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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: September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from__________to___________
Commission File Number 0-9992
KLA-TENCOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2564110
- ------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
160 Rio Robles
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
(408) 875-3000
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 1, 1999 there were 89,948,961 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
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INDEX
Page
Number
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
June 30, 1999 and September 30, 1999 ............................ 3
Condensed Consolidated Statements of Operations for
the Three Month Ended September 30, 1998
and 1999 ........................................................ 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 1998 and 1999 .......... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......... 18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings................................................... 19
Item 6 Exhibits and Reports on Form 8-K.................................... 19
SIGNATURES 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands)
June 30, September 30,
1999 1999
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 271,488 $ 316,869
Short-term investments 59,574 83,046
Accounts receivable, net 280,070 332,280
Inventories 195,679 206,404
Other current assets 135,530 145,748
---------- -------------
Total current assets 942,341 1,084,347
Land, property and equipment, net 168,335 168,548
Marketable securities 424,121 353,631
Other assets 50,103 54,576
---------- -------------
Total assets $1,584,900 $1,661,102
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 14,567 $ 16,440
Accounts payable 35,249 29,101
Other current liabilities 302,501 327,525
---------- -------------
Total current liabilities 352,317 373,066
---------- -------------
Stockholders' equity:
Common stock and capital in excess of par value 504,352 521,649
Retained earnings 723,048 762,550
Accumulated other comprehensive income 5,183 3,837
---------- -------------
Total stockholders' equity 1,232,583 1,288,036
---------- -------------
Total liabilities and stockholders' equity $1,584,900 $1,661,102
========== ============
See accompanying notes to unaudited condensed consolidated financial statements.
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KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended
September 30,
1998 1999
--------- ---------
Revenues $ 205,230 $ 272,989
Costs and operating expenses:
Costs of goods sold 112,655 136,117
Engineering, research and development 42,926 46,718
Selling, general and administrative 52,573 53,414
Non-recurring acquisition, restructuring
and other charges -- (6,000)
--------- ---------
Total costs and operating expenses 208,154 230,249
--------- ---------
Income (loss) from operations (2,924) 42,740
Interest income and other, net 17,063 12,706
--------- ---------
Income before income taxes 14,139 55,446
Provision for income taxes 3,959 15,944
--------- ---------
Net income $ 10,180 $ 39,502
========= =========
Earnings per share:
Basic $ 0.12 $ 0.44
========= =========
Diluted $ 0.11 $ 0.42
========= =========
Weighted average number of shares:
Basic 87,342 88,996
========= =========
Diluted 89,257 93,967
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOW
(In thousands)
Three Months Ended
September 30,
1998 1999
--------- ---------
Cash flows from operating activities:
Net income $ 10,180 $ 39,502
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,643 12,921
Restructuring charges -- (6,000)
Net gain on sale of marketable securities (5,119) (3,911)
Changes in assets and liabilities:
Accounts receivable, net 49,433 (36,335)
Inventories 1,848 (7,998)
Other assets 152 (11,630)
Accounts payable (15,499) (6,724)
Other current liabilities (3,485) 26,200
--------- ---------
Net cash provided by operating activities 49,153 6,025
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (9,675) (11,841)
Net (purchases) sales of available for sale securities (16,254) 47,355
--------- ---------
Net cash (used in) provided by investing activities (25,929) 35,514
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 1,977 19,355
Stock repurchases (2,554) (2,161)
Net payments under debt obligations (1,918) (830)
--------- ---------
Net cash provided by (used in) financing activities (2,495) 16,364
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (4,872) (12,522)
--------- ---------
Net increase in cash and cash equivalents 15,857 45,381
Cash and cash equivalents at beginning of period 215,970 271,488
--------- ---------
Cash and cash equivalents at end of period $ 231,827 $ 316,869
--------- ---------
Supplemental cash flow disclosures:
Income taxes paid (refunded) $ 3,763 $ (1,956)
========= =========
Interest paid $ 378 $ 84
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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KLA-TENCOR CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments (consisting only of
normal recurring accruals) necessary for their fair presentation in accordance
with generally accepted accounting principles. Preparing financial statements
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. The results for the three month
period ended September 30, 1999 are not necessarily indicative of results to be
expected for the entire year. This financial information should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1999.
