1
Exhibit 13.1
FINANCIAL HIGHLIGHTS
In thousands, except per share data
Year ended June 30, 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
OPERATIONS:
Revenues $ 376,454 $ 695,950 $1,094,492 $1,031,824 $1,166,325
Income from operations $ 55,784 $ 156,609 $ 296,266 $ 145,832 $ 164,631
Net income $ 40,443 $ 104,811 $ 196,634 $ 105,396 $ 134,096
Basic income per share $ 0.61 $ 1.40 $ 2.42 $ 1.29 $ 1.58
Diluted income per share $ 0.59 $ 1.34 $ 2.34 $ 1.24 $ 1.52
Net income excluding other charges(1) $ 40,443 $ 120,965 $ 196,634 $ 151,272 $ 155,574
Diluted income per share
excluding other charges(1) $ 0.59 $ 1.54 $ 2.34 $ 1.78 $ 1.76
YEAR END STATUS:
Cash, cash equivalents and
marketable securities $ 174,305 $ 385,040 $ 468,475 $ 687,249 $ 723,481
Working capital $ 277,791 $ 452,350 $ 591,397 $ 531,313 $ 605,688
Total assets $ 430,453 $ 850,406 $1,157,919 $1,343,307 $1,548,397
Stockholders equity $ 307,334 $ 652,222 $ 870,999 $1,014,613 $1,197,714
(1) Excludes non-recurring acquisition, merger and restructuring charges of $16
million, $61 million and $22 million in 1995, 1997 and 1998, respectively.
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KLA - TENCOR 1998
MANAGEMENT'S DISCUSSION & ANALYSIS of
FINANCIAL CONDITION & RESULTS of OPERATIONS
RESULTS OF OPERATIONS. Fiscal 1998 was the third consecutive year the Company
achieved revenues in excess of $1 billion. The year began with continued
recovery of the orders and shipments of process control and yield management
equipment over the previous year as many semiconductor manufacturers expanded
and upgraded existing facilities. However, in the last half of fiscal 1998,
revenue growth and operations were impacted sharply by a downturn in the
semiconductor industry driven by overcapacity and pricing pressures in the DRAM
market as well as weakness in Japan and Asia Pacific economies. These conditions
were evidenced by a shift in the Company's percent of revenues from Asia Pacific
to the United States and Western Europe. The first half of fiscal 1998 showed
marked improvements in sales in the Yield Management Solutions Group and growth
in the Company's market share of the Metrology business. While these trends have
continued throughout the year, results declined, primarily in the Wafer
Inspection Group, since new fab construction was delayed or stopped as
semiconductor manufacturers reassessed their capital spending and expansion
plans in light of the deteriorating market conditions.
Despite the market fluctuations, the financial position of the Company has
remained strong. In response to the decline in revenue growth and new order
levels, broad measures have been implemented to reduce costs and control
spending. However, the Company has continued its new product development by
investment in leading edge technologies and by strategic acquisitions. These
investments have and are expected to continue to position the Company's
extensive productline to address the critical initiatives that are key to its
customers, including the acceleration of technology to sub-quarter micron and
300 millimeter wafers. During this most recent downturn in the business cycle,
yield management and yield enhancement are more critical than ever before as
semiconductor companies strive to maintain effective low cost manufacturing
environments with reduced capital budgets.
REVENUES AND GROSS MARGINS. Revenues increased $135 million, or 13%, in 1998
versus 1997 primarily due to increased volumes of the Company's data analysis
systems sales including Automatic Defect Classification, review systems and
increased market penetration by the CD SEM model 8100. In addition, increases
were realized in Field Service revenue. These increases offset declines in the
Wafer Inspection Group's revenues during the last half of fiscal 1998. Overall
revenue declines in the second half of fiscal 1998 were driven by reduced
spending capital, particularly in the Asia Pacific region. Revenues in 1997 when
compared to 1996 declined approximately 6% due to excess capacity and lower
prices in the DRAM market which slowed semiconductor equipment purchases.
Gross margin decreased to 52.4% in 1998 from 54.3% in 1997 and 57.1% in 1996.
The decrease during the last two years was primarily due to increased
infrastructure costs of the Company's Customer Service Group and higher warranty
and installation costs related to new product introductions.
RESEARCH AND DEVELOPMENT. Net research and development (R&D) expenses were $182
million, $134 million and $116 million, or 15.6%, 13.0% and 10.6% of revenues in
1998, 1997 and 1996, respectively. The increase in dollars in 1998 compared to
1997, and in 1997 compared to 1996, is primarily attributable to increases in
headcount and project material costs associated with the Company's ongoing
efforts to develop products which address new market segments and enhancements
to existing products including next generation 300mm products and inspection
enhancements for sub-quarter micron technology.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A)
expenses were $242 million, $219 million and $213 million, or 20.8%, 21.3% and
19.4% of revenues, in 1998, 1997 and 1996, respectively. The increase in dollars
in 1998 compared to 1997 can be attributed primarily to strengthening of the
worldwide sales and applications infrastructure organization. The increase in
dollars in 1997 compared to 1996 can be attributed primarily to increases in
expenses resulting from the significant efforts involved with enhancements to
the Company's information systems infrastructure.
NON-RECURRING ACQUISITION, RESTRUCTURING AND OTHER CHARGES. During fiscal 1998,
the Company acquired complementary businesses and technologies including Nanopro
GmbH, Groff Associates (dba VARS) and DeviceWare Inc. which were recorded under
the purchase method of accounting. These companies were acquired for an
aggregate amount of approximately $21 million consisting primarily of in-process
technology. Additionally, the Company acquired Amray, Inc. (Amray), which was
recorded under the pooling-of-interests method of accounting. The Company
incurred approximately $2 million in professional fees related to this
acquisition which have been included in "non-recurring acquisition,
restructuring and other charges". Amray's historical operations, net assets, and
cash flows were not material to the Company's consolidated financial results
prior to the acquisition. Excluding the non-recurring charges, the Company's
results of operations were not materially affected by these acquisitions.
