KLA-Tencor Corporation — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2014 (fiscal Q3 2014), with year-to-date results for the nine months ended March 31, 2014. The filing is for fiscal 2014, notwithstanding the request metadata’s “2013 Q3” label. KLA-Tencor supplies process-control and yield-management equipment, software and services, primarily to semiconductor manufacturers.
Key financial results
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $831.6 million | $729.0 million | $2,195.1 million | $2,122.7 million |
| Gross margin | 58.8% | 57.5% | 58.7% | 56.2% |
| Operating income | $261.2 million | $202.2 million | $599.1 million | $542.1 million |
| Net income | $203.6 million | $166.4 million | $454.0 million | $408.4 million |
| Diluted EPS | $1.21 | $0.98 | $2.70 | $2.41 |
| Operating cash flow | Not separately provided | Not separately provided | $530.2 million | $737.6 million |
Q3 revenue increased 14% year over year, and net income increased 22%. Product revenue was $670.1 million and service revenue was $161.5 million. Q3 operating margin was approximately 31.4%, versus 27.7% a year earlier. The nine-month effective tax rate was 20.0%; management estimated approximately 20.6% for fiscal 2014.
Balance sheet, liquidity and capital allocation
At March 31, 2014, cash and cash equivalents were $776.2 million and marketable securities were $2.251 billion, totaling $3.027 billion. Long-term debt carrying value was $747.8 million, representing $750 million principal of 6.90% senior notes due 2018. Working capital was $3.7 billion. The company reported compliance with debt covenants and said existing liquidity and operating cash generation should meet requirements for at least 12 months.
Nine-month investing cash use was $395.4 million and financing cash use was $344.4 million. Financing included $224.4 million of dividends and $180.7 million of share repurchases. The quarterly dividend declared was $0.45 per share. Cash and cash equivalents declined by $209.2 million from the fiscal-year start, while cash, cash equivalents and marketable securities combined increased by $108 million.
Changes versus comparable periods
- Q3 revenue rose 14% year over year; product revenue increased 16% and service revenue 8%. Compared with the prior quarter, revenue increased 18%, mainly reflecting higher beginning revenue backlog.
- Q3 gross margin improved 1.3 percentage points year over year, but declined from 59.5% in the prior quarter to 58.8%, reflecting product/service mix, lower capacity utilization and higher customer-support costs, partly offset by higher volume.
- Nine-month revenue increased 3% and net income increased 11% year over year. Gross margin improved 2.5 percentage points, primarily due to lower inventory reserves and customer-support costs, better mix and higher capacity utilization.
- Nine-month operating cash flow fell $207.4 million year over year, mainly due to lower collections, higher payroll payments and cash payments on incentive awards.
Outlook, commentary and risks
- Management expected revenue for the quarter ending June 30, 2014 to be lower than Q3, as customers assessed investment plans for leading-edge device technologies. No numerical revenue forecast was provided.
- Management cited long-term demand drivers from advanced technologies and greater process-control needs, while emphasizing the semiconductor equipment industry’s cyclical and unpredictable capital spending and concentrated customer base.
- One significant customer exercised audit rights relating to customer-specific commercial commitments; the outcome was uncertain and no accrual had been recorded for this contingency.
- Other disclosed exposures include customer order delays or cancellations, product acceptance and revenue timing, inventory and supplier commitments, foreign exchange and investment-market risks, tax examinations, litigation and indemnification obligations. The company had $234.5 million of open inventory purchase commitments, primarily due within 12 months.
- On March 28, 2014, the company acquired software-related assets and liabilities of a privately held company for $18 million cash. Preliminary allocation included $8.6 million goodwill.
Important facts for investors to verify
- Whether the anticipated Q4 FY2014 revenue decline materialized, and how customer spending and backlog evolved.
- The status and potential financial or commercial consequences of the significant customer audit.
- Customer concentration and regional revenue mix: three customers each exceeded 10% of revenue in the periods reported; Asia represented a substantial share of sales.
- Cash conversion and working-capital trends, particularly receivables, inventory and deferred system profit, alongside continued dividends and repurchases.
- Tax-rate assumptions, potential resolution of tax examinations, and the treatment of approximately $1.1 billion of foreign cash management intended to permanently reinvest.