<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: December 31, 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 January 31, 2000 there were 183,602,096 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
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INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
June 30, 1999 and December 31, 1999 ............................. 3
Condensed Consolidated Statements of Operations for
the Three and Six Month Periods Ended December 31, 1998
and 1999 ........................................................ 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended December 31, 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.......... 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................... 17
Item 4 Submission of Matters to a Vote of Security Holders................. 17
Item 6 Exhibits and Reports on Form 8-K.................................... 17
SIGNATURES 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 271,488 $ 354,918
Short-term investments 59,574 91,215
Accounts receivable, net 280,070 316,625
Inventories 195,679 222,233
Other current assets 135,530 150,797
---------- ----------
Total current assets 942,341 1,135,788
Land, property and equipment, net 168,335 170,674
Marketable securities 424,121 407,788
Other assets 50,103 64,292
---------- ----------
Total assets $1,584,900 $1,778,542
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 14,567 $ 15,145
Accounts payable 35,249 37,898
Other current liabilities 302,501 358,528
---------- ----------
Total current liabilities 352,317 411,571
---------- ----------
Stockholders' equity:
Common stock and capital in excess of par value 504,352 551,411
Retained earnings 723,048 811,799
Accumulated other comprehensive income 5,183 3,761
---------- ----------
Total stockholders' equity 1,232,583 1,366,971
---------- ----------
Total liabilities and stockholders' equity $1,584,900 $1,778,542
========== ==========
</TABLE>
See accompanying notes to condensed consolidated unaudited financial statements.
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KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1999 1998 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 193,371 $ 330,757 $398,601 $603,746
Costs and operating expenses:
Costs of goods sold 104,909 153,373 217,564 289,490
Engineering, research and development 38,470 55,624 81,396 102,342
Selling, general and administrative 49,966 60,148 102,539 113,562
Non-recurring acquisition, restructuring
and other charges 42,700 62 42,700 (5,938)
--------- --------- -------- --------
Total costs and operating expenses 236,045 269,207 444,199 499,456
--------- --------- -------- --------
Income (loss) from operations (42,674) 61,550 (45,598) 104,290
Interest income and other, net 14,083 6,850 31,146 19,556
--------- --------- -------- --------
Income (loss) before income taxes (28,591) 68,400 (14,452) 123,846
Provision (benefit) for income taxes (10,994) 19,151 (7,035) 35,095
--------- --------- -------- --------
Net income (loss) $ (17,597) $ 49,249 $ (7,417) $ 88,751
========= ========= ======== ========
Earnings (loss) per share:
Basic $ (0.10) $ 0.27 $ (0.04) $ 0.49
========= ========= ======== ========
Diluted $ (0.10) $ 0.26 $ (0.04) $ 0.47
========= ========= ======== ========
Weighted average number of shares:
Basic 174,926 180,607 174,828 179,307
========= ========= ======== ========
Diluted 174,926 190,780 174,828 189,352
========= ========= ======== ========
</TABLE>
See accompanying notes to condensed consolidated unaudited financial statements.
4
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KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,417) $ 88,751
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 21,721 28,525
Deferred income taxes -- (321)
Restructuring charges 35,000 (7,838)
Non-recurring acquisition charges 7,700 1,900
Net gain on sale of marketable securities (11,119) (3,323)
Changes in assets and liabilities:
Accounts receivable, net 40,353 (15,778)
Inventories 21,976 (26,128)
Other assets (627) (61,350)
Accounts payable (23,690) 1,764
Other current liabilities (31,679) 56,363
--------- ---------
Net cash provided by operating activities 52,218 62,565
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net (10,173) (25,642)
Net sales (purchases) of available for sale securities (43,265) 25,267
Acquisition of assets and technology (12,522) (6,900)
--------- ---------
Net cash used in investing activities (65,960) (7,275)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 18,710 54,690
Stock repurchases (20,648) (7,565)
Net payments under debt obligations (4,483) (2,729)
--------- ---------
Net cash provided by (used in) financing activities (6,421) 44,396
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (18,181) (16,256)
--------- ---------
Net increase (decrease) in cash and cash equivalents (38,344) 83,430
Cash and cash equivalents at beginning of period 215,970 271,488
--------- ---------
Cash and cash equivalents at end of period $ 177,626 $ 354,918
========= =========
Supplemental cash flow disclosures:
Income taxes paid, net of refunds $ 6,415 $ 2,039
========= =========
Interest paid $ 996 $ 166
========= =========
</TABLE>
See accompanying notes to condensed consolidated unaudited financial statements.