Certain items previously reported in specific financial statement captions have
been reclassified to conform with the presentation of the three month period
ended September 30, 1999.
NOTE 2. Inventories (in thousands):
June 30, September 30,
1999 1999
--------- -------------
Customer service parts $ 41,276 $ 44,802
Raw materials 45,906 50,836
Work-in-process 52,913 60,516
Demonstration equipment 37,469 37,070
Finished goods 18,115 13,180
-------- --------
$195,679 $206,404
======== ========
NOTE 3. The Company has adopted a plan to repurchase shares of its Common Stock
on the open market for the purpose of partially offsetting dilution created by
employee stock options and stock purchase plans. During the three month period
ended September 30, 1999, the Company repurchased 32,000 shares of its Common
Stock at a cost of $2.2 million.
NOTE 4. As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which
establishes the requirements for reporting and presentation of comprehensive
income and its components. SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components, however, it has no
effect on the Company's net income or total stockholders' equity. For the three
month periods ended September 30, 1998 and 1999, the components of comprehensive
income, net of tax, are as follows:
Three months ended
September 30,
1998 1999
-------- --------
Net income $ 10,180 $ 39,502
Currency translation adjustments 1,182 2,228
Change in unrealized gain (loss) on investments, net (982) (3,574)
-------- --------
Other comprehensive income (loss) 200 (1,346)
-------- --------
Total comprehensive income $ 10,380 $ 38,156
======== ========
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NOTE 5. Basic net income per share, is calculated using the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is computed in the same manner and also gives effect to all dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options. During the three month period ended
September 30, 1998, options to purchase approximately 1,058,000 shares at prices
ranging from $26.88 to $69.88 were not included in the computation of diluted
EPS because the exercise price was greater than the average market price of
common shares. During the three month period ended September 30, 1999, options
to purchase 2,500 shares at a price of $69.88 were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of common shares. The reconciling difference between the
computation of basic and diluted earnings per share for the three month periods
ended September 30, 1998 and 1999, is the inclusion of the dilutive effect of
stock options issued to employees under employee stock option plans.
NOTE 6. In November 1998, the Company entered into a restructuring plan
associated with the downturn in the semiconductor industry. The total pre-tax
restructuring charge was $35 million. The plan includes consolidation of
facilities, a write-down of assets associated with affected programs and
reductions in the Company's global workforce. The Company expects to continue to
utilize the restructuring reserves during the remainder of fiscal 2000 as the
program is completed.
During the three month period ended September 30, 1999, the Company determined
that $6 million of the restructuring reserve established during November 1998
would not be utilized because of a change in management's plans for utilization
of certain facilities resulting from an increase in demand for the Company's
products. Accordingly, the restructuring reserve reversal was included in the
determination of income from operations for the three month period ended
September 30, 1999.
Restructuring and related charges for the period from November 1998 until
September 30, 1999 were as follows (in thousands):
Severance
Facilities Inventory and Benefits Other Total
Restructuring provision $ 12,491 $ 9,721 $ 8,126 $ 4,662 $ 35,000
Write-down of assets (2,035) (6,729) -- (3,168) (11,932)
Cash expenditures (2,109) (409) (2,620) (1,000) (6,138)
-------- -------- -------- -------- --------
Balance at June 30, 1999 $ 8,347 $ 2,583 $ 5,506 $ 494 $ 16,930
Cash expenditure (219) (52) -- (271)
Restructuring reserve reversal (5,721) (279) -- -- (6,000)
-------- -------- -------- -------- --------
Balance at Sept 30, 1999 $ 2,407 $ 2,304 $ 5,454 $ 494 $ 10,659
======== ======== ======== ======== ========
NOTE 7. In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137 (SFAS No. 137), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 137 amends Statement of Financial
Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities," to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No.