During fiscal 1997, the Company recorded charges totaling $61 million for
merger, restructuring and other non-recurring events. Of this amount
approximately $46 million was the result of the merger between KLA Instruments
and Tencor Instruments on April 30, 1997, $6 million was a result of the
write-off of a Tencor bad debt and $9 million was additional restructuring
charges primarily related to lease exit costs incurred by Tencor Instruments
prior to the merger. The remaining balance of approximately $5 million will be
used in the first half of fiscal 1999.
INTEREST INCOME AND OTHER, NET. Interest income and other, net is comprised
primarily of income recognized upon settlement of certain foreign currency
contracts and interest income earned on the Company's investment and cash
portfolio. The increase over the last two years has been attributable to income
recognized upon settlement of certain foreign currency contracts and interest
resulting from higher average investment balances.
PROVISION FOR INCOME TAXES. The provision for income taxes on the Company's
pretax income was 35%, 39.4% and 37.3% in fiscal 1998, 1997 and 1996,
respectively. The Company's effective tax rate decreased to 32% in 1998
excluding the effect of non-recurring acquisition costs from 34.9% in 1997 prior
to restructuring and merger costs. This decline results primarily from
realization of tax attributes related to a prior acquisition, relatively fewer
non-deductible merger and acquisition related costs and a relative reduction in
state and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES. Working capital grew to $606 million in 1998
compared to $531 million in 1997. Major components of working capital and
liquidity continue to be the Company's $308 million in cash, cash equivalents
and short-term investments. In addition, the Company maintains $415 million in
marketable securities classified as long-term as of June 30, 1998. Cash flow
from operations was approximately $50 million in 1998, compared to operating
cash flow of approximately $236 million in 1997. The change in cash flow from
operations in 1998 compared to 1997 is primarily due to increases in inventory
and accounts receivable.
Capital expenditures for each of the fiscal years 1998, 1997 and 1996
approximated $60 million and consisted primarily of computers and manufacturing
equipment. The Company believes that the existing cash balances and short-term
investments, along with cash generated from operations, will be sufficient to
meet the Company's working capital requirements through fiscal year 1999.
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YEAR 2000 COMPLIANCE. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. The Company believes that the
majority of its products and systems are Year 2000 ready or will be brought to a
state of readiness prior to the year 2000. However, complete testing is not
feasible and hidden problems may remain. In addition, the Company utilizes
third-party equipment and software that may not be Year 2000 compliant although
these too are under evaluation and planning for Year 2000 readiness. Failure of
the companies products or third-party equipment or software to operate properly
with regard to the Year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business and operating results. Furthermore, the
purchasing patterns of customers or potential customers may be affected by Year
2000 issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products and services such as those offered by the
Company, which could have a material adverse effect on the Company's business
and operating results.
OTHER FACTORS AFFECTING COMPANY RESULTS. The Company's operating results have
fluctuated in the past and may fluctuate in the future. During the last half of
fiscal 1998 operating results have been adversely affected as the Company
experienced declines in revenues and margins and due to reduced capital
equipment spending by the semiconductor industry. This decline is primarily due
to the build up of excess semiconductor manufacturing capacity, coupled with the
Asian financial crisis. The Company's operating results are dependent on many
factors, including the economic conditions in the semiconductor and related
industries, both in the US and abroad, the size and timing of the receipt of
orders from customers, customer cancellations or delays of shipments, the
Company's ability to develop, introduce, and market new and enhanced products on
a timely basis, among others. The Company has experienced reductions in orders,
cancellations and delays in shipments which may continue to adversely affect
sales and margins in future periods. The Company expects unfavorable effects on
orders, sales and margins to persist at least through the remainder of the
calendar year and possibly beyond. The Company's expense levels are based, in
part, on expectations of future revenues. If revenue levels in a particular
period do not meet expectations operating results may be adversely affected.
The Company's business depends and will continue to depend in the future upon
the capital equipment expenditures of semiconductor manufacturers, which in turn
depend on the current and anticipated market demand for integrated circuits and
products utilizing integrated circuits. The current industry downturn has had an
adverse effect on the semiconductor industry's level of capital expenditures.
The Company believes that it is relatively well positioned for this downturn
because of its array of products, its focus on yield improvement and process
development rather than pure capacity, its sales of metrology products to
non-semiconductor industries and its strong balance sheet. Nevertheless, there
can be no assurance that the Company will be able to withstand the effects of an
industry downturn in the short term or over an extended period if the downturn
is prolonged.
Rapid technological changes in semiconductor manufacturing processes subject the
semiconductor manufacturing equipment industry to increased pressure to maintain
technological parity with deep submicron process technology. While focused on
controlling expenses to address the downturn in the semiconductor industry, the
Company continues to believe that its future success will depend in part upon
its ability to develop, manufacture and successfully introduce new products with
improved capabilities including those for 300mm wafers and devices with critical
dimensions at .25-micron and below and to continue to enhance existing products.
Due to the risks inherent in transitioning to new products, the Company will be
required to forecast demand for new products while managing the transition from
older products. There can be no assurance that the Company will successfully and
timely develop and manufacture new hardware and
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software products or that new hardware and software products introduced by the
Company will be accepted in the marketplace. If new products have reliability or
quality problems then reduced orders, higher manufacturing costs, delays in
collecting accounts receivable and additional service and warranty expense may
result. Additionally, there can be no assurance that future technologies,
processes or product developments will not render the Company's current product
offerings obsolete. However, if the Company does not continue to successfully
introduce new products, its results of operations will be adversely affected.
The Company expects to continue to make significant investments in research and
development and to sustain its current spending levels for customer support in
fiscal year 1999 to meet current customer requirements and effectively position
the Company for growth when the business cycle turns favorable.
The semiconductor equipment industry is highly competitive. The Company has
experienced and expects to continue to face substantial global competition. 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. A few 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.
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 the Asia Pacific, one of the largest areas for the sale of yield
management and process monitoring equipment. Countries in the Asia Pacific
region, including Japan, Korea and Taiwan, have experienced weaknesses in their
currency, banking and equity markets in recent periods. These weaknesses may
continue to adversely affect demand for the Company's products, the U.S. dollar
value of the Company's foreign currency denominated sales, the availability and
supply of resources, and the Company's consolidated results of operations.
