KLA-Tencor Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013 (first quarter of fiscal 2014); comparisons are primarily with the three months ended September 30, 2012. Financial statements are unaudited.
Business context and results
KLA-Tencor supplies semiconductor process-control and yield-management systems, software and services. Results are sensitive to cyclical customer capital spending, shipment timing and a concentrated customer base. Management reported strong new equipment orders across memory, foundry and logic, but lower beginning backlog and shipments weighed on quarterly revenue. Management expects to fulfill those orders and recognize the related revenue in future periods; the filing gives no quantified revenue or earnings guidance.
Key financial metrics
| Metric | Q1 FY14 | Q1 FY13 | Change |
|---|---|---|---|
| Revenue | $658.3 million | $720.7 million | Down 9% |
| Product revenue | $501.7 million | $574.1 million | Down 13% |
| Service revenue | $156.6 million | $146.6 million | Up 7% |
| Gross margin | 57.8% | 56.0% | Up 1.8 percentage points |
| Operating income | $149.9 million | $186.6 million | Down 20% |
| Net income | $111.2 million | $135.4 million | Down 18% |
| Diluted EPS | $0.66 | $0.80 | Down 18% |
| Operating cash flow | $177.2 million | $245.4 million | Down $68.1 million |
Gross margin improved despite lower revenue, which management attributed mainly to more favorable product mix, lower customer-support costs and lower inventory reserves; reduced revenue volume was a partial offset. Operating expenses included $132.3 million of R&D, up 10% year over year, and $98.5 million of SG&A, up 1%. The effective tax rate was 20.5%, versus 23.3%; management estimated a 22.9% annual rate for FY14.
Cash and cash equivalents plus marketable securities totaled $2.95 billion at September 30, 2013, up $33.0 million from June 30. Working capital was $3.5 billion. Cash declined by $80.4 million during the quarter; investing activities used $136.7 million and financing activities used $123.7 million. Capital expenditures were $21.8 million. The company paid $74.6 million in dividends and repurchased $60.5 million of stock.
Long-term debt was $747.5 million on the balance sheet, representing $750 million principal of 6.90% senior notes due in 2018. Management said the company was in compliance with debt covenants. Approximately $1.1 billion of cash and investments were held abroad; $972.7 million was intended to remain permanently reinvested, and repatriation of those funds could trigger estimated taxes of 30%–50%.
Material changes and management commentary
- Product revenue decreased due mainly to lower shipments and opening backlog, associated with timing of customer procurement and requested fulfillment for next-generation defect-inspection equipment. Service revenue rose as the installed base of post-warranty systems grew.
- Revenue mix shifted notably by geography: Taiwan contributed 18% of revenue, compared with 38% a year earlier; North America rose to 28% from 21%, and Europe and Israel to 18% from 8%.
- Defect inspection represented 52% of revenue, metrology 20%, service 24% and other 4%. Two customers each accounted for more than 10% of quarterly revenue.
- Operating cash flow was lower year over year, primarily reflecting about $100 million less in accounts-receivable collections and about $13 million more in tax payments, partly offset by lower accounts-payable payments.
- The quarterly dividend increased from $0.40 to $0.45 per share. Management said cash from operations and existing liquidity should meet requirements for at least the next 12 months.
Outlook, risks, contingencies and unusual items
- The company operates in a cyclical semiconductor-equipment market; customer orders may be delayed, canceled or concentrated among a few large customers. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- One significant customer notified the company of its intent to exercise audit rights related to customer-specific commercial commitments. The outcome is unknown, and no accrual had been recorded for this contingency.
- Open supplier purchase commitments were approximately $303.4 million, primarily due within 12 months; certain agreements may include cancellation penalties. Future Cash LTI payments were committed at $62.9 million before estimated forfeitures.
- Legal proceedings include commercial, intellectual-property, customer and employment matters. The company considered recorded provisions adequate but said outcomes are uncertain and actual costs could exceed accruals.
- Foreign-exchange hedges, investment values and interest rates create market risks. A modeled immediate 10% rise in interest rates would reduce the fair value of the fixed-income portfolio by $1.4 million; management stated hedges generally offset currency movements in underlying exposures.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong new orders convert into shipments and revenue, and how backlog and customer acceptance timing develop.
- Customer concentration and the result of the significant customer’s planned audit, including any financial or commercial consequences.
- Gross-margin sustainability as product mix, shipment volume, inventory reserves and customer-support costs change.
- Cash generation and receivables collections, alongside dividends, repurchases and the company’s substantial supplier commitments.
- Tax exposure associated with foreign cash, ongoing tax examinations and the estimated FY14 effective tax rate.