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133 establishes accounting and reporting standards for derivative instruments
including standalone instruments, such as forward currency exchange contracts
and interest rate swaps or embedded derivatives and requires that these
instruments 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 is required to
adopt SFAS No. 133 in the first quarter of its fiscal year ending June 30, 2001.
The effect of SFAS No. 133 is not expected to be material to the Company's
financial statements.
NOTE 8. A discussion regarding certain pending legal proceedings is included in
Footnote 9 of the Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended June 30, 1999. The information provided therein
remains unchanged. Although the outcome of these claims cannot be predicted with
certainty, management does not believe that any of these legal matters will have
a material adverse effect on the Company's financial condition. Were an
unfavorable ruling to occur, there exists the possibility of a material impact
on the net income of the period in which the ruling occurs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Current Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the of Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
risks and uncertainties, including the risk factors set forth in this discussion
and in the Company's Annual Report on Form 10-K for the year ended June 30,
1999. Generally, the words "anticipate", "expect", "intend", "believe" and
similar expressions identify forward looking statements. The information
included in this Quarterly Report is as of the filing date with the Securities
and Exchange Commission and future events or circumstances could differ
significantly from the forward looking statements included here.
RESULTS OF OPERATIONS
Revenues were $273 million for the three month period ended September 30, 1999,
compared to $205 million for the same period of the prior fiscal year,
representing an increase of 33%. The increase in revenues is primarily
attributable to increased capital spending by major semiconductor manufacturers.
Our Wafer Inspection products were the largest beneficiary of the increased
capital spending by major semiconductor manufacturers.
Gross margins were 50% for the three month period ended September 30, 1999,
compared to 45% of revenues for the same period in the prior fiscal year. Gross
margins increased primarily due to increased capacity utilization resulting from
higher unit volume as well as faster growth of higher margin product revenue
compared to lower margin service revenue.
Engineering, research and development (R&D) expenses were $47 million for the
three month period ended September 30, 1999 compared to $43 million for the same
period in the prior fiscal year. As a percentage of revenues, R&D expenses
decreased to 17% for the three month period ended September 30, 1999 compared to
21% for the same period in the prior fiscal year. Our investment in R&D
represents a continued commitment to product development in new and emerging
market segments and enhancements to existing products for 0.18 micron, copper
development and 300mm wafers.
Selling, general and administrative expenses were $53 million for the three
month period ended September 30, 1999 as well as for the same period in the
prior fiscal year. Selling, general and administrative expenses remained flat in
spite of the increase in revenue as a result of the restructuring and cost
reduction plans, including reductions in headcount and consolidation of
facilities, which we adopted during the three month period ended December 31,
1998.
During the three month period ended September 30, 1999, we determined that $6
million of the restructuring reserve established during November 1998 would not
be utilized because of a change in management's plans for utilization of certain
facilities resulting from an increase in demand for our products. Accordingly,
the restructuring reserve reversal was included in the determination of income
from operations for the three month period ended September 30, 1999.
Interest income and other, net, decreased to $13 million for the three months
ended September 30, 1999, compared to $17 million in the same period in the
prior fiscal year. The decrease is due to lower returns on our investment
portfolio and a smaller gain on sale of marketable securities.
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Our effective tax rate for the three months ended September 30, 1999 was 28% on
pretax income excluding nonrecurring income created by the reversal of our prior
fiscal year restructuring reserves. This rate is consistent with the rate
applied to recurring income during the prior fiscal year. The tax rate on the
nonrecurring income was 35%, which is consistent with the tax rate applied when
the restructuring reserve and related charge were recorded during the three
month period ended December 31, 1998. The overall tax rate was 28.8% for the
three month period ended September 30, 1999. We anticipate a tax rate of
approximately 28% for the balance of the fiscal year ending June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended September 30, 1999, cash, cash equivalents,
short-term investments and marketable securities balances decreased to $754
million from $755 million. Net cash provided by operations for the three month
period ended September 30, 1999, was $6 million, compared to $49 million of net
cash from operations for the same period of the prior fiscal year. This change
primarily resulted from increased net income before non-cash charges and an
increase in other liabilities offset by an increase in accounts receivable and
inventory. Capital expenditures of $12 million were for manufacturing and
engineering equipment and leasehold improvements necessary for our operations.