Although the Company attempts to manage near term currency risks through
"hedging," there can be no assurance that such efforts will be adequate. These
factors may have a material adverse effect on the Company's future business and
financial results.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial
Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. Such items may include
foreign currency translation adjustments, unrealized gains/losses from investing
and hedging activities, and other transactions. Such items include foreign
currency translation adjustments and unrealized gains/losses from investing and
hedging activities for the Company. This Statement is required to be adopted in
the first quarter of the Company's fiscal year ending June 30, 1999.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information". This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments and related disclosures about products and services, geographic areas,
and major customers in interim financial reports issued to shareholders. This
Statement is required to be adopted in the Company's fiscal year ending June 30,
1999. The effect of SFAS No. 131 will not be material to the Company's financial
statement disclosure.
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In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). It
establishes accounting and reporting standards for derivative instruments
including standalone instruments, such as forward currency exchange contracts
and interest note swaps or embedded derivatives, such as conversion options
contained in convertible debt investments are requires that these instruments be
marked-to-market on an ongoing basis. The Company is required to adopt SFAS 133
in the first quarter of its fiscal year ending June 30, 2000. The effect of SFAS
No. 133 will not be material to the Company's financial statements.
MARKET RISK DISCLOSURE. At the end of fiscal 1998, the Company had an investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $458 million (see Note 4 of Notes to Consolidated Financial
Statements). These securities, like 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 10% from
levels as of June 30, 1998, the fair value of the portfolio would decline by
approximately $5.5 million.
Other than statements of historical fact, statements made in this Annual Report
include forward looking statements, such as statements with respect to the
Company's future financial performance, operating results, plans and objectives.
Actual results may differ materially from those currently anticipated depending
on a variety of risk factors some of which are set forth in "Other Factors
Affecting Company Results" above.
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KLA - TENCOR 1998
CONSOLIDATED BALANCE SHEETS
June 30, (in thousands, except per share data) 1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 279,225 $ 215,970
Short-term investments 69,606 92,343
Accounts receivable, net 269,291 304,140
Inventories 174,634 234,565
Deferred income taxes 54,799 90,729
Other current assets 12,452 18,624
----------- -----------
Total current assets 860,007 956,371
----------- -----------
Land, property and equipment, net 117,595 140,937
Marketable securities 338,418 415,168
Other assets 27,287 35,921
----------- -----------
Total assets $ 1,343,307 $ 1,548,397
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 25,113 $ 21,482
Accounts Payable 41,155 46,353
Other current liabilities 262,426 282,848
----------- -----------
Total current liabilities 328,694 350,683
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $0.001 par value, 250,000 authorized,
83,759 and 87,444 shares issued and outstanding 84 87
Capital in excess of par value 458,224 497,496
Retained earnings 542,706 683,836
Net unrealized gain on investments 17,591 26,108
Cumulative translation adjustment (3,992) (9,813)
----------- -----------
Total stockholders' equity 1,014,613 1,197,714
----------- -----------
Total liabilities and stockholders' equity $ 1,343,307 $ 1,548,397
=========== ===========
See accompanying notes to consolidated financial statements.
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KLA - TENCOR 1998
CONSOLIDATED STATEMENTS of INCOME
Year ended June 30,
(in thousands, except per share data) 1996 1997 1998
------------- ------------- -------------
Revenues $ 1,094,492 $ 1,031,824 $ 1,166,325
------------- ------------- -------------
Costs and operating expenses:
Cost of goods sold 469,681 471,910 554,917
Engineering, research and development 115,920 134,105 181,903
Selling, general and administrative 212,625 219,425 242,400
Non-recurring acquisition, restructuring
and other charges -- 60,552 22,474
------------- ------------- -------------
Total costs and operating expenses 798,226 885,992 1,001,694
------------- ------------- -------------
Income from operations 296,266 145,832 164,631
Interest income and other, net 17,834 28,147 41,680
------------- ------------- -------------
Income before income taxes 314,100 173,979 206,311
Provision for income taxes 117,466 68,583 72,215
------------- ------------- -------------
Net income $ 196,634 $ 105,396 $ 134,096
------------- ------------- -------------
Earnings per share:
Basic $ 2.42 $ 1.29 $ 1.58
Diluted $ 2.34 $ 1.24 $ 1.52
Weighted average number of shares:
Basic 81,148 81,943 85,097
Diluted 84,195 85,203 88,522
See accompanying notes to consolidated financial statements.
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KLA - TENCOR 1998
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
Common Stock and Capital
in Excess of Par Value Net Cumulative
------------------------ Retained Unrealized Translation
(in thousands) Shares Amount Earnings Gain Adjustment Totals
-------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1995 80,392 $ 406,810 $ 240,676 $ 1,241 $ 3,495 $ 652,222
Net issuance under employee stock plans 1,604 15,298 -- -- -- 15,298
Repurchase of common stock (250) (5,456) -- -- -- (5,456)
Tax benefits of stock option transactions -- 9,778 -- -- -- 9,778
Cumulative translation adjustment -- -- -- -- (5,439) (5,439)
Unrealized gain on investments, net -- -- -- 7,962 -- 7,962
Net income -- -- 196,634 -- -- 196,634
-------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1996 81,746 426,430 437,310 9,203 (1,944) 870,999
Net issuance under employee stock plans 2,013 22,235 -- -- -- 22,235
Tax benefits of stock option transactions -- 9,643 -- -- -- 9,643
Cumulative translation adjustment -- -- -- -- (2,048) (2,048)
Unrealized gain on investments, net -- -- -- 8,388 -- 8,388
Net income -- -- 105,396 -- -- 105,396
-------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1997 83,759 458,308 542,706 17,591 (3,992) 1,014,613
Net issuance under employee stock plans 2,263 34,537 -- -- -- 34,537
Repurchase of common stock (378) (16,038) -- -- -- (16,038)
Tax benefits of stock option transactions -- 20,529 -- -- -- 20,529
Cumulative translation adjustment -- -- -- -- (5,821) (5,821)
Unrealized gain on investments, net -- -- -- 8,517 -- 8,517
Issuance of common stock in connection
with acquisition 1,800 247 7,034 -- -- 7,281
Net income -- -- 134,096 -- -- 134,096
-------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1998 87,444 $ 497,583 $ 683,836 $ 26,108 $ (9,813) $ 1,197,714
======== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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KLA - TENCOR 1998
CONSOLIDATED STATEMENTS of CASHFLOW
Year ended June 30, (in thousands) 1996 1997 1998
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 196,634 $ 105,396 $ 134,096
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,967 52,340 38,917
Write-off of acquired in-process technology and other
non-recurring acquisition charges -- -- 20,546
Deferred income taxes (19,704) (17,267) (46,225)
Changes in assets and liabilities:
Accounts receivable (96,586) 34,859 (57,542)
Inventories (86,538) 21,307 (62,271)
Other assets 3,815 (11,817) (16,951)
Accounts payable 15,921 (3,580) 3,821
Other current liabilities 72,760 55,094 35,866
------------- ------------- -------------
Net cash provided by operating activities 111,269 236,332 50,257
------------- ------------- -------------
Cash flows from investing activities:
Payments for in-process technology and other non-recurring
acquisition charges -- -- (18,771)
Purchase of property and equipment (64,589) (56,793) (64,389)
Purchases of available for sale securities (509,262) (997,283) (915,185)
Proceeds from available for sale securities 484,060 870,391 825,643
------------- ------------- -------------
Net cash used in investing activities (89,791) (183,685) (172,702)
------------- ------------- -------------
Cash flows from financing activities:
Issuance of common stock, net 25,076 31,878 58,440
Stock repurchases (5,456) -- (16,038)
Payments under debt obligations (39,277) (42,490) (36,632)
Borrowings under debt obligations 45,177 35,738 33,996
------------- ------------- -------------
Net cash provided by financing activities 25,520 25,126 39,766
------------- ------------- -------------
Effect of exchange rate changes on cash and cash equivalents 2,586 (252) 19,424
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 49,584 77,521 (63,255)
Cash and cash equivalents at beginning of period 152,120 201,704 279,225
------------- ------------- -------------
Cash and cash equivalents at end of period $ 201,704 $ 279,225 $ 215,970
============= ============= =============
Supplemental cash flow disclosures:
Income taxes paid $ 108,196 $ 68,430 $ 85,394
Interest paid $ 2,103 $ 1,551 $ 2,303
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE OPERATIONS AND PRINCIPLES OF CONSOLIDATION
KLA-Tencor Corporation ("the Company") is a global provider of yield management
solutions for semiconductor manufacturing and related industries. The Company
has subsidiaries in the United States, Western Europe, Japan and Asia Pacific.
The consolidated financial statements include the financial statements of
KLA-Tencor and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents consist of highly liquid investments that are valued at
amortized cost, which approximates market value, and have original maturity
dates of three months or less from the date of acquisition. Investments include
equity and debt securities with maturities greater than three months from the
date of acquisition. The Company has classified all securities as
available-for-sale, as the sale of such securities may be required prior to
maturity to implement management strategies. Investments classified as
available-for-sale are reported at fair value with unrealized gains or losses
excluded from earnings and reported as a separate component of shareholders'
equity, net of applicable taxes, until realized.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Demonstration units are stated at their manufacturing costs and reserves
are recorded to state the demonstration units at their net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property and
equipment is based on the straight-line method over the estimated useful lives
of the assets, which are 30 years for buildings, ten years for building
improvements, five to seven years for furniture and fixtures, and three to five
years for machinery and equipment. The life of the lease or the useful life,
whichever is shorter, is used for the amortization of leasehold improvements.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist principally of investments, accounts receivable and financial
instruments used in hedging activities.
Investments are maintained with high quality institutions, the composition and
maturities of which are regularly monitored by management. Generally, these
securities maintain a highly liquid market and may be redeemed upon demand and,
therefore, bear minimal risk. The Company, by policy, limits the amount of
credit exposure to any one financial institution or commercial issuer. The
Company has not experienced any material losses on its investments.
A majority of the Company's trade receivables are derived from sales to large
multinational semiconductor manufacturers. Concentration of credit risk with
respect to trade receivables are considered to be limited due to its customer
base and the diversity of its geographic sales areas. The Company performs
ongoing credit evaluations of its customers' financial condition. The Company
maintains a provision for potential credit losses based upon expected
collectibility of all accounts receivable. The write-off of uncollectable
amounts has been insignificant except for the write-off of Tencor bad debt of
approximately $6 million in fiscal 1997.
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The Company is exposed to credit loss in the event of nonperformance by
counterparties on the foreign exchange contracts used in hedging activities. The
Company does not anticipate nonperformance by these counterparties.
FOREIGN CURRENCY
The functional currencies of the Company's significant foreign subsidiaries are
the local currencies. Accordingly, all assets and liabilities of the foreign
operations are translated to U.S. dollars at current exchange rates, and
revenues and expenses are translated to U.S. dollars using weighted average
exchange rates in effect during the period. The gains and losses from foreign
currency translation of these subsidiaries' financial statements are recorded
directly into a separate component of shareholders' equity under the caption
"cumulative translation adjustment." Foreign currency transaction gains and
losses have not been significant.
The Company's foreign subsidiaries operate and sell the Company's products in
various global markets. As a result the Company is exposed to changes in
interest rates and foreign currency exchange rates. The Company utilizes foreign
currency forward exchange contracts to hedge against 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.
The Company does not use derivative financial instruments for speculative or
trading purposes. Because the impact of movements in currency exchange rates on
forward contracts offsets the related impact on the exposures hedged, these
financial instruments do not subject the Company to speculative risk that would
otherwise result from changes in currency exchange rates. Realized gains and
losses on forward exchange contracts are included in other income, net, which
offset foreign exchange gains or losses from revaluation of foreign
currency-denominated receivable and payable balances. The cash flows related to
gains and losses on these contracts are classified in the same category as the
hedged transactions in the Consolidated Statements of Cash Flows.