5
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KLA-TENCOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS
NOTE 1. In the opinion of management, the accompanying condensed
consolidated unaudited 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 December 31, 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 to the presentation of the three-month period ended
December 31, 1999.
NOTE 2. Inventories (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
-------- ------------
<S> <C> <C>
Customer service parts $ 41,276 $ 45,300
Raw materials 45,906 48,781
Work-in-process 52,913 79,976
Demonstration equipment 37,469 37,562
Finished goods 18,115 10,614
-------- --------
$195,679 $222,233
======== ========
</TABLE>
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 six month
period ended December 31, 1999, the Company repurchased 188,000 shares of its
Common Stock at a cost of $7.6 million.
NOTE 4. For the three- and six-month periods ended December 31, 1998 and
1999, the components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(17,597) $ 49,249 $ (7,417) $ 88,751
-------- -------- -------- --------
Foreign currency translation adjustments 3,790 1,344 4,972 3,572
Unrealized gains (losses) on investments (4,759) (1,420) (5,741) (4,994)
-------- -------- -------- --------
Other comprehensive loss (969) (76) (769) (1,422)
-------- -------- -------- --------
Total comprehensive income (loss) $(18,566) $ 49,173 $ (8,186) $ 87,329
======== ======== ======== ========
</TABLE>
NOTE 5. Basic earnings (loss) 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
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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- and six- month periods ended December 31, 1998,
diluted loss per share was calculated using the weighted average number of
shares outstanding during the periods. Options outstanding during the periods
were excluded from the computation of diluted loss per share because the effect
in periods with a net loss would be anti-dilutive. During the three- and six-
month periods ended December 31, 1999, options to purchase 94,900 and 83,430
shares at a weighted average price of $46.30 and $44.60 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- and six-
month periods ended December 31, 1999, is the inclusion of the dilutive effect
of stock options issued to employees under employee stock option plans.
For shareholders of record on January 4, 2000, the Company effected a 2:1 stock
split of its Common Stock in the form of a 100 percent stock dividend. The stock
dividend was paid on January 18, 2000. All share and per share amounts have been
adjusted to reflect this transaction retroactively.
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 included consolidation of
facilities, 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- and six-month periods ended December 31, 1999, the Company
determined that $1.8 and $7.8 million respectively of the restructuring reserve
established during the three-month period ended December 31, 1998 would not be
utilized because of a change in management's plans for utilization of certain
facilities resulting from an increase in demand for the Company's products.
Accordingly, the restructuring reserve reversal was included in the
determination of income from operations for the three- and six-month periods
ended December 31, 1999.
Restructuring and related charges for the period from November 1998 until
December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Severance
Facilities Inventory and Benefits Other Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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 (2,328) (409) (2,672) (1,000) (6,409)
Restructuring reserve reversal (5,721) (279) --- --- (6,000)
-------- -------- -------- -------- --------
Balance at September 30, 1999 2,407 2,304 5,454 494 10,659
Write-down of assets --- (1,420) --- (494) (1,914)
Cash expenditure (143) --- (376) --- (519)
Restructuring reserve reversal (1,257) --- (581) --- (1,838)
-------- -------- -------- -------- --------
Balance at December 31, 1999 $ 1,007 $ 884 $ 4,497 $ --- $ 6,388
======== ======== ======== ======== ========
</TABLE>
NOTE 7. On November 30, 1999, KLA-Tencor acquired software developer ACME
Systems, Inc. (ACME). ACME is a leading supplier of yield engineering analysis
software used to correlate parametric electrical test and wafer sort yield data
with in-line Work In Process (WIP)
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and Metrology data. The acquisition was accounted for as a purchase.
Accordingly, the estimated fair value of assets acquired and liabilities assumed
were included in KLA-Tencor's condensed consolidated balance sheet as of
December 31, 1999 and the results of operations from November 30, 1999 through
December 31, 1999 were included in the Company's condensed consolidated
statement of operations.
KLA-Tencor acquired ACME for a total of $6.9 million in cash. The total purchase
price was allocated to the estimated fair value of assets acquired and
liabilities assumed based on management estimates
The in-process research and development charge of $1.9 million was determined by
KLA-Tencor management, utilizing valuation methodologies approved by the
Securities and Exchange Commission ("SEC"). However, there can be no assurance
that the SEC will not take issue with assumptions used in KLA-Tencor's valuation
model and require KLA-Tencor to revise the amount allocated to in-process
research and development.
