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, 2002
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
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(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)
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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, 2003 there were 190,203,282 shares of the
Registrant's Common Stock, $0.001 par value, outstanding.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Unaudited Balance Sheets at
December 31, 2002 and June 30, 2002 ............................................ 3
Condensed Consolidated Unaudited Statements of Operations
for the Three and Six Months Ended December 31, 2002 and 2001................... 4
Condensed Consolidated Unaudited Statements of Cash Flows
for the Six Months Ended December 31, 2002 and 2001............................. 5
Notes to Condensed Consolidated Unaudited Financial Statements.................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 18
Item 3 Quantitative and Qualitative Disclosures About Market Risk......................... 31
Item 4 Controls and Procedures............................................................
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................................. 33
Item 4 Submission of Matters to a Vote of Security Holders 34
Item 6 Exhibits and Reports on Form 8-K................................................... 34
SIGNATURES .............................................................................. 35
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CERTIFICATIONS .............................................................................. 36
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, June 30,
(in thousands) 2002 2002
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ASSETS
Current assets:
Cash and cash equivalents $ 530,595 $ 429,820
Marketable securities 275,052 243,526
Accounts receivable, net 257,561 277,006
Inventories 289,956 323,016
Other current assets 355,717 345,920
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Total current assets 1,708,881 1,619,288
Land, property and equipment, net 400,367 300,560
Marketable securities 503,574 660,237
Other assets 138,024 137,633
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Total assets $ 2,750,846 $ 2,717,718
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,947 $ 52,988
Deferred profit 177,851 193,852
Unearned revenue 49,734 54,886
Other current liabilities 400,513 385,764
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Total current liabilities 651,045 687,490
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Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock and capital in excess of par value 751,413 765,946
Retained earnings 1,340,188 1,259,695
Accumulated other comprehensive income 8,200 4,587
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Total stockholders' equity 2,099,801 2,030,228
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Total liabilities and stockholders' equity $ 2,750,846 $ 2,717,718
============================================================================================================
See accompanying notes to condensed consolidated financial statements.
KLA-TENCOR CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
December 31, December 31,
(in thousands, except per share data) 2002 2001 2002 2001
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Revenue:
Product $ 268,075 $ 354,608 $ 580,583 $ 809,004
Service 66,843 49,540 129,855 97,976
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Total revenue $ 334,918 404,148 710,438 906,980
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Costs and operating expenses:
Costs of goods sold 171,138 201,811 357,482 446,179
Research and development 71,935 74,061 142,788 146,984
Selling, general and administrative 65,089 71,996 135,530 153,244
Non-recurring acquisition, restructuring
and other, net -- -- (9,402) --
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Total costs and operating expenses 308,162 347,868 626,398 746,407
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Income from operations 26,756 56,280 84,040 160,573
Interest income and other, net 11,702 10,001 21,872 22,553
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Income before income taxes 38,458 66,281 105,912 183,126
Provision for income taxes 9,230 17,233 25,419 47,613
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Net income $ 29,228 $ 49,048 $ 80,493 $ 135,513
===============================================================================================================
Earnings per basic share:
Net income $ 0.15 $ 0.26 $ 0.43 $ 0.72
====================================================
Earnings per diluted share:
Net income $ 0.15 $ 0.25 $ 0.42 $ 0.70
====================================================
Weighted average number of shares:
Basic 189,018 186,200 189,229 186,928
====================================================
Diluted 193,519 194,637 193,904 194,855
====================================================
See accompanying notes to condensed consolidated financial statements.
