<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
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 October 30, 1998 there were 87,409,754 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Unaudited Interim Balance Sheets at
June 30, 1998 and September 30, 1998 ...................... 3
Condensed Consolidated Unaudited Interim Statements of
Operations for the Three Month Periods Ended September
30, 1997 and September 30, 1998 ........................... 4
Condensed Consolidated Unaudited Interim Statements of
Cash Flows for the Three Months Ended September 30, 1997
and 1998 .................................................. 5
Notes to Condensed Consolidated Unaudited Interim
Financial Statements...................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk... 11
PART II OTHER INFORMATION 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 215,970 $ 231,827
Short-term investments 92,343 61,402
Accounts receivable, net 304,140 260,306
Inventories 234,565 234,774
Deferred income taxes 90,729 91,244
Other current assets 18,624 21,039
----------- -----------
Total current assets 956,371 900,592
Land, property and equipment, net 140,937 139,849
Marketable securities 415,168 466,476
Other assets 35,921 33,818
----------- -----------
Total assets $ 1,548,397 $ 1,540,735
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 21,482 $ 20,454
Accounts payable 46,353 31,348
Other current liabilities 282,848 281,416
----------- -----------
Total current liabilities 350,683 333,218
----------- -----------
Stockholders' equity:
Common stock and capital in excess of par value 497,583 497,006
Retained earnings 683,836 694,016
Net unrealized gain on investments 26,108 25,126
Cumulative translation adjustment (9,813) (8,631)
----------- -----------
Total stockholders' equity 1,197,714 1,207,517
----------- -----------
Total liabilities and stockholders' equity $ 1,548,397 $ 1,540,735
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated
unaudited interim financial statements.
3
<PAGE> 4
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1997 1998
--------- ---------
<S> <C> <C>
Revenues $ 312,420 $ 205,230
--------- ---------
Costs and expenses:
Cost of sales 140,764 112,655
Engineering, research and development 45,177 42,926
Selling, general and administrative 62,138 52,573
--------- ---------
Total costs and operating expenses 248,079 208,154
--------- ---------
Income (loss) from operations 64,341 (2,924)
Interest income and other, net 8,785 17,063
--------- ---------
Income before income taxes 73,126 14,139
Provision for income taxes 23,404 3,959
--------- ---------
Net income $ 49,722 $ 10,180
========= =========
Earnings per share:
Basic $ 0.59 $ 0.12
========= =========
Diluted $ 0.56 $ 0.11
========= =========
Weighted average number of shares:
Basic 84,095 87,342
========= =========
Diluted 88,783 89,257
========= =========
</TABLE>
See accompanying notes to condensed consolidated
unaudited interim financial statements.
4
<PAGE> 5
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 49,722 $ 10,180
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 11,865 11,643
Changes in assets and liabilities:
Accounts receivable, net (75,675) 49,433
Inventories (12,887) 1,848
Other assets (1,083) 152
Accounts payable 6,663 (15,499)
Other current liabilities 17,555 (3,485)
--------- ---------
Net cash provided by (used in)
operating activities (3,840) 54,272
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (22,501) (9,675)
Net purchases of available for sale securities (20,823) (21,373)
--------- ---------
Net cash used in investing activities (43,324) (31,048)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 23,276 1,977
Stock repurchases (2,900) (2,554)
Payments under debt obligations (2,495) (1,918)
--------- ---------
Net cash provided by (used in) financing activities 17,881 (2,495)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (564) (4,872)
--------- ---------
Net increase (decrease) in cash and cash equivalents (29,847) 15,857
Cash and cash equivalents at beginning of period 279,225 215,970
--------- ---------
Cash and cash equivalents at end of period $ 249,378 $ 231,827
========= =========
Supplemental cash flow disclosures:
Income taxes paid $ 11,393 $ 3,763
Interest paid $ 770 $ 378
</TABLE>
See accompanying notes to unaudited condensed
consolidated interim financial statements.
5
<PAGE> 6
KLA-TENCOR CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
NOTE 1. In the opinion of the Company's management, the unaudited condensed
consolidated interim financial statements include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair statement of results.
The results for the quarter ended September 30, 1998, are not necessarily
indicative of results to be expected for the entire year. This financial
information should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual amounts could differ materially from those amounts.
NOTE 2. Inventories (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1998
-----------------------------
<S> <C> <C>
Customer service parts $ 31,671 $ 36,715
Raw materials 49,630 63,305
Work-in-process 79,238 68,941
Demonstration equipment 47,234 45,182
Finished goods 26,792 20,631
-------- --------
$234,565 $234,774
======== ========
</TABLE>
NOTE 3. During fiscal 1997, the Company adopted a plan to repurchase shares of
its own Common Stock on the open market. During the quarter ended September 30,
1998, the Company repurchased 95,000 shares of its Common Stock at a cost of
$2.6 million.