At June 30, 1998, the Company had forward exchange contracts maturing throughout
fiscal 1999 and early fiscal 2000 to sell and purchase approximately $219
million and $6 million, respectively, in foreign currency, primarily Japanese
yen. At June 30, 1997, the Company had forward contracts maturing throughout
fiscal 1998 and early 1999 to sell and purchase approximately $225 million and
$10 million, respectively, in foreign currency, primarily Japanese yen. Of these
forward exchange contracts, approximately $111 million and $5 million of
contracts hedge foreign currency assets and liabilities, respectively, carried
on the balance sheet as of June 30, 1998, and consequently the financial
statements reflect the fair market value of the contracts and their underlying
transactions. Approximately $108 million and $1 million of the contracts hedge
firm commitments for future sales and purchases, respectively, denominated in
foreign currency. The fair market value of these contracts on June 30, 1998,
based upon prevailing market rates on that date, was approximately $104 million
and $1 million, respectively. As of June 30, 1998, and based on prevailing
market rates on that date, the unrealized loss on each set of contracts was
approximately $4 million.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial instruments
using available market information and valuation methodologies. The amounts
reported as investments and bank borrowings reasonably estimate their fair
value. The fair value of the Company's cash, cash equivalents, accounts
receivable, accounts payable and other current liabilities approximates the
carrying amount due to the relatively short maturity of these items.
REVENUE RECOGNITION
The Company recognizes revenue when the product has been shipped and collection
of the resulting receivable is probable. A provision for the estimated costs of
fulfilling warranty and installation
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obligations is recorded at the time the related revenue is recognized. Service
and maintenance contract revenues are deferred and recognized ratably over the
period of the related contract.
NET INCOME PER SHARE
In December 1997 the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (EPS). Under the provisions of this statement,
basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed by using the weighted average
number of common shares outstanding during the period and gives effect to all
dilutive potential common shares outstanding during the period. The reconciling
difference between the computation of basic and diluted earnings per share for
all periods presented, is the inclusion of the dilutive effect of stock options
issued to employees under employee stock option plans.
Options to purchase approximately 1,078,708, 674,028, and 1,357,376 shares were
outstanding at June 30, 1998, 1997, and 1996 respectively, but not included in
the computation of diluted EPS because the exercise price was greater than the
average market price of common shares in each respective year. The exercise
price ranges of these options were $48.06 to $69.88, $33.81 to $48.31, and
$33.81 to $46.56 at June 30, 1998, 1997 and 1996 respectively.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its employee stock option plans and employee stock
purchase plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The Company
provides additional proforma disclosure required by Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation" (see Note 6).
RECLASSIFICATIONS
Certain amounts in fiscal years prior to 1998 have been reclassified to conform
to the 1998 financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is required to be adopted in the
Company's fiscal year ending June 30, 1999. The effect of SFAS No. 130 will not
be material to the Company's financial statement disclosure.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related
13
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disclosures about products and services, geographic areas, and major customers.
This Statement is required to be adopted in the Company's fiscal year ending
June 30, 1999. The effect of SFAS No. 131 will not be material to the Company's
financial statement disclosure.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). It
establishes accounting and reporting standards for derivative instruments
including standalone instruments, such as forward currency exchange contracts
and interest note swaps or embedded derivatives, such as conversion options
contained in convertible debt investments and requires that these instruments be
marked-to-market on an ongoing basis. Along with the derivatives, the underlying
hedged items are also to be marked-to-market on an ongoing basis. These market
value adjustments are to be included either in the income statement or
stockholders' equity, depending on the nature of the transaction. The Company
currently only participates in hedge transactions of assets, liabilities and
firm commitments and does not anticipate that the adoption of this Statement
will have a material impact on the financial statements as the gains and losses
on the hedge transactions offset the losses and gains on the underlying items
being hedged. The Company is required to adopt SFAS 133 in the first quarter of
its fiscal year ending June 30, 2000.
NOTE 2 - BALANCE SHEET COMPONENTS
June 30, (in thousands) 1997 1998
------------- -------------
Inventories:
Customer service parts $ 31,387 $ 31,671
Raw materials 36,829 49,630
Work-in-process 71,998 79,238
Demonstration equipment 20,580 47,234
Finished goods 13,840 26,792
------------- -------------
$ 174,634 $ 234,565
============= =============
Property and equipment:
Land $ 10,502 $ 10,687
Buildings and improvements 11,053 11,169
Machinery and equipment 129,869 158,317
Office furniture and fixtures 17,849 22,280
Leasehold improvements 38,805 54,440
------------- -------------
208,078 256,893
Less: accumulated depreciation
and amortization (90,483) (115,956)
------------- -------------
$ 117,595 $ 140,937
============= =============
Other current liabilities:
Warranty, installation and retrofit $ 50,569 $ 60,008
Compensation and benefits 76,955 101,975
Income taxes payable 62,784 57,660
Other accrued expenses 72,118 63,205
------------- -------------
$ 262,426 $ 282,848
============= =============
NOTE 3 - NON-RECURRING ACQUISITION, RESTRUCTURING AND OTHER CHARGES
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During fiscal 1998, the Company acquired all of the outstanding stock of Nanopro
GmbH, VARS Inc. and Device Ware for an aggregate amount of approximately $21
million in cash. These companies specialize in various aspects of advanced wafer
inspection tools and related software. These acquisitions were accounted for
using the purchase method of accounting. The purchase price was allocated to the
acquired assets and liabilities which primarily consisted of in-process
technology. Excluding the aggregate $21 million write-offs of acquired
in-process technology, the aggregate impact of these acquisitions were not
material to the Company's consolidated statements of operations in the current
fiscal year.
In April 1998, the Company completed its acquisition of Amray, Inc. (Amray), a
privately owned provider of scanning electron microscope systems, using the
pooling of interests method of accounting. The Company acquired all of the
outstanding capital stock of Amray in exchange shares of its common stock. In
addition, the Company incurred $2 million in professional fees and restructuring
charges related to this acquisition. Amray's historical operations, net assets,
and cash flows are not material to the Company's consolidated financial results
and, therefore, were not reflected in the Company's consolidated financial
results prior to the acquisition.
During fiscal 1997, the Company recorded charges totaling $61 million for
merger, restructuring and other non-recurring events. Of this amount
approximately $46 million was the result of the merger between KLA Instruments
and Tencor Instruments on April 30, 1997, $6 million was a result of the
write-off of a Tencor bad debt and additional restructuring charges of $9
million primarily related to lease exit costs incurred by Tencor Instruments
prior to the merger. During fiscal 1998, approximately $17 million of the
accrued balance was used and $5 million of the accrued balance remains and is
expected to be utilized ratably during the first half of fiscal 1999.
