KLA-Tencor Corporation — Fiscal Q2 2018 Form 10-Q
Reporting period: Three and six months ended December 31, 2017. The filing is unaudited and reports results for KLA-Tencor Corporation, a supplier of semiconductor process-control and yield-management equipment and services.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $975.8 million | $876.9 million | $1,945.4 million | $1,627.6 million |
| Gross margin | 64.4% | 63.7% | 64.0% | 63.4% |
| Income before taxes | $347.3 million | $306.8 million | $683.5 million | $529.1 million |
| Income tax provision | $481.6 million | $68.6 million | $536.8 million | $112.7 million |
| Net income (loss) | $(134.3) million | $238.3 million | $146.6 million | $416.4 million |
| Diluted EPS | $(0.86) | $1.52 | $0.93 | $2.65 |
- Quarterly revenue rose 11% year over year and 1% from Q1 FY2018. Six-month revenue grew 20% year over year. Product and service revenue each increased 11% year over year in Q2.
- Quarterly gross margin improved from 63.7% to 64.4%; management cited higher volume and favorable mix year over year. Six-month margin increased from 63.4% to 64.0%.
- Net loss in Q2 resulted from the tax provision associated primarily with the Tax Cuts and Jobs Act, not a decline in pretax earnings. The company recorded provisional tax charges totaling $442.0 million, including a $340.9 million transition-tax estimate and $101.1 million deferred-tax remeasurement.
- R&D expense was $156.7 million in Q2, up 20% year over year; six-month R&D increased 17%. SG&A rose 13% year over year in Q2. Interest expense declined year over year, primarily following debt repayment.
Cash flow, liquidity and debt
- Six-month operating cash flow was $503.0 million, compared with $392.2 million a year earlier. Investing activities provided $138.9 million, versus $308.2 million used in the prior-year period; financing activities used $726.4 million, versus $247.6 million.
- Cash and cash equivalents were $1.073 billion and marketable securities $1.685 billion at December 31, 2017, totaling $2.758 billion. Working capital was $3.19 billion. Cash, equivalents and securities declined $258.6 million from June 30, 2017.
- Debt carrying value was $2.486 billion, down from $2.930 billion at June 30, 2017. Principal debt outstanding was $2.50 billion: $2.25 billion in senior notes and $250 million drawn on a new $750 million revolving facility. The company repaid $250 million of notes at maturity and paid off remaining term loans.
- The company reported compliance with debt covenants; its revolving-facility interest coverage and leverage ratios were 13.19:1 and 1.59:1, respectively, against minimum/maximum covenant levels of 3.50:1 and 3.00:1. Management said available liquidity and expected operating cash flow should cover requirements for at least the next 12 months.
- Six-month cash uses included $192.9 million of dividends and dividend equivalents and $80.4 million of share repurchases. The quarterly dividend was $0.59 per share.
Business trends, outlook and risks
- Management attributed product-revenue growth to memory and logic customer investment in next-generation technology and capacity. The company described Q2 process-control equipment revenue as modestly higher than the prior quarter and service growth as reflecting a larger installed base of post-warranty systems.
- Management highlighted advanced-node investment, EUV qualification, memory demand, AI, IoT and automotive applications as industry drivers, while noting that semiconductor capital spending is cyclical and timing is difficult to predict. No specific revenue or EPS guidance for the next quarter is stated in the provided filing text.
- Management expected a recurring tax rate of 17% for the remaining six months of FY2018, excluding certain period costs and changes in uncertain tax positions. The provisional tax accounting remained subject to refinement; the company was still evaluating the tax treatment of GILTI provisions.
- Of $2.76 billion in cash, equivalents and marketable securities, $1.96 billion was held outside the United States. The company intended to indefinitely reinvest $1.76 billion; repatriation of certain foreign funds could incur state and foreign taxes.
- Key risks include customer and industry concentration, volatile semiconductor-equipment spending, order delays or cancellations, inventory obsolescence and manufacturing utilization, technology and competitive pressures, foreign-exchange and interest-rate exposure, and substantial debt. One customer represented about 17% of Q2 revenue and 22% of six-month revenue.
- Purchase commitments were estimated at $481.0 million, primarily due within 12 months. The filing also describes ordinary-course litigation and indemnification exposures; management stated recorded amounts were adequate but outcomes are uncertain. Management reported disclosure controls effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $442.0 million provisional tax charge, transition-tax estimate and deferred-tax remeasurement change as the company completes its Tax Act accounting.
- Whether the stated 17% recurring tax rate is achieved and how the unresolved GILTI accounting election affects subsequent tax expense.
- Whether semiconductor customer spending, especially among concentrated memory and logic customers, sustains revenue growth and avoids order push-outs or inventory charges.
- How operating cash flow, foreign-held liquidity, dividends and repurchases evolve alongside the $2.50 billion principal debt balance and revolving-facility obligations.
- Whether the expected revenue-recognition changes from adoption of the customer-contract standard in FY2019 materially alter the timing or presentation of revenue, including warranty-related deferrals.