To determine the value of the in-process technology, the expected future cash
flow attributable to the in-process technology was discounted, taking into
account the percentage of completion, utilization of pre-existing technology,
risks related to the characteristics and applications of the technology,
existing and future markets, and technological risk associated with completing
the development of the technology. The valuation approach used was a form of
discounted cash flow approach commonly known as the "percentage of completion"
approach whereby the cash flows from the technology are multiplied by the
percentage of completion of the in-process technology.
NOTE 8. 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. 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.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles (GAAP) to revenue recognition in financial
statements. The Company is required to adopt SAB 101 in the quarter beginning
after December 15, 1999. Although the Company believes its revenue recognition
policies are in accordance with GAAP, the Company is currently studying SAB 101
and has not determined its impact on the Company's financial statements.
NOTE 9. 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 $331 million and $604 million for the three- and six-month periods
ended December 31, 1999, compared to $193 million and $399 million for the same
periods of the prior fiscal year, representing an increase of 71% and 51% for
the respective periods. The increase in revenues was primarily attributable to
increased capital spending by major semiconductor manufacturers. We experienced
increased revenues across all product lines as a result of the increased capital
spending by major semiconductor manufacturers.
Gross margins were 54% and 52% of revenues for the three- and six-month periods
ended December 31, 1999, compared to 46% and 45% of revenues for the same
periods in the prior fiscal year. Gross margins increased primarily due to
increased capacity utilization resulting from higher unit volume as well as
faster growth of higher margin product revenue compared to lower margin service
revenue.
Engineering, research and development (R&D) expenses were $56 million and $102
million for the three- and six-month periods ended December 31, 1999, compared
to $38 million and $81 million for the same periods in the prior fiscal year. As
a percentage of revenues, R&D expenses decreased to 17% for the three- and
six-month periods ended December 31, 1999, compared to 20% for the same periods
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 0.13 micron, copper development and 300mm
wafers.
Selling, general and administrative expenses were $60 million and $114 million
for the three- and six-month periods ended December 31, 1999, compared to $50
million and $103 million for the same periods in the prior fiscal year. As a
percentage of revenues, selling, general and administrative expenses were 18%
and 19% for the three- and six-month periods ended December 31, 1999, compared
to 26% for the same periods in the prior fiscal year. Aggregate selling, general
and administrative expenses increased over prior periods due to increases in our
sales and marketing infrastructure, including hiring additional sales people.
During the three- and six-month periods ended December 31, 1999, we determined
that $1.8 and $7.8 million, respectively, of the $35 million restructuring
reserve established during the three-month period ended December 31, 1998 would
not be utilized because of a change in management's plans for utilization of
certain facilities resulting from an increase in demand for our products.
Accordingly, the restructuring reserve reversal was included in the
determination of income from operations for the three- and six-month periods
ended December 31, 1999.
Non-recurring acquisition charges were $1.9 million for the three-month period
ended December 31, 1999, compared to $7.7 million for the same period in the
prior fiscal year. The current-year charge resulted from the acquisition of ACME
Systems, Inc.
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Interest income and other, net, decreased to $7 million and $20 million for the
three- and six-month periods ended December 31, 1999, compared to $14 million
and $31 million in the same periods in the prior fiscal year. The decrease was
due primarily to a smaller gain on sale of marketable securities as the Company
deferred a previously planned sale of stock in a supplier company.
Our effective tax rate for the three- and six-month periods ended December 31,
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 charges were
recorded during the three-month period ended December 31, 1998. The overall tax
rate was 28% and 28.3% for the three- and six-month periods ended December 31,
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 six-month period ended December 31, 1999, cash, cash equivalents,
short-term investments and marketable securities balances increased to $854
million from $755 million. Net cash provided by operations for the six-month
period ended December 31, 1999 was $62 million, compared to $52 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 $26 million were for manufacturing and
engineering equipment and leasehold improvements necessary for our operations.
Common stock issued through our employee stock purchase program and through
stock option exercises during the six-month period ended December 31, 1999
provided $55 million.
Working capital increased to $724 million as of December 31, 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 and to an increase in accounts receivable due to increased sales. 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;
- the shortage of qualified workers in the areas we operate; and
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- our ability to manage our manufacturing requirements.
Operating results also could be affected by sudden changes in customer
requirements, currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or more of the
global markets in which we do business. As a result of these or other factors,
we could fail to achieve our expectations as to future revenues, gross profit
and income from operations. Our failure to meet the performance expectations set
and published by external sources could result in a sudden and significant drop
in the price of our stock, particularly on a short-term basis, and could
negatively impact the value of any investment in our stock.