KLA-TENCOR CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31,
(in thousands) 2002 2001
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Cash flows from operating activities:
Net income $ 80,493 $ 135,513
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 35,434 33,345
Deferred income taxes -- (2,645)
Non-recurring acquisition, restructuring
and other, net (9,402) --
Net (gain) loss on sale of marketable securities (8,677) 1,077
Changes in assets and liabilities:
Accounts receivable, net 19,446 36,590
Inventories 33,057 58,975
Other assets (11,139) (14,318)
Accounts payable (30,039) (18,195)
Deferred profit 16,001 (130,290)
Other current liabilities (27,265) (44,708)
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Net cash provided by operating activities 97,909 55,344
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Cash flows from investing activities:
Purchase of land, property and equipment, net (126,155) (50,776)
Cash paid for acquisition -- (4,035)
Purchase of marketable securities (799,620) (783,564)
Proceeds from sale of marketable securities 892,439 552,104
Proceeds from maturity of marketable securities 49,468 84,478
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Net cash provided (used) in investing activities 16,132 (201,793)
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Cash flows from financing activities:
Issuance of common stock 33,826 34,161
Stock repurchases (48,359) (110,812)
Net payments under short-term debt obligations -- (499)
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Net cash used in financing activities (14,533) (77,150)
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Effect of exchange rate changes on cash
and cash equivalents 1,267 (3,059)
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Net increase (decrease) in cash and cash equivalents 100,775 (226,658)
Cash and cash equivalents at beginning of period 429,820 529,674
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Cash and cash equivalents at end of period $ 530,595 $ 303,016
==============================================================================================================
Supplemental cash flow disclosures:
Income taxes (refunded) paid, net $ (2,924) $ (16,136)
=========== ===========
Interest paid $ 142 $ 428
=========== ===========
See accompanying notes to condensed consolidated financial statements.
KLA-TENCOR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation The condensed consolidated financial statements have
been prepared by KLA-Tencor Corporation ("KLA-Tencor" or the "Company") pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the unaudited interim
financial statements reflect all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods indicated. These
financial statements and notes, however, should be read in conjunction with the
Item 8, "Financial Statements and Supplementary Data" included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002, filed with
the SEC on September 20, 2002.
The results of operations for the three and six months ended December 31,
2002 are not necessarily indicative of the results that may be expected for any
other interim period or for the full fiscal year ending June 30, 2003.
Fair Value of Financial Instruments KLA-Tencor has evaluated the estimated
fair value of financial instruments using available market information and
valuation methodologies. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts. The fair value of KLA-Tencor's cash, cash equivalents, accounts
receivable, accounts payable and other current liabilities approximates the
carrying amount due to the relatively short maturity of these items.
Marketable Securities Short-term marketable securities include debt and
equity securities acquired with maturities exceeding three months but less than
one year from the date of acquisition. Non-current marketable securities include
debt securities acquired with maturities exceeding one year from the date of
acquisition. While KLA-Tencor's intent is to hold debt securities to maturity,
KLA-Tencor has classified all debt securities as available-for-sale, as the sale
of such securities may be required prior to maturity to implement management
strategies. Such securities are reported at fair value determined based on
quoted market prices at the reporting date for those instruments, with
unrealized gains and losses excluded from earnings and included in "Accumulated
other comprehensive income," net of applicable taxes, until realized. KLA-Tencor
has classified some equity securities that have readily determinable fair values
in a similar manner. The cost of securities sold is based on the specific
identification method. Realized gains or losses and declines in value, if any,
judged to be other than temporary are reported in "Interest income and other,
net" in the Condensed Consolidated Statements of Operations. Certain equity
securities have been classified as trading securities. These trading securities
are reported at fair value determined based on quoted market prices at the
reporting date for those instruments, with unrealized gains or losses included
in earnings for the applicable period. The net amount of such gains and losses
for the three months and six months ended December 31, 2002 were not material.
As of December 31, 2002, the fair value of the trading securities was $11
million.
Intangible Assets Purchased technology, patents, trademarks, favorable
leases and goodwill are presented at cost, net of accumulated amortization.
Effective July 1, 2001, KLA-Tencor replaced ratable amortization of goodwill
with periodic testing of goodwill for impairment in accordance with the
provision of Statement of Financial Accounting Standard No. 142, "Goodwill and
Intangible Assets." Intangible assets other than goodwill are amortized over
their estimated useful lives using the straight-line method.
Impairment of Long-Lived Assets KLA-Tencor evaluates the carrying value of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying value of the asset may be impaired in accordance with the
provisions of Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets." An impairment loss is recognized when
estimated future cash flows expected to result from the use of the asset
including disposition is less than the carrying value of the asset.
Concentration of Credit Risk Financial instruments, which potentially
subject KLA-Tencor to credit risk, consist principally of investments, accounts
receivable and derivative financial instruments used in hedging activities.
Investments are maintained with high-quality institutions, and the
composition and maturities of investments are regularly monitored by management.
Generally, these securities are traded in a highly liquid market, may be
redeemed upon demand and bear minimal risk. KLA-Tencor, by policy, limits the
amount of credit exposure to any one financial institution or commercial issuer.
KLA-Tencor has not experienced any material losses on its investments.