NOTE 4 - INVESTMENTS
The amortized cost and estimated fair value of securities available for sale as
of June 30, 1997 and 1998, are as follows (in thousands):
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
June 30, 1997
U.S. Treasuries $ 70,777 $ 236 $ 373 $ 70,640
Municipal bonds 273,391 1,010 494 273,907
Corporate debt securities 26,120 63 228 25,955
Other 245,178 28,111 26 273,263
------------- ------------- ------------- -------------
$ 615,466 $ 29,420 $ 1,121 $ 643,765
Less: cash equivalents 235,622 135 16 235,741
short-term investments 42,159 28,517 1,070 69,606
------------- ------------- ------------- -------------
Long-term investments $ 337,685 $ 768 $ 35 $ 338,418
============= ============= ============= =============
June 30, 1998
U.S. Treasuries $ 22,849 $ 102 $ 21 $ 22,930
Mortgage backed securities 39,951 567 76 40,442
Municipal bonds 414,760 3,649 140 418,269
Corporate debt securities 63,439 155 53 63,541
Corporate equity securities 10,895 38,292 -- 49,187
Other 84,727 139 233 84,633
------------- ------------- ------------- -------------
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16
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Other 84,727 139 233 84,633
------------- ------------- ------------- -------------
$ 636,621 $ 42,904 $ 523 $ 679,002
Less: cash equivalents 171,466 43 18 171,491
short-term investments 73,260 19,406 323 92,343
------------- ------------- ------------- -------------
Long-term investments $ 391,895 $ 23,455 $ 182 $ 415,168
============= ============= ============= =============
The contractual maturities of securities classified as available for sale as of
June 30, 1998, regardless of the consolidated balance sheet classification, are
as follows (in thousands):
Estimated
Fair Value
-------------
Due within one year $ 180,966
Due after one year through five years 229,034
Due after five years 219,815
-------------
$ 629,815
=============
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. The realized gains and losses for the year ended June 30, 1998 and
1997, were not material to the Company's financial position or results of
operations.
NOTE 5 - INCOME TAXES
Year ended June 30, (in thousands) 1996 1997 1998
------------- ------------- -------------
The components of income before
income taxes are as follows:
Domestic income before income taxes $ 290,199 $ 152,778 $ 172,964
Foreign income before income taxes 23,901 21,201 33,347
------------- ------------- -------------
$ 314,100 $ 173,979 $ 206,311
============= ============= =============
The provision (benefit) for income taxes are
comprised of the following:
Current:
Federal $ 109,420 $ 66,439 $ 94,402
State 18,193 10,603 13,598
Foreign 9,557 8,808 10,440
------------- ------------- -------------
137,170 85,850 118,440
Deferred:
Federal (19,162) (15,238) (42,149)
State (1,787) (1,766) (4,376)
Foreign 1,245 (263) 300
------------- ------------- -------------
(19,704) (17,267) (46,225)
------------- ------------- -------------
Provision for income taxes $ 117,466 $ 68,583 $ 72,215
============= ============= =============
Actual current tax liabilities are lower than reflected above for fiscal years
1996, 1997 and 1998 by $10, $10 and $20 million, respectively, due to the stock
option deduction benefits recorded as credits to capital in excess of par value.
The significant components of deferred income tax assets (liabilities) are as
follows:
Deferred tax assets:
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Federal and state loss and credit carryforwards $ 2,820 $ 1,633
State tax 597 26,606
Nondeductible reserves and other 73,767 98,218
------------- -------------
77,184 126,457
------------- -------------
Deferred tax liabilities:
Depreciation (4,105) (4,625)
Unremitted earnings of foreign subsidiaries not
permanently reinvested (11,239) (11,501)
Unrealized (gain) loss on investments (11,036) (15,330)
Other (2,713) (6,951)
------------- -------------
(29,093) (38,407)
------------- -------------
Deferred tax assets valuation allowance (4,576) (1,633)
------------- -------------
Total net deferred tax assets $ 43,515 $ 86,417
============= =============
The reconciliation of the United States federal statutory income tax rate to the
Company's effective income tax rate is as follows:
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.5 3.3 2.9
Effect of foreign operations taxed at various rates 0.4 0.7 0.0
Benefit from foreign sales corporation (2.9) (3.3) (2.8)
Realized deferred tax assets previously reserved (0.4) -- (1.4)
Merger costs -- 4.5 3.0
Other 1.7 (0.8) (1.7)
---- ---- ----
37.3% 39.4% 35.0%
==== ==== ====
Undistributed earnings of certain of the Company's foreign subsidiaries, for
which no U.S. federal income taxes have been provided, aggregated approximately
$13 million at June 30,1998. The amount of the unrecognized deferred tax expense
related to the investments in foreign subsidiaries is estimated at approximately
$5 million at June 30,1998.
The IRS is currently auditing the Company's federal income tax returns for
fiscal 1995 to 1996. Management believes sufficient taxes have been provided in
prior years and that the ultimate outcome of the IRS audits will not have a
material adverse impact on the Company's financial position or results of
operations.
NOTE 6 - STOCKHOLDERS' EQUITY AND EMPLOYEE BENEFITS
In March 1989, the Company implemented a plan to protect stockholders' rights in
the event of a proposed takeover of the Company. The Plan provides that if any
person or group acquires 15% or more of the Company's Common Stock, each Right
not owned by such person or group will entitle its holder to purchase, at the
then-current exercise price, the Company's Common Stock at a value of twice that
exercise price. The rights are redeemable by the Company and expire in April
2006.
STOCK OPTION AND INCENTIVE PLANS. The Company has various stock option and
management incentive plans for selected employees, officers, directors, and
consultants. The plans provide for awards in the form of stock options, stock
appreciation rights, stock purchase rights, and performance shares. As of June
30, 1998, only stock options have been awarded under the plans.