Semiconductor Equipment Industry Volatility
The semiconductor equipment industry is highly cyclical. The purchasing
decisions of our customers are highly dependent on the economies of both the
local markets in which they are located and the semiconductor industry
worldwide. The timing, length and severity of the up-and-down cycles in the
semiconductor equipment industry are difficult to predict. This cyclical nature
of our marketplace impacts our ability to accurately project our future revenue
and expense levels. When cyclical fluctuations result in lower than expected
revenue levels, operating results may be adversely affected and cost reduction
measures may be necessary in order for us to remain competitive and financially
sound. During a down cycle, we must be in a position to adjust our cost and
expense structure to 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. Failure to respond to industry cycles
would adversely affect our business.
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 predict accurately 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
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enhancements or that we will be able to secure the financial resources necessary
to fund future development. Substantial research and development costs typically
are incurred before we confirm the technical feasibility and commercial
viability of a product, and not all development activities result in
commercially viable products. In addition, we cannot ensure that these products
or enhancements will receive market acceptance or that we will be able to sell
these products at prices that are favorable to us. Our business will be
adversely affected 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, a continued or additional
decline in the economies of any of the countries or regions in which we do
business would negatively affect our operating results.
Managing global operations and sites located throughout the world presents
challenges associated with, among other things, cultural diversity and
organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic local or international economic downturns, trade balance issues,
political instability and fluctuations in interest and currency exchange rates
could negatively 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.
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
12
<PAGE> 13
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
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. Our 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 the financial stability of key suppliers, and maintaining appropriate
inventories of key parts. Although we make reasonable efforts to ensure that
parts are available from multiple suppliers, key parts may be available only
from a single supplier or a limited group of suppliers. There can be no
assurance that our business will not be harmed if we do not receive sufficient
parts to meet our production requirements in a timely and cost-effective manner.
Operations at our primary manufacturing facilities and our assembly
subcontractors are subject to disruption for a variety of reasons, including
work stoppages, fire, earthquake, flooding or other natural disasters. Such
disruption could cause delays in shipments of products to our customers. We
cannot ensure that alternate production capacity would be available if a major
disruption were to occur, or that if it were available, it could be obtained on
favorable terms. Such a disruption could result in cancellation of orders or
loss of customers and could seriously harm our business.
13
<PAGE> 14
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 manage these
risks effectively 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.
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 as a result of this currency
change.
Year 2000 Issue
The Year 2000 computer issue presented risks for us as it did for other
companies. However, based on currently available information, we have not
experienced material Year 2000 issues, related either to internal systems or to
products sold by us to customers.
The Year 2000 problem arose 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 have read, or attempted to have 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,
needed 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 were dependent upon our
critical
14
<PAGE> 15
suppliers, contract manufacturers, other vendors, and customers to determine if
their operations, products, services and payments they provide were Year 2000
ready.
The inability of computer software programs to accurately recognize, interpret
and process date codes designating the year 2000 and beyond could have caused
errors or operating problems that would have disrupted business operations. If
this would have occurred in our internal systems it could have adversely
affected our ability to process orders, to forecast production requirements or
to issue invoices. A significant failure of our computer integrated
manufacturing systems that monitor and control factory equipment would have
disrupted manufacturing operations and caused a delay in the completion and
shipping of products. Similarly, if our critical suppliers' or customers'
systems or products failed because of a Year 2000 malfunction, their disruption
could have negatively impacted our operating results. Finally, if our own
products had malfunctioned as a result of a failure in date recognition, we
could have experienced increased warranty claims and litigation, which could
have harmed our business.
To avoid these kinds of disruptions, KLA-Tencor commenced a broad-ranging Year
2000 readiness program during fiscal 1997. The Year 2000 project was established
to ensure that all of our company-wide systems, components, infrastructure,
critical suppliers and products would operate in such a manner that business
would be uninterrupted into and beyond the year 2000. The three main goals of
our Year 2000 readiness program were: internal information and operating
systems; our supply chain; and external product readiness.
The first focus area was our internal information and operating systems. This
internal Year 2000 readiness project included three major activities:
- Inventory collection and categorization, which included
identification of all our systems and items that needed to be
addressed for year 2000 readiness and creation of a master list
categorized by critical need;
- Assessment, in which each functional group evaluated 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 included
vendor provided application patches, correction of bugs as necessary
and needed upgrades of software and hardware.
As of December 31, 1999 we had completed the activities of this project.