A majority of KLA-Tencor's trade receivables are derived from sales to
large multinational semiconductor manufacturers throughout the world.
Concentration of credit risk with respect to trade receivables is considered to
be limited due to its customer base and the diversity of its geographic sales
areas. KLA-Tencor performs ongoing credit evaluations of its customers'
financial condition. KLA-Tencor maintains a reserve for potential credit losses
based upon expected collectibility of all accounts receivable.
KLA-Tencor is exposed to credit loss in the event of nonperformance by
counterparties on the foreign exchange contracts used in hedging activities.
KLA-Tencor does not anticipate nonperformance by these counterparties.
Warranty KLA-Tencor provides standard warranty coverage on its systems for
twelve months, providing labor and parts necessary to repair the systems during
the warranty period. KLA-Tencor accounts for the estimated warranty cost as a
charge to cost of sales when revenue is recognized. The estimated warranty cost
is based on historical product performance and field expenses. Utilizing actual
service records, KLA-Tencor calculates the average service hours and parts
expense per system and applies the actual labor and overhead rates to determine
the estimated warranty charge. KLA-Tencor updates these estimated charges every
quarter. The actual product performance and/or field expense profiles may
differ, and in those cases KLA-Tencor adjusts warranty accruals accordingly. The
following table shows the details of the product warranty accrual, as required
by Financial Accounting Standards Board ("FASB") Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," for the three months ended
December 31, 2002:
Amount of
Liability
(in thousands) Debit/(Credit)
- -------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $ (42,762)
Accruals for warranties issued during the period (12,638)
Changes in liability related to pre-existing warranties 5,283
Settlements made during the period 11,570
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Balance at December 31, 2002 $ (38,547)
=================================================================================================
Revenue Recognition In December 1999, the SEC issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The SEC
Staff addressed several issues in SAB 101, including the timing of revenue
recognition for sales that involve contractual customer acceptance provisions
and installation of the product if these events occur after shipment and
transfer of title. KLA-Tencor implemented the provisions of SAB 101 in the
fourth fiscal quarter of 2001, retroactive to July 1, 2000. Prior to adoption of
SAB 101, KLA-Tencor's general policy was to recognize revenue on shipment.
KLA-Tencor derives revenue from four sources - system sales, spare part
sales, service contracts and software license fees. System sales include
hardware and software that is incidental to the product. SAB 101 has no impact
on KLA-Tencor's revenue recognition policy for spare part sales, service
contracts and software license fees.
Prior to the implementation of SAB 101, system revenue was generally
recognized upon shipment. Effective July 1, 2000, KLA-Tencor changed its method
of accounting for system sales to generally recognize revenue upon a positive
affirmation by the customer that the system has been installed and is operating
according to predetermined specifications. In certain limited cases, KLA-Tencor
may deviate from the need for a written acceptance by the customer, as follows:
o When system sales to independent distributors have no
installation, contain no acceptance agreement, and 100%
payment is due upon shipment, revenue is recognized on
shipment;
o When the system requires no integration and installation is
inconsequential, revenue is recognized on shipment. In these
cases KLA-Tencor is required to perform the installation but
KLA-Tencor considers installation not essential to the
functionality of the equipment, and there are no additional
tests required to be performed on-site. In addition, third
party distributors and customers regularly complete the
installation of these tools;
o When the customer fab has already accepted the same tool, with
the same specifications on the same process, for the same
application, and it can be objectively demonstrated that it
meets all of the required acceptance criteria upon shipment, a
portion of revenue can be recognized at the time of shipment.
Revenue recognized upon shipment is exclusive of the amount
allocable to the installation element. Revenue attributable to
the installation element is the higher of the payment amount
due upon acceptance or the fair value of installation;
o When the system is performing in production and meets all
published and contractually agreed specifications, but the
customer withholds signature on our acceptance document due to
warranty or other issues unrelated to product performance;
o When the system is damaged during transit, revenue is
recognized upon receipt of cash payment from the customer.
Total revenue recognized under conditions where KLA-Tencor deviates from
the need for a written acceptance by the customer were less than 3.5% and 3.0%
of total revenue for the three months and six months ended December 31, 2002,
respectively, compared with 2.5% of total revenue for each of the three and six
months ended December 31, 2001, respectively.