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In calendar 1996, the Company granted employees the right to re-price certain
stock options issued to employees during the period August 1994 through August
1996. The 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 value on the date of grant.
The activity under the option plans, combined, was as follows:
Weighted-
Available Options Average
For Grant Outstanding Exercise Price
--------- ----------- --------------
Balances at June 30, 1995 2,738,614 7,737,430 11.82
Additional shares reserved 3,700,000 -- --
Options granted (3,283,370) 3,283,370 30.62
Options canceled/expired 1,240,116 (1,253,098) 32.03
Options exercised -- (906,797) 5.40
--------- ---------- -----
Balances at June 30, 1996 4,395,360 8,860,905 16.70
Additional shares reserved 1,600,000 -- --
Options granted (4,479,879) 4,479,879 30.15
Options canceled/expired 610,357 (1,992,129) 31.22
Options exercised -- (1,087,689) 8.20
--------- ---------- -----
Balances at June 30, 1997 2,125,838 10,260,966 $ 20.65
Additional shares reserved 2,501,603 -- --
Options granted (3,629,888) 3,629,888 46.44
Options canceled/expired 751,710 (915,914) 30.56
Options exercised -- (1,380,175) 10.33
--------- ---------- -----
Balances at June 30, 1998 1,749,263 11,594,765 29.11
========= ========== =====
The options outstanding at June 30, 1998, have been segregated into ranges for
additional disclosure as follows:
Options Outstanding Options Vested and Exercisable
------------------------------------------------ ------------------------------------
Number Weighted-Average Weighted- Number Vested
Range of Outstanding Remaining Average and Exercisable Weighted-Average
Exercise Prices at 06/30/98 Contractual Life Exercise Price at 06/30/98 Exercise Price
- --------------- ----------- ------------------ -------------- --------------- ----------------
$ 1.48 - $18.13 2,648,431 5.58 $ 10.33 2,520,700 $ 10.09
$18.14 - $21.88 3,441,548 7.26 19.99 1,546,289 19.32
$21.89 - $40.81 1,494,828 8.63 35.32 286,795 31.55
$40.82 - $40.94 1,749,010 9.33 40.94 500 40.88
$40.95 - $54.75 1,369,056 8.83 46.10 386,214 44.46
$54.76 - $69.89 891,892 9.09 60.58 371,414 60.56
- --------------- ---------- ---- --------- --------- ---------
$ 1.48 - $69.89 11,594,765 7.69 $ 29.11 5,111,912 $ 20.35
=============== ========== ==== ========== ========= =========
The weighted average fair value of options granted in 1998, 1997 and 1996 is
$26.36, $14.61 and $14.56, respectively. Options exercisable were 5,111,912,
4,592,963, and 4,425,065 as of June 30, 1998, 1997 and 1996, respectively.
EMPLOYEE STOCK PURCHASE PLAN. The Company's employee stock purchase plan
provides that eligible employees may contribute up to 10% of their base earnings
toward the semi-annual purchase of the Company's Common Stock. The employee's
purchase price is derived from a formula based on the fair market value of the
Common Stock. No compensation expense is recorded in connection with the plan.
In 1998, 1997 and 1996, 882,869, 925,311 and 697,203 shares, respectively, had
been purchased by employees. At June 30, 1998, 819,306 shares were reserved and
available for
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issuance under this plan. The weighted average fair value of shares issued in
1998, 1997 and 1996 is $11.20, $7.67, and $8.07, respectively.
PRO FORMA NET INCOME AND EARNINGS PER SHARE. Pro forma information regarding net
income and net income per share is required by SFAS 123, and has been determined
as if the Company had accounted for its employee stock purchase plan and
employee stock options granted subsequent to June 30, 1995, under the fair value
method of SFAS 123. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model for the single option
approach with the following weighted-average assumptions:
1996 1997 1998
---- ---- ----
Stock option plan:
Expected stock price volatility 50.0% 50.0% 55.0%
Risk free interest rate 6.4% 6.2% 5.8%
Expected life of options (years) 5.4 5.4 5.6
Stock purchase plan:
Expected stock price volatility 50.0% 50.0% 55.0%
Risk free interest rate 5.7% 5.6% 5.4%
Expected life of options (years) 1-2 1-2 1-2
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and employee stock purchase plan have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of such Company
options.
For purposes of pro forma disclosures required by SFAS 123, the estimated fair
value of the options is amortized to expense over the options' vesting periods.
The Company's pro forma information follows for the years ended June 30, 1996,
1997, 1998 follows (in thousands except for earnings per share information):
1996 1997 1998
------------- ------------- -------------
Net income:
Historical $ 196,634 $ 105,396 $ 134,096
Proforma $ 189,331 $ 89,608 $ 106,882
Historical earnings per share:
Basic $ 2.42 $ 1.29 $ 1.58
Diluted $ 2.34 $ 1.24 $ 1.52
Proforma earnings per share:
Basic $ 2.33 $ 1.09 $ 1.26
Diluted $ 2.27 $ 1.07 $ 1.24
The pro forma effect on net income and earnings per share for fiscal 1998 and
fiscal 1997 is not representative of the pro forma effect net income in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to fiscal 1996.
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OTHER EMPLOYEE BENEFIT PLANS. The Company has a profit sharing program for
eligible employees which distributes, on a quarterly basis, a percentage of
pretax profits. In addition, the Company has an employee savings plan that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. During 1998, the Company matched dollar-for-dollar up to $1,000 of
an eligible employee's contribution. The total charge to operations under the
profit sharing and 401(k) programs aggregated approximately $22 million, $24
million and $32 million in 1998, 1997 and 1996, respectively.
The Company has a non-qualified deferred compensation plan whereby certain key
executives may defer a portion of their salary and bonus. Participants direct
the investment of their account balances among mutual funds selected by the
participants. Distributions from the plan commence following a participant's
retirement or termination of employment. At June 30, 1998, the Company had a
deferred compensation liability under the plan of $26 million.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company has an agreement with a bank to sell, with recourse, certain of its
trade receivables. The total amount of the facility is the yen equivalent of
approximately $80 million based upon exchange rates as of June 30, 1998. The
Company has accounted for the sale of certain of these receivables as an off
balance sheet financing arrangement. During fiscal 1998, approximately $166
million of receivables were sold under this arrangement. As of June 30, 1998,
$52 million remains uncollected. The Company does not believe it is materially
at risk for any losses as a result of this agreement.
The Company has entered into a master operating lease for land, office and
manufacturing facilities constructed for its use in Milpitas and San Jose,
California. Monthly rent payments under these leases vary based upon the London
Interbank Offering Rate (LIBOR). At the end of the lease the Company, at its
option, can acquire the properties at their original cost or arrange for the
properties to be acquired. If the Company does not purchase the properties at
the end of the lease, the Company will be contingently liable to the lessor for
residual value guarantees aggregating $132 million. In addition, under the terms
of the lease, the Company must maintain compliance with certain financial
covenants. As of June 30, 1998, the Company was in compliance with all of its
covenants. Management believes that the contingent liability relating to the
residual value guarantees does not currently have a material adverse effect on
the Company's financial position or results of operations.
