six month periods ended December 31, 1997,
compared to $50.2 million and $108.8 million for the same periods of the prior
fiscal year. As a percentage of revenues, SG&A decreased to18.9% and 19.4% for
the three and six month period ended December 31, 1997, compared to 20.7% and
21.6% for the same periods of the prior fiscal year. The dollar increase during
the periods is due primarily to additions to headcount, investment in the
Company's worldwide information systems and customer group sales applications
resources worldwide.
In the first quarter of fiscal 1997, the Company incurred restructuring charges
of $8.5 million for costs related to downsizing its operations as well as
exiting certain leased facilities.
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Interest income and other, net, increased $4.0 million and $7.1 million for the
three and six month periods ended December 31, 1997, compared to the same
periods of the prior fiscal year. The increase is due primarily to higher
average investment balances when compared to the same periods a year ago.
The Company's effective tax rate decreased to 32% for the three and six month
periods ended December 31, 1997, compared to 35.6% and 35.4% for the same
periods of the prior fiscal year. This decrease is due primarily to the
realization of tax attributes related to a prior acquisition and benefits from
R&D tax credits.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1985 through 1992. The Company has received a notice of proposed
tax deficiency for such years and filed a tax protest letter with the IRS on
June 10, 1996, in response to that IRS notice. Management believes sufficient
taxes have been provided in prior years and that the ultimate outcome of the IRS
audit will not have a material adverse impact on the Company's financial
position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended December 31, 1997, cash, cash equivalents,
short-term investments and marketable securities balances declined $2.7 million
to $684.6 million. Cash used in operations for the six month period was $5.8
million, resulting primarily from increases in accounts receivable and inventory
and offset in part by net income, which includes non-cash charges for
depreciation. During the six months ended December 31, 1997, approximately $81.0
million of the Company's accounts receivable were sold.
Capital expenditures of $33.7 million during the first six months of fiscal 1998
were primarily for computer equipment and facilities improvements to support the
Company's growth.
Cash and 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 securities could
result in additional dilution to the Company's stockholders.
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RISK FACTORS
The Company's quarterly operating results have fluctuated in the past and may
fluctuate in the future. The Company's operating results are dependent on many
factors, including the economic conditions in the semiconductor 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 (which includes its ability to attract, hire and assimilate an
adequate number of qualified people), among others. There can be no assurance
that one or more of these factors will not adversely impact the Company's
quarterly operating results.
The Company's business depends and will depend in the future upon the capital
equipment expenditures of semiconductor manufacturers, which in turn depend on
the current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. The semiconductor industry has been cyclical in
nature and historically has experienced periodic downturns. Even during periods
of reduced revenues, in order to remain competitive the Company will be required
to continue to invest in research and development and to maintain extensive
ongoing worldwide customer service and support capability which could adversely
affect its financial results.
Rapid technological changes in semiconductor manufacturing processes subject the
semiconductor manufacturing equipment industry to increased pressure to maintain
technological 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.
The Company expects to continue to make significant investments in research and
development. There can be no assurance that future technologies, processes or
product developments will not render the Company's current product offerings
obsolete or that the Company will be able to develop and introduce new products
or enhancements to its existing products which satisfy customer needs in a
timely manner or achieve market acceptance. The failure to do so could adversely
affect the Company's business.
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The semiconductor equipment industry is highly competitive. The Company has
experienced and expects to continue to face substantial competition throughout
the world. The Company believes that to remain competitive, it will require
significant financial resources in order to offer a broad range of products, to
maintain customer service and support centers worldwide, and to invest in
product and process research and development. The Company believes that the
semiconductor equipment industry is becoming increasingly dominated by large
manufacturers, who have the resources to support customers on a worldwide basis.
Many of these competitors have substantially greater financial resources and
more extensive engineering, manufacturing, marketing and customer service and
support capabilities than the Company. In addition, there are smaller emerging
semiconductor equipment companies which provide innovative technology. No
assurance can be given that the Company will be able to compete successfully
worldwide.
International revenues accounted for 65%, 66% and 65% of the Company's net
revenues for fiscal years 1995, 1996 and 1997, respectively. International sales
were 63% for the three and six month periods ended December 31, 1997. The
Company expects that international revenues will continue to represent a
significant percentage of its net revenues. International revenues and
operations may be adversely affected by imposition of governmental controls,
restrictions on export technology, political instability, trade restrictions,
changes in tariffs and the difficulties associated with staffing and managing
international operations. In addition, international sales may be adversely
affected by economic conditions in each country. The future performance of the
Company will be dependent, in part, upon its ability to continue to compete
successfully in Asia, one of the largest areas for the sale of yield management
and process monitoring equipment. Countries in the Asia Pacific region,
including Japan, Korea and Taiwan, have recently experienced weaknesses in their
currency, banking and equity markets. These weaknesses could adversely affect
consumer demand for the Company's products, the U.S. dollar value of the
Company's foreign currency denominated sales, the availability and supply of
resources, and the Company's consolidated results of operations. Although the
Company attempts to manage near term currency risks through "hedging," there can
be no assurance that such efforts will be adequate. These factors could have a
material adverse effect on the Company's future business and financial results.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.12 Participation Agreement dated as of November 12,
1997, including exhibits, schedules and related
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 Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period
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)
February 11, 1998 Fredrick A. Ball
- -------------------------- -------------------------------
(Date) Fredrick A. Ball
Vice President Finance and Accounting
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.12 Participation Agreement dated as of November 12, 1997
including exhibits, schedules and related 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 Schedule.