In accordance with SAB 101, KLA-Tencor also allows for multiple element
revenue arrangement in cases where certain elements of a sales contract are not
delivered and accepted at the same time. In such cases, KLA-Tencor defers the
fair value of the unaccepted element until that element is delivered to and
accepted by the customer. To be considered a separate element, the product or
service in question must represent a separate earnings process, and is not
essential to the functionality of the delivered and accepted portion of the same
sales contract. If the unaccepted element is essential to the functionality of
the delivered and accepted portion, the whole amount of the sales contract is
deferred until all elements are accepted.
Spare parts revenue is recognized when the product has been shipped, risk
of loss has passed to the customer and collection of the resulting receivable is
probable.
Service and maintenance revenue is recognized ratably over the term of the
maintenance contract. If maintenance is included in an arrangement, which
includes a software license agreement, amounts related to maintenance are
allocated based on vendor specific objective evidence. Non-standard warranty
includes services incremental to the standard 40-hour per week coverage for
twelve months. Non-standard warranty is deferred as unearned revenue and is
recognized ratably as revenue when the applicable warranty term period
commences. Consulting and training revenue is recognized when the related
services are performed.
Revenue from software license fees is typically recognized upon shipment if
collection of the resulting receivable is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate a
portion of the total fee to any undelivered elements of the arrangement. Such
undelivered elements in these arrangements typically consist of services and/or
upgrades. If vendor-specific objective evidence does not exist for the
undelivered elements of the arrangement, all revenue is deferred until such
evidence does exist, or until all elements are delivered, whichever is earlier.
In instances where an arrangement to deliver software requires significant
modification or customization, license fees are recognized under the percentage
of completion method of contract accounting. Allowances are established for
potential product returns and credit losses. To date, revenue from license fees
have been less than 10% of total revenue.
As a result of implementing SAB 101, KLA-Tencor changed its method of
accounting for revenue recognition. This change resulted in cumulative deferred
revenue of $660.9 million as of July 1, 2000, which was recorded as a non-cash
charge of $306.4 million (after reduction for product and warranty costs of $207
million and income taxes of $147.5 million). The deferred profit balance as of
December 31, 2002 was $178 million and equals the amount of system revenue that
was invoiced and due on shipment but deferred under SAB 101 less applicable
product and warranty costs. KLA-Tencor also defers the fair value of
non-standard warranty bundled with equipment sales as unearned revenue. The
unearned revenue balance as of December 31, 2002 and June 30, 2002 was $50
million and $55 million, respectively. Strategic Development Agreements Gross
engineering, research and development expenses were partially offset by external
funding received under certain strategic development programs conducted with
several of our customers and government grants. The Company received external
funding of $4 million and $10 million for the three and six months ended
December 31, 2002, respectively, compared to $3 million and $6 million for the
three and six months ended December 31, 2001, respectively.
Earnings Per Share Basic earnings per share ("EPS") is calculated by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is calculated by using the weighted average number of common shares
outstanding during the period and gives effect to all dilutive potential common
shares outstanding during the period. The reconciling difference between the
computation of basic and diluted earnings per share for all periods presented is
the inclusion of the dilutive effect of stock options issued to employees under
employee stock option plans.
During the three months and six months ended December 31, 2002, options to
purchase approximately 6,358,394 shares and 5,869,964 shares, respectively, at
prices ranging from $37.05 to $68.00, were not included in the computation of
diluted EPS because the exercise price was greater than the average market price
of common shares. During the three months and six months ended December 31,
2001, options to purchase approximately 10,875,333 shares and 4,580,198 shares,
respectively, at prices ranging from $33.75 to $68.00 were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of common shares.
Accounting for Stock-Based Compensation Plans: KLA-Tencor accounts for its
employee stock option and employee stock purchase plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock- based employee compensation is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
Reclassifications Certain prior year balances have been reclassified to
conform to the current financial statement presentation. These reclassifications
had no impact on previously reported results of operations or stockholders'
equity.
Recent Accounting Pronouncements KLA-Tencor adopted SFAS No. 143,
"Accounting for Obligations Associated with the Retirement of Long-Lived Assets"
and SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived
Assets". SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides guidance for legal obligations associated with
the retirement of tangible long-lived assets. SFAS No. 144 establishes a single
accounting model for the impairment or disposal of long-lived assets, including
discontinued operations. Adoption of these pronouncements did not have a
significant effect on our consolidated financial statements.
