KLA-Tencor Corporation (KLA) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended December 31, 2010. Financial statements are unaudited; amounts below are in U.S. dollars. KLA-Tencor supplies process-control and yield-management products and services to the semiconductor and related industries.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2010 | Prior-year quarter | Six months ended Dec. 31, 2010 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $766.3 million | $440.4 million | $1,448.7 million | $783.0 million |
| Operating income | $268.9 million | $47.1 million | $504.5 million | $62.0 million |
| Net income | $185.5 million | $21.8 million | $339.7 million | $42.2 million |
| Diluted EPS | $1.09 | $0.13 | $2.00 | $0.24 |
| Gross margin | 59% (about 59.4%) | 53% | 60% (about 60.3%) | 52% |
- Quarterly revenue increased 74% year over year, led by product revenue, up 99%; service revenue rose 10%. For the six months, revenue increased 85% year over year.
- Quarterly operating margin was approximately 35.1% and net margin approximately 24.2%. Gross margin eased from 61% in the September quarter to 59%, which management attributed mainly to product mix.
- Six-month operating cash flow was $289.5 million, versus $236.9 million a year earlier. Investing activities used $43.4 million and financing activities used $191.3 million. Capital expenditures were $22.7 million.
- Cash, cash equivalents and marketable securities totaled $1.636 billion at December 31, 2010, up from $1.534 billion at June 30, 2010. Working capital was $2.3 billion. Long-term debt was $746.0 million on the balance sheet; the notes have $750 million principal and mature in 2018. The company reported compliance with debt covenants.
- Quarterly dividend paid was $0.25 per share, compared with $0.15 a year earlier. The company repurchased 3.531 million shares for approximately $117.3 million in the six-month period.
Material changes and management commentary
- Management said customer demand remained strong and near historical highs, though below the preceding two quarters. The December quarter was the sixth consecutive quarter of revenue growth, supported by higher customer capital spending and factory utilization.
- Product mix shifted toward defect-inspection and metrology equipment. Defect inspection generated 66% of quarterly revenue; service contributed 18%.
- Quarterly R&D expense was $94.9 million, up 14% year over year; six-month R&D expense rose 17%. Management cited investment in future technologies and customer yield challenges. Quarterly SG&A fell 11% year over year, mainly reflecting lower litigation and impairment costs and a $1.4 million real-estate sale gain.
- Management believes available liquidity and operating cash generation will meet requirements for at least the next 12 months. No specific revenue or earnings guidance was provided. The filing cautions that current favorable industry conditions may not continue and that KLA-Tencor cannot predict their duration.
Risks, contingencies and unusual items
- Management warned that semiconductor-equipment demand is cyclical and difficult to forecast, and that a downturn could lead to order delays or cancellations, lower margins, restructuring, or inventory and capacity-related charges. Customer concentration and reliance on capital spending are significant risks.
- Inventory increased to $504.7 million from $401.7 million at June 30; accounts receivable rose to $531.5 million from $440.1 million. Management specifically noted potential inventory or other capacity-related charges if demand weakens.
- System revenue recognized before customer acceptance was 35% of quarterly revenue, versus 26% in the September quarter and 22% in the prior-year quarter. Management attributed the increase to shipments of tools that had already met acceptance criteria at customer fabs.
- A $6.8 million impairment charge on privately held equity investments reduced “interest income and other, net” in the December quarter. The company also recorded a $1.4 million gain on sale of San Jose real estate. No goodwill impairment was recorded; the annual test found reporting-unit fair values substantially above carrying values.
- Open supplier purchase commitments were $289.2 million, primarily due within 12 months. Litigation includes matters related to historical stock-option practices and other ordinary-course claims; outcomes and potential costs are uncertain. Tax examinations are ongoing in the U.S. and foreign jurisdictions, and management said up to $3.6 million of unrecognized tax benefits might be recognized within 12 months.
- The filing identifies foreign-exchange, interest-rate, investment-value, supplier, product-performance, cybersecurity, natural-disaster and other operational risks. A 10% adverse currency move would reduce the fair value of hedge contracts by an estimated $17.0 million, with a similar offset expected in underlying exposures.
Important facts for investors to verify
- Whether strong semiconductor customer spending and the recent revenue-growth trend continued after December 31, 2010.
- Whether product mix, manufacturing costs and volume efficiencies sustain margins, and whether elevated inventory converts to sales without material write-offs.
- How much reported revenue depends on systems recognized before customer acceptance, and whether related acceptance or collection risks change.
- Developments in major-customer concentration, supplier commitments, litigation and tax audits.
- Capital allocation and liquidity: continued dividends and buybacks, cash and securities balances, and repayment obligations on the 2018 notes.