The amounts of common stock issued through our employee stock purchase program
and stock option exercises during the three month period ended September 30,
1999 was $19 million.
Working capital increased to $711 million as of September 30, 1999 compared to
$590 million at June 30, 1999 primarily due to a shift of our investment
portfolio from marketable securities into short term investments and cash
equivalents. We believe that existing liquid capital resources and funds
generated from operations combined with the ability, if necessary, to borrow
funds will be adequate to meet our operating and capital requirements and
obligations through the foreseeable future. However, we can give no assurances
that we will continue to generate sufficient funds from operations or that we
will be able to borrow funds on reasonable terms in the future, if necessary.
RISK FACTORS
Fluctuations in Operating Results and Stock Price
Our operating results have varied widely in the past and our future operating
results will continue to be subject to quarterly variations based upon a wide
variety of factors including those listed in this section and throughout this
Quarterly Report. In addition, future operating results may not follow any past
trends. The factors we believe make our results more likely to fluctuate and
difficult to predict include:
- the cyclical nature of the semiconductor industry;
- the reduction in the price and profitability of our products;
- our timing of new product introductions;
- our ability to develop and implement new technologies;
- the change in customers' schedules for fulfillment of orders;
- the cancellation of contracts by major customers; and
- our ability to manage our manufacturing requirements.
Operating results also could be affected by sudden changes in customer
requirements, currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or more of the
global markets in which we do business. As a result of
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these or other factors, we could fail to achieve our expectations as to future
revenues, gross profit and income from operations. Our failure to meet the
performance expectations set and published by external sources could result in a
sudden and significant drop in the price of our stock, particularly on a
short-term basis, and could negatively impact the value of any investment in our
stock.
Year 2000 Issue
The Year 2000 computer issue presents risks for us as it does for other
companies. The Year 2000 problem arises from the use of a two-digit field to
identify years in computer programs, and the assumption of a single century, the
1900s. Any program so created may read, or attempt to read, "00" as the year
1900. There are two other related issues which could also lead to incorrect
calculations or failure: some systems' programming assigns special meaning to
certain dates and the year 2000 is a leap year. Accordingly, some computer
hardware and software, including programs embedded within machinery and parts,
will need to be modified prior to the year 2000 in order to remain functional.
We use a significant number of computer software programs and operating systems
in our internal operations, including applications used in our financial,
product development, order management and manufacturing systems, as well as in
the products we manufacture and sell. Additionally, we are dependent upon our
critical suppliers, contract manufacturers, other vendors, and customers to
determine if their operations, products, services and payments they provide are
Year 2000 ready.
The inability of computer software programs to accurately recognize, interpret
and process date codes designating the year 2000 and beyond could cause errors
or operating problems that would disrupt business operations. If this occurred
in our internal systems it could adversely affect our ability to process orders,
forecast production requirements or issue invoices. A significant failure of our
computer integrated manufacturing systems that monitor and control factory
equipment, would disrupt manufacturing operations and cause a delay in the
completion and shipping of products. Similarly, if our critical suppliers' or
customers' systems or products fail because of a Year 2000 malfunction, their
disruption could negatively impact our operating results. Finally, if our own
products malfunctioned as a result of a failure in date recognition, we could
experience increased warranty claims and litigation which could harm our
business.
To avoid these kinds of disruptions, KLA-Tencor commenced a broad-ranging Year
2000 readiness program during fiscal 1997. The Year 2000 program was established
to ensure that all of our company-wide systems, components, infrastructure,
critical suppliers and products will operate in such a manner that business is
uninterrupted into and beyond the year 2000. The goals of the Year 2000
readiness program were to:
- - Establish and maintain up-to-date communication with users;
- - Determine systems/items that need to be addressed for Year 2000 readiness;
- - Test the above systems;
- - Correct Year 2000 problems as necessary;
- - Maintain sustained support;
- - Develop a contingency/recovery plan for unanticipated Year 2000 issues.