NOTE 4. As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which
establishes rules for the reporting and presentation of comprehensive income and
its components. SFAS No. 130 requires accumulated translation adjustments and
net unrealized gains/losses on investments to be included in other comprehensive
income. The adoption of SFAS No. 130 did not impact the Company's net income or
total stockholders' equity. For the three months ended September 30, 1997 and
1998, the components of total comprehensive income are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
-------------------------
<S> <C> <C>
Net income $ 49,722 $ 10,180
-------- --------
Foreign currency translation adjustments (564) 1,182
Unrealized gains (losses) on investments,
net of tax 8,383 (982)
-------- --------
Other comprehensive income 7,819 200
-------- --------
Comprehensive income $ 57,541 $ 10,380
======== ========
</TABLE>
6
<PAGE> 7
NOTE 5. Basic net income per share is computed using the weighted average number
of common shares outstanding during the period and diluted earnings per share is
computed in the same manner and additionally 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. During the three month
periods ended September 30, 1997 and 1998 diluted net income per share does not
include the effect of options to purchase 2,500 shares at a price of $69.88, and
1,058,000 shares at prices ranging from $26.88 to $69.88, respectively, because
the exercise price was greater than the average market price of common shares
during the period.
In August 1998, the Company offered employees the right to reprice certain stock
options. The repricing 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.
NOTE 6. 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. This Statement is required to be adopted
in the Company's annual financial statements for fiscal year ending June 30,
1999. The effect of SFAS No. 131 is not expected to 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 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 133 in the first quarter of its fiscal year ending June 30, 2000. The
effect of SFAS No. 133 is not expected to be material to the Company's financial
statements.
NOTE 7. On November 3, 1998, the Company announced a restructuring plan which
includes a consolidation of facilities, certain program cutbacks, employee
severance and a write-down of assets associated with affected facilities and
programs. The Company expects the restructuring plan and related cost estimates
to be completed by the end of its second fiscal quarter. As a result of the
restructuring charge, the Company expects to report a net loss for its second
fiscal quarter.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis may contain forward-looking statements
that reflect the Company's current judgment regarding the matters addressed by
such statements. Because such statements apply to future events, they are
subject to risks and uncertainties that could cause actual results to differ.
Important factors that could cause actual results to differ are described in the
following discussion and under "Risk Factors".
RESULTS OF OPERATIONS
Revenues were $205 million for the three months ended September 30, 1998,
compared to $312 million for the same period of the prior fiscal year. The
decrease in revenues is primarily attributable to decreased semiconductor
equipment demand by leading semiconductor manufacturers who have reduced capital
spending levels due to excess manufacturing capacity. Revenue declines were
experienced across most product lines with the exception of the Reticle and
Photomask division where customer needs are driven by continuing long-term
technology changes and less by current capacity considerations.
Gross margins were 45% of revenues for the three month period ended September
30, 1998, compared to 55% of revenues for the same period of the prior fiscal
year. Gross margins declined primarily due to shift in product mix as higher
margin product sales from the Wafer Inspection and Metrology divisions declined
as a percentage of total revenue. In addition, margins were adversely affected
by reduced capacity utilization as a result of lower business volume.
Engineering, research and development (R&D) expenses were $43 million for the
three month period ended September 30, 1998 compared to $45 million for the same
period of the prior fiscal year. As a percentage of net sales, R&D expenses
increased to 21% for the three month period ended September 30, 1998 compared to
14% for the same period of the prior fiscal year. The slight decrease in
absolute dollars is primarily attributable to certain cost reduction measures
the Company has implemented as result of the current semiconductor industry
conditions. The increase in R&D spending as a percentage of sales represents the
Company's continued dedication to technology and product development in new
market segments and enhancements to existing products including inspection
enhancements for quarter micron and below.
Selling, general and administrative (SG&A) expenses were $53 million for the
three month period ended September 30, 1998, compared to $62 million for the
same period of the prior fiscal year. The decrease in dollars during the period
is due to cost reduction actions implemented by the Company during its last two
quarters.
Interest income and other, net, increased $8 million for the three month period
ended September 30, 1998, compared to the same period of the prior fiscal year.
The increase is due primarily to gains realized on the sale of certain equity
securities held in a supplier company as well as increases in interest income on
higher average cash equivalents and investment balances.
The Company's effective tax rate decreased to 28% for the three month period
ended September 30, 1998, compared to 32% for the same period of the prior
fiscal year. The decline is due primarily to additional benefits derived from
tax-exempt interest in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended September 30, 1998, cash, cash equivalents,
short-term investments and marketable securities balances increased
approximately $36 million to $760 million. Cash provided by operations for the
three month period was $54 million, resulting primarily from collections on
accounts receivable. Capital expenditures of $10 million were primarily for
computers and equipment necessary for the Company's operations.