The second area of emphasis in our Year 2000 readiness program was to ensure our
supply chain was prepared. Manufacturing divisions identified over 400 key
suppliers that needed to be evaluated. As of December 31, 1999 we were able to
classify all our key suppliers as low risk with respect to Year 2000 readiness.
The final area of focus for our Year 2000 readiness program was our external
products. KLA-Tencor has over 18,000 installed tools at our customers' sites. We
know that Year 2000 readiness was a major issue for our customers, who faced
important logistical issues in assuring their continued operations. Our field
service engineers audited the majority of our tools for their configuration to
determine what needed to be done to bring our products, including older
out-of-warranty products, to a state of readiness for the Year 2000. As of
December 31, 1999, we completed the activities of this project.
The costs of our Year 2000 readiness program were primarily associated with the
use of existing internal resources and incremental external spending. We
estimate we incurred approximately $9 million of incremental external spending
directly associated with this program through December 31, 1999. Based on
currently available information, we have not incurred costs that related to any
15
<PAGE> 16
of our significant third party service provider's failure to achieve Year 2000
readiness. We did not separately identify the costs incurred for our Year 2000
readiness program that were the result of use of internal resources and
therefore, these costs are not included in the above estimates.
Based on currently available information, we have not experienced Year 2000
issues, related either to internal systems or products sold by us to customers,
nor do we anticipate any additional Year 2000 issues, specifically those related
to some programming assigning special meaning to certain dates or to the year
2000 being a leap year. However, a significant disruption of our financial
management and control systems or a lengthy interruption in our manufacturing
operations caused by a Year 2000-related issue could result in a material
adverse impact on our operating results and financial condition. Additionally,
we have not experienced a disruption of our operations caused by a supplier's
Year 2000-related issues. However, a significant disruption of our operations
caused by a supplier's Year 2000-related issue, or our customer's concerns about
Year 2000 readiness of our product could seriously harm our business.
We believe that Year 2000 readiness was achieved by January 1, 2000. However, we
cannot assure our readiness programs successfully detected and corrected all
potential year 2000 associated problems. Furthermore, we cannot assure that our
internal systems and products sold by us to customers have run all combinations
of all software programs that could be affected by Year 2000 computer issues.
The costs of bringing our products and systems to a state of compliance with the
year 2000 were not material and we do not anticipate future costs, if any, will
have a material impact on our financial statements.
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, 1999 have not changed significantly.
16
<PAGE> 17
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of KLA-Tencor Corporation was held on
November 16, 1999 at the Company's offices in Milpitas, California. Of the
89,491,136 shares outstanding as of September 20, 1999, the record date,
77,810,728 shares (86%) were present or represented by proxy at the
meeting.
1. The table below presents the results of the election to the
Company's board of directors.
<TABLE>
<CAPTION>
Votes
Votes For Withheld
---------- ---------
<S> <C> <C>
Kenneth Levy 74,131,725 3,679,003
Samuel Rubinovitz 74,132,338 3,678,390
Jon D. Tompkins 74,127,083 3,683,645
Lida Urbanek 74,136,006 3,674,722
</TABLE>
2. The stockholders ratified the appointment of PricewaterhouseCoopers
LLP as the Company's independent accountants for the fiscal year ended
June 30, 2000. This proposal received 77,590,110 votes for, 26,023 votes
against, with 198,475 abstaining and 3,880 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Form 8-K
None
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLA-TENCOR CORPORATION
(Registrant)
February 11, 2000 /s/ John H. Kispert
- ------------------------ --------------------------------------
(Date) John H. Kispert
Vice President, Finance and Accounting
18
<PAGE> 19
EXHIBIT INDEX
<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> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 354,918
<SECURITIES> 499,003
<RECEIVABLES> 316,625
<ALLOWANCES> 0
<INVENTORY> 222,233
<CURRENT-ASSETS> 1,135,788
<PP&E> 341,085
<DEPRECIATION> 170,411
<TOTAL-ASSETS> 1,778,542
<CURRENT-LIABILITIES> 411,571
<BONDS> 0
0
0
<COMMON> 551,411
<OTHER-SE> 811,799
<TOTAL-LIABILITY-AND-EQUITY> 1,778,542
<SALES> 603,746
<TOTAL-REVENUES> 603,746
<CGS> 289,490
<TOTAL-COSTS> 499,456
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144
<INCOME-PRETAX> 123,846
<INCOME-TAX> 35,095
<INCOME-CONTINUING> 88,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,751
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.47
</TABLE>