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We are on schedule to meet each of these goals in our three main areas of focus.
The three focus areas of our Year 2000 readiness program are: internal
information and operating systems; our supply chain; and external product
readiness.
The first focus area is our internal information and operating systems. The
project team for information and operating systems is composed of managers and
individual contributors from our computer information systems group and other
functional areas including finance and human resources, augmented by
representatives from each operational division. We also have project managers
responsible for readiness in functional areas such as treasury, facilities,
security, engineering, manufacturing, and service. This internal Year 2000
readiness program includes three major activities:
- - Inventory collection and categorization, which includes identification of
all our systems and items that need to be addressed for year 2000 readiness
and creation of a master list categorized by critical need;
- - Assessment, in which each functional group evaluates the readiness of
systems inventoried; including as necessary, researching vendor
documentation, direct vendor contact, code search, and/or execution of a
detailed test plan; and
- - Remediation or correction of the problems found, which include vendor
provided application patches, correction of bugs as necessary and needed
upgrades of software and hardware.
As of September 30, 1999, we have completed a majority of the activities of this
project, and we continue to address any remaining issues to ensure that accurate
information will be available prior to January 1, 2000.
The second area of emphasis in our Year 2000 readiness program is to ensure our
supply chain is prepared. Product divisions identified over 400 key suppliers
that needed to be evaluated. Questionnaires were sent to each of these
suppliers, whose responses were reviewed and classified. On-site audits were
performed at critical suppliers where readiness issues could be of serious
consequence to our operations. In addition, over 100 more suppliers are being
systematically reviewed by telephone to confirm that their preparations will be
completed as required. As of September 30, 1999 we were able to classify all our
key suppliers as low risk with respect to Year 2000 readiness, and we continue
to monitor the addition of new suppliers to assure readiness is maintained.
However, the readiness of third parties overall varies widely. Because our
readiness is dependent on timely Year 2000 readiness of third parties, there can
be no assurances that our efforts alone will resolve all Year 2000 issues
applicable to our internal processes or our products.
The final area of focus for our Year 2000 readiness program is our external
products. KLA-Tencor has over 18,000 installed tools at our customers' sites. We
know that Year 2000 readiness is a major issue for our customers, who face
important logistical issues in assuring their continued operations. Our field
service engineers have audited the majority of our tools for their configuration
to determine what needs to be done to bring our products, including older
out-of-
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warranty products, to a state of readiness for the Year 2000. Readiness, upgrade
requirements or "never ready" status has been reviewed through a series of
system audits and an implementation plan put in place as required for each of
our products. The framework of this project is similar to that established for
our internal systems. This program has covered several key areas including date
inspections, operating system investigations, runtime tests, software
inspections and third party software component inventory. As of September 30,
1999, we have met the majority of the goals of this project, and we continue to
address the remaining issues to ensure accurate information will be available
prior to January 1, 2000.
The costs of our Year 2000 readiness program are primarily associated with the
use of existing internal resources and incremental external spending. We
estimate we have incurred approximately $8 million of incremental external
spending directly associated with this program through September 30, 1999. We
anticipate we will incur future incremental external spending to complete our
readiness program of approximately $1 million. However, the actual future
incremental spending may prove to be higher. Also, this estimate does not
include the costs that could be incurred if one or more of our significant third
party service providers fails to achieve Year 2000 readiness. We have not
separately identified the costs incurred for our Year 2000 readiness program
that are the result of use of internal resources and therefore, these costs are
not included in the above estimates.