The Company leases several other facilities under operating leases that expire
at various times through fiscal 2012, with renewal options at the fair market
value for additional periods up to five years. The Company also leases equipment
and other facilities under operating leases.
Total rent expense under all operating leases was $18 million, $15 million and
$10 million for the years ended June 30, 1998, 1997 and 1996, respectively.
Future minimum lease commitments under these operating leases at June 30, 1998
(which include estimated lease payments for the Company's Milpitas and San Jose,
California, facilities using a LIBOR of approximately 6.0% and total
construction costs of $132 million), are $19 million, $16 million, $14 million,
$13 million, $6 million, and $11 million in fiscal 1999 through 2003 and
thereafter, respectively.
NOTE 8 - INDUSTRY AND GEOGRAPHIC INFORMATION
No single customer accounted for more than 10% of net revenues in 1998, 1997 and
1996. International sales accounted for 56%, 65% and 66% of the Company's
revenues in 1998, 1997 and 1996, respectively.
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The following is a summary of the Company's geographic operations:
Year ended June 30, (in thousands) 1996 1997 1998
----------- ----------- -----------
Sales to unaffiliated customers:
United States $ 375,639 $ 364,162 $ 513,065
Western Europe 143,816 137,314 147,070
Japan 352,080 257,382 291,175
Asia Pacific 222,957 272,966 215,015
----------- ----------- -----------
Total sales to unaffiliated customers 1,094,492 1,031,824 1,166,325
Intercompany sales among geographic areas:
United States 90,561 5,548 43,993
Western Europe 54,059 85,075 10,843
Japan 81,494 124,998 229,102
Asia Pacific 18,627 6,337 10,706
Consolidation eliminations (244,741) (221,958) (294,644)
----------- ----------- -----------
Revenues $ 1,094,492 $ 1,031,824 $ 1,166,325
=========== =========== ===========
Operating results:
United States $ 75,597 $ 40,802 $ 90,655
Western Europe 54,436 39,344 25,079
Japan 124,100 68,835 51,187
Asia Pacific 67,085 62,685 38,648
321,218 211,666 205,569
General corporate expenses (24,952) (65,834) (40,938)
----------- ----------- -----------
Income from operations $ 296,266 $ 145,832 $ 164,631
=========== =========== ===========
Identifiable assets:
United States $ 423,560 $ 822,067 $ 657,147
Western Europe 51,045 49,417 97,336
Japan 124,839 100,311 126,764
Asia Pacific 81,724 22,680 38,180
General corporate assets 476,751 348,832 628,970
----------- ----------- -----------
Total assets $ 1,157,919 $ 1,343,307 $ 1,548,397
=========== =========== ===========
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
At June 30, 1998, 1997 and 1996, total foreign liabilities (excluding
intercompany balances) were $71 million, $85 million and $76 million,
respectively. For fiscal years 1998, 1997 and 1996, foreign capital expenditures
and depreciation expense were $14 million, $4 million and $7 million and $5
million, $2 million and $1 million, respectively.
NOTE 9 - QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
In thousands,
except per share amounts September 30 December 31 March 31 June 30
------------ ----------- -------- --------
1998:
Revenues $312,420 $326,361 $274,164 $253,380
Gross profit 171,656 176,126 139,940 123,686
Income from operations 64,341 67,224 30,708 (1) 2,358 (2)
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In thousands,
except per share amounts September 30 December 31 March 31 June 30
------------ ----------- -------- --------
Net Income 49,722 52,058 28,971 (1) 3,345 (2)
Net Income per share:
Basic $ 0.59 $ 0.61 $ 0.34 (1) $ 0.04 (2)
Diluted $ 0.56 $ 0.59 $ 0.33 (1) $ 0.04 (2)
1997:
Revenues $261,140 $242,155 $252,346 $276,183
Gross profit 145,776 127,281 135,241 151,616
Income from operations 46,165 (3) 47,750 49,000 2,917 (4)
Net Income 33,580 (3) 34,219 36,995 602 (4)
Net Income per share:
Basic $ 0.41 (3) $ 0.42 $ 0.45 $ 0.01 (4)
Diluted $ 0.40 (3) $ 0.40 0.43 $ 0.01 (4)
(1) Includes non-recurring acquisition and restructuring charges of $3
million. Net income, basic and diluted net income per share would have
been $31 million, $0.37 and $0.35, respectively, excluding these costs.
(2) Includes non-recurring acquisition and restructuring charges of $19
million. Net income, basic and diluted net income per share would have
been $23 million, $0.26 and $0.26, respectively, excluding these costs.
(3) Includes restructuring costs of $9 million. Net income, basic and
diluted net income per share would have been $39 million, $0.47 and
$0.46, respectively, excluding these costs.
(4) Includes merger, restructuring and other costs of $52 million. Net
income, basic and diluted net income per share would have been $42
million, $0.50 and $0.48, respectively, excluding these costs.
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QUARTERLY COMMON STOCK MARKET PRICE:
1998 Quarter ended September 30 December 31 March 31 June 30
- ------------------ ------------ ----------- -------- -------
High 76 7/8 74 48 43 1/4
Low 48 1/4 33 1/2 33 3/8 24 1/4
1997 Quarter ended September 30 December 31 March 31 June 30
- ------------------ ------------ ----------- -------- -------
High 24 3/4 40 49 3/4 53 1/8
Low 14 3/4 17 5/8 25 1/2 35 1/2
The preceding table sets forth the high and low prices of the Company's Common
Stock as traded on the Nasdaq National Market System during the last two years.
As of September 1, 1998, there were approximately 2,103 shareholders of record
of the Company's Common Stock. The price for the Company's Common Stock as of
the close of business on September 1, 1998 was $25.38 per share. The Company has
never paid cash dividends to its stockholders. The Company does not plan to pay
cash dividends in the foreseeable future.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of KLA-Tencor Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of KLA-Tencor
Corporation and its subsidiaries at June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 28, 1998
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