8
<PAGE> 9
Working capital decreased slightly to $567 million as of September 30, 1998
compared to $606 million at June 30, 1998. The Company believes that existing
liquid resources and funds generated from operations combined with its ability
to borrow funds will be adequate to meet its operating and capital requirements
and obligations through the foreseeable future. The Company believes that
success in its industry requires substantial capital in order to maintain the
flexibility to take advantage of opportunities as they may arise. Accordingly,
the Company may, from time to time, as market and business conditions warrant,
invest in or acquire businesses, products, or technologies which it believes
complement its overall business strategy.
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. Costs to bring its products and systems to a state of compliance with the
year 2000 have not been material and the Company does not anticipate future
costs will have a material impact on the financial statements. 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 Company's 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. The
Company is also in the process of contacting its critical suppliers,
manufacturers, distributors, and other vendors to determine if their operations
and the products and services that they provide to the Company are Year 2000
compliant. Where practicable, the Company will attempt to mitigate its risks
with respect to the failure of third parties to be Year 2000 ready, including
developing contingency plans where practicable. However, such failures,
including failures of any contingency plans, remain a possibility and could have
a materially adverse impact on the Company's results of operations or financial
condition. 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.
RISK FACTORS
The Company expects that international revenues will continue to represent a
significant percentage of its revenues and international revenues and operations
may be adversely affected by economic conditions specific to each country. The
future performance of the Company depends, in part, upon its ability to continue
to compete successfully in the Asia Pacific, one of the largest regions for the
sale of yield management and process monitoring equipment. Countries in this
region, including Japan, Korea and Taiwan, have experienced weaknesses in their
currency, banking and equity markets in recent periods which 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. In addition,
international sales 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. 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.
9
<PAGE> 10
During the last three quarters operating results have been adversely affected as
the Company experienced declines in orders, revenues and margins due to reduced
capital equipment spending by the semiconductor industry. On November 3, 1998,
the Company announced the implementation of a restructuring plan to address the
current downturn in the semiconductor industry. This plan is expected to be
completed by the end of the Company's second fiscal 1999 quarter. There can be
no assurance that such cost reduction plans will be sufficient to address the
current market conditions. The current semiconductor industry decline is
primarily due to the build up of excess semiconductor manufacturing capacity
worldwide, coupled with the Asian financial crisis. The Company's operating
results are dependent on many factors, including 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. Operating results have
fluctuated in the past and may fluctuate in the future. If revenue levels in a
particular period do not meet expectations, operating results may be adversely
affected and additional cost reduction measures may be necessary for the Company
to remain competitive in the market place.
The semiconductor equipment industry is highly competitive and global in nature
and the Company has experienced and expects to continue to face substantial
competition. The Company believes that to remain competitive 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'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 fab capacity, its sales of metrology products to non-semiconductor
industries and its strong balance sheet. The Company believes that the
semiconductor equipment industry is becoming increasingly dominated by large
manufacturers with the resources to support customers worldwide. Some 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 can provide innovative technology. No
assurance can be given that the Company will be able to compete successfully
worldwide or 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.
10
<PAGE> 11
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. Although the
Company is focused on controlling expenses in the current 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 300mm wafers and
sub-quarter micron design rules) and to continue to enhance existing products.
The Company must be able to forecast demand for new products while managing the
transition from older products. There can be no assurance that the Company will
successfully or timely develop and manufacture new products or that any such
products 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposures as set forth in Item 7a of its Annual Report
on Form 10-K for the year ended June 30, 1998 have not changed significantly.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
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, 1998 Robert J. Boehlke
- ----------------- -----------------------------------------
(Date) Robert J. Boehlke
Executive Vice President
and Chief Financial Officer
12
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 231,827
<SECURITIES> 527,878
<RECEIVABLES> 260,306
<ALLOWANCES> 0
<INVENTORY> 234,774
<CURRENT-ASSETS> 923,860
<PP&E> 266,412
<DEPRECIATION> 126,563
<TOTAL-ASSETS> 1,540,735
<CURRENT-LIABILITIES> 333,218
<BONDS> 0
0
0
<COMMON> 497,006
<OTHER-SE> 710,511
<TOTAL-LIABILITY-AND-EQUITY> 1,540,735
<SALES> 205,230
<TOTAL-REVENUES> 205,230
<CGS> 112,655
<TOTAL-COSTS> 95,499
<OTHER-EXPENSES> 17,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 422
<INCOME-PRETAX> 14,139
<INCOME-TAX> 3,959
<INCOME-CONTINUING> 10,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,180
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
</TABLE>