Based on currently available information, we do not believe that the Year 2000
issues related to internal systems or products sold by us to customers, as
discussed above, will have a material impact on our financial condition or
overall trends in results of operations. While we have undertaken a Year 2000
readiness program and have performed extensive testing of our internal systems
and the products we manufacture, we are uncertain to what extent we may be
affected by such matters. A significant disruption of our financial management
and control systems or a lengthy interruption in our manufacturing operations
caused by a Year 2000 readiness program related issue could result in a material
adverse impact on our operating results and financial condition. A supplier's
failure to ensure Year 2000 capability or our customer's concerns about Year
2000 readiness of our product could seriously harm our business.
We believe that Year 2000 readiness will be achieved prior to January 1, 2000.
However, due to the substantial nature of work and the extent of testing that
must take place, there can be no assurance that we will not experience delays or
material costs associated with the program, which could be potentially
detrimental to our operations . Furthermore, we cannot assure that such programs
will successfully detect and correct all potential year 2000 associated problems
in advance. To date, costs of bringing our products and systems to a state of
compliance with the year 2000 have not been material and we do not anticipate
future costs will have a material impact on our financial statements.
Semiconductor Equipment Industry Volatility
The semiconductor equipment industry is highly cyclical. The purchasing
decisions of our customers are highly dependent on the economies of both the
local markets in which they are located and the semiconductor industry
worldwide. The timing, length and severity of the up-and-down cycles in the
semiconductor equipment industry are difficult to predict. This
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cyclical nature of our marketplace impacts our ability to accurately budget our
expense levels, which are based in part on our projections of future revenues.
When cyclical fluctuations result in lower than expected revenue levels,
operating results may be adversely affected and cost reduction measures may be
necessary in order for us to remain competitive and financially sound. During a
down cycle, we must be in a position to adjust our cost and expense structure to
the prevailing market condition and to continue to motivate and retain our key
employees. In addition, during periods of rapid growth, we must be able to
increase manufacturing capacity and personnel to meet customer demand. We can
provide no assurance that these objectives can be met in a timely manner in
response to industry cycles. If we fail to respond to industry cycles, our
business could be adversely impacted.
During the most recent down cycle, the semiconductor industry experienced excess
production capacity that caused semiconductor manufacturers to decrease capital
spending. We generally do not have long-term volume production contracts with
our customers and we do not control the timing or volume of orders placed by our
customers. Whether and to what extent our customers place orders for any
specific products and the mix and quantities of products included in those
orders are factors beyond our control. Insufficient orders will result in
under-utilization of our manufacturing facilities and infrastructure and will
negatively impact our operating results and financial condition.
Technological Change and Customer Requirements
Success in the semiconductor equipment industry depends, in part, on continual
improvement of existing technologies and rapid innovation of new solutions. For
example, the semiconductor industry continues to shrink the size of
semiconductor devices and recently has begun to commercialize the process of
copper-based interconnects. These and other evolving customer needs require us
to respond with continued development programs and to cut back or discontinue
older programs which may no longer have industry-wide support. Technical
innovations are inherently complex and require long development cycles and
appropriate professional staffing. Our competitive advantage and future business
success depend on our ability to accurately predict evolving industry standards,
develop and introduce new products which successfully address changing customer
needs, win market acceptance of these new products and manufacture these new
products in a timely and cost-effective manner. If we do not develop and
introduce new products and technologies in a timely manner in response to
changing market conditions or customer requirements, our business could be
seriously harmed.
In this environment, we must continue to make significant investments in
research and development in order to enhance the performance and functionality
of our products, to keep pace with competitive products and to satisfy customer
demands for improved performance, features and functionality. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements or that we will be able to secure the financial resources necessary
to fund future development. Substantial research and development costs typically
are incurred before we confirm the technical feasibility and commercial
viability of a product, and not all development activities result in
commercially viable products. In addition, we cannot ensure that these products
or enhancements will receive market acceptance or that we will be able to sell
these
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products at prices that are favorable to us. Our business will be adversely
impacted if we are unable to sell our products at favorable prices or if our
products are not accepted by the market in which we operate.
Competition
Our industry includes large manufacturers with substantial resources to support
customers worldwide. Our future performance depends, in part, upon our ability
to continue to compete successfully worldwide. Some of our competitors are
diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products, some of which compete with the
products and services that we offer. These competitors may bundle their products
in a manner that may discourage customers from purchasing our products. In
addition, we face competition from smaller emerging semiconductor equipment
companies whose strategy is to provide a portion of the products and services
which we offer, using innovative technology to sell products into specialized
markets. Loss of competitive position could negatively impact our prices,
customer orders, revenues, gross margins, and market share, any of which would
negatively impact our operating results and financial condition. Our failure to
compete successfully with these other companies would seriously harm our
business.
International Trade and Economic Conditions
Ours is an increasingly global market. A significant percentage of our revenues
are derived from outside the United States and we expect that international
revenues will continue to represent a substantial percentage of our revenues.
Our international revenues and operations are affected by economic conditions
specific to each country and region. Although economies in the Asia Pacific
region have stabilized to some degree, compared to early-to-mid fiscal 1999, and
certain countries such as Taiwan have relatively healthy economies, we remain
cautious about general macroeconomic developments in the Asia Pacific region,
particularly Japan. Japan's economy is important to the overall financial health
of the region. If the economies in the Asia Pacific region stagnate or
deteriorate, the economies of other regions could also be impaired. Because of
our significant dependence on international revenues, our operating results
could be negatively impacted by a continued or additional decline in the
economies of any of the countries or regions in which we do business.
Managing global operations and sites located throughout the world presents
challenges associated with, among other things, cultural diversity and
organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic local or international economic downturns, trade balance issues,
political instability and fluctuations in interest and currency exchange rates
could negatively impact our business and results of operations. Although we
attempt to manage near term currency risks through the use of hedging
instruments, there can be no assurance that such efforts will be adequate.
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Intellectual Property Obsolescence and Infringement
Our success is dependent in part on our technology and other proprietary rights.
We own various United States and international patents and have additional
pending patent applications relating to some of our products and technologies.
The process of seeking patent protection is lengthy and expensive, and we cannot
be certain that pending or future applications will actually result in issued
patents, or that, issued patents will be of sufficient scope or strength to
provide meaningful protection or commercial advantage to us. Other companies and
individuals, including our larger competitors, may develop technologies that are
similar or superior to our technology or design around the patents we own.
We also maintain trademarks on certain of our products and services and claim
copyright protection for certain proprietary software and documentation.
However, we can give no assurance that our trademarks and copyrights will be
upheld or successfully deter infringement by third parties.
While patent, copyright and trademark protection for our intellectual property
is important, we believe our future success in highly dynamic markets is most
dependent upon the technical competence and creative skills of our personnel. We
attempt to protect our trade secret and other proprietary information through
agreements with our customers, suppliers, employees and consultants and through
other security measures. We also rely on trade secret protection for our
technology, in part through confidentiality agreements with our employees,
consultants and third parties. We also maintain exclusive and non-exclusive
licenses with third parties for strategic technology used in certain products.
However, these employees, consultants and third parties may breach these
agreements, and we may not have adequate remedies for wrongdoing. In addition,
the laws of certain territories in which we develop, manufacture or sell our
products may not protect our intellectual property rights to the same extent as
do the laws of the United States.
As is typical in the semiconductor equipment industry, from time to time we have
received communications from other parties asserting the existence of patent
rights, copyrights, trademark rights or other intellectual property rights which
they believe cover certain of our products, processes, technologies or
information. Our customary practice is to evaluate such assertions and consider
whether to seek licenses where appropriate. Based on industry practice and prior
experience, we believe that licenses or other rights, if necessary, will be
available on commercially reasonable terms for existing or future claims.
Nevertheless, we cannot ensure that licenses can be obtained, or if obtained
will be on acceptable terms or that litigation or other administrative
proceedings will not occur. The inability to obtain necessary licenses or other
rights on reasonable terms could seriously harm our operating results and
financial condition.
Key Suppliers
We use a wide range of materials in the production of our products including
custom electronic and mechanical components, and we use numerous suppliers to
supply materials. We generally do not have guaranteed supply arrangements with
our suppliers. Because of the variability and uniqueness of customers orders, we
do not maintain an extensive inventory of materials for manufacturing. We seek
to minimize the risk of production and service interruptions and/or shortages of
key parts by selecting and qualifying alternative suppliers for key parts,
monitoring
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the financial stability of key suppliers, and maintaining appropriate
inventories of key parts. Although we make reasonable efforts to ensure that
parts are available from multiple suppliers, key parts may be available only
from a single supplier or a limited group of suppliers. There can be no
assurance that our business will not be harmed if we do not receive sufficient
parts to meet our production requirements in a timely and cost-effective manner.
Operations at our primary manufacturing facilities and our assembly
subcontractors are subject to disruption for a variety of reasons, including
work stoppages, fire, earthquake, flooding or other natural disasters, as well
as Year 2000 related problems. Such disruption could cause delays in shipments
of products to our customers. We cannot ensure that alternate production
capacity would be available if a major disruption were to occur, or that if it
were available, it could be obtained on favorable terms. Such a disruption could
result in cancellation of orders or loss of customers and could seriously harm
our business.
Key Employees
Our employees are vital to our success, and our key management, engineering and
other employees are difficult to replace. We generally do not have employment
contracts with our key employees. Further, we do not maintain key person life
insurance on any of our employees. The expansion of high technology companies
worldwide has increased demand and competition for qualified personnel. We may
not be able to attract, assimilate or retain qualified employees in the future.
These factors could seriously harm our business.
Acquisitions
We seek to develop new technologies from both internal and external sources. As
part of this effort, we may make acquisitions of, or significant investments in,
businesses with complementary products, services and/or technologies.
Acquisitions involve numerous risks, including management issues and costs in
connection with integration of the operations, technologies, and products of the
acquired companies, possible write-downs of impaired assets, and the potential
loss of key employees of the acquired companies. The inability to effectively
manage these risks could seriously harm our business.
Litigation
We have in the past been involved in litigation relating to the infringement by
us of other parties' patents and intellectual property rights. This type of
litigation tends to be expensive and requires significant management time and
attention. In addition, if we lose in this type of litigation, a court could
require us to pay substantial damages and/or royalties, prohibiting us from
using essential technologies. For these and other reasons, this type of
litigation could have a material adverse effect on our business, financial
condition and results of operations. Also, although we may seek to obtain a
license under a third party's intellectual property rights in order to bring an
end to certain claims or actions asserted against us, we may not be able to
obtain such a license on reasonable terms or at all.
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Euro Conversion
A new European currency was implemented commencing in January 1999 to replace
the separate currencies of eleven western European countries. This requires
changes in our operations as we modify systems and commercial arrangements to
deal with the new currency. Modifications are necessary in operations such as
payroll, benefits and pension systems, contracts with suppliers and customers,
and internal financial reporting systems. During the three-year transition
period in which transactions may also be made in the old currencies, we must
maintain dual currency processes for our operations. We have identified the
issues created by this problem and the cost of this effort is not expected to
have a material effect on our business or results of operations. We cannot be
assured, however, that all problems will be foreseen and corrected or that no
material disruption of our business will occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposures as set forth in its Annual Report on Form
10-K for the year ended June 30, 1998 have not changed significantly.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A discussion regarding certain pending legal proceedings is included in
Footnote 9 of the Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1999. The information
provided therein remains unchanged. Although the outcome of these claims
cannot be predicted with certainty, management does not believe that any
of these legal matters will have a material adverse effect on the
Company's financial condition. Were an unfavorable ruling to occur,
there exists the possibility of a material impact on the net income of
the period in which the ruling occurs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
3.2 By-Laws as amended on October 4, 1999.
(b) 8-K
None
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)
November 12, 1999 /s/ ROBERT J. BOEHLKE
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(Date) Robert J. Boehlke
Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit # Description
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3.2 By-Laws as amended on October 4, 1999.
27.1 Financial Data Schedule