In June 2002, the FASB issued Statement No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liabilities Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
This Statement requires that a liability for costs associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. SFAS 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002. The standard will in
certain circumstances change the timing of recognition of restructuring costs.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." This issue addresses determination of whether an arrangement
involving more than one deliverable contains more than one unit of accounting
and how arrangement consideration should be measured and allocated to the
separate units of accounting. EITF Issue No. 00-21 will be effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003 or the
Company may elect to report the change in accounting as a cumulative-effect
adjustment. The Company is reviewing EITF Issue No. 00-21 and has not yet
determined the impact this issue will have on its consolidated operating results
and financial position.
In December 2002, FASB issued Statement No. 148 ("SFAS 148"), "Accounting
for Stock-Based Compensation Transition and Disclosure". This Statement amends
FASB Statement No. 123 ("SFAS 123"); "Accounting for Stock-Based Compensation",
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. Since KLA-Tencor is continuing to account for stock-based
compensation according to APB 25, adoption of SFAS 148 will require KLA-Tencor
to provide prominent disclosures about the effects of SFAS 123 on reported
income and will require disclosure of these affects in the interim consolidated
financial statements as well. SFAS 148 will be effective for interim fiscal
periods beginning after December 15, 2002. The Company believes that the
adoption of this standard will have no material impact on its consolidated
operating results and financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company believes
that the adoption of this standard will have no material impact on the
consolidated financial statements.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out basis) or market. The components of inventories are as
follows:
December 31, June 30,
(in thousands) 2002 2002
- --------------------------------------------------------------------------------------------------------------
Inventories
Customer service parts $ 116,039 $ 116,240
Raw materials 44,293 75,753
Work-in-process 60,790 53,542
Demonstration equipment 40,998 54,003
Finished goods 27,836 23,478
- --------------------------------------------------------------------------------------------------------------
Total $ 289,956 $ 323,016
==============================================================================================================
NOTE 3 - STOCK REPURCHASE PROGRAM
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. On October 10, 2002, the Board
of Directors authorized the repurchase of an additional 5.0 million shares under
the plan. During the six months ended December 31, 2002 and 2001, the Company
repurchased 1,466,000 and 3,130,000 shares of its Common Stock at a cost of
approximately $48 million and $111 million.
NOTE 4 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three months ended Six months ended
December 31, December 31,
(in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Net income $ 29,228 $ 49,048 $ 80,493 $ 135,513
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss):
Currency translation adjustments 3,966 (6,586) 1,600 (2,659)
Gain (loss) on cash flow hedging instruments, net (1,356) 3,977 1,469 1,235
Unrealized gains (losses) on investments, net of taxes
(benefits) of $ (2,097) and $ 343 for the three and six months
ended December 31, 2002 and $80 and $281 for the three and
six month months ended December 31, 2001 (3,321) (126) 544 (445)
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (711) (2,735) 3,613 (1,869)
- -------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 28,517 $ 46,313 $ 84,106 $ 133,644
===================================================================================================================
NOTE 5 - NONRECURRING ACQUISITION, RESTRUCTURING AND OTHER COSTS
Restructuring and Other Costs
During the three months ended September 30, 2002, KLA-Tencor restructured
certain of its operations and facilities to accommodate the planned occupancy of
its Livermore campus and to streamline operations due to the industry downturn.
Restructuring costs were classified into two main categories: facilities and
other charges of $4.6 million and severance and benefits of $1.1 million. As
part of the facilities consolidation, KLA-Tencor is exiting several of its
leased buildings and have included the remaining net book value of the related
leasehold improvements as well as the future lease payments, net of anticipated
sublease revenue, in the charge. Severance and benefits include involuntary
termination of approximately 70 personnel from manufacturing, engineering,
sales, marketing, and administration in the United States, Japan and Europe. The
following table shows the details of the facilities, severance and other
restructuring costs accrual for the six months ended December 31, 2002:
Balance at Non-recurring Balance at
(in thousands) June 30, 2002 charges Utilized December 31, 2002
- --------------------------------------------------------------------------------------------------------
Facilities and other $ 405 $ 4,623 $ (801) $ 4,227
Severance and benefits -- 1,127 (862) 265
- --------------------------------------------------------------------------------------------------------
Total $ 405 $ 5,750 $ (1,663) $ 4,492
========================================================================================================
In addition, during the first fiscal quarter of 2003, KLA-Tencor received
$15.2 million as a second installment on the sale of software and intellectual
property associated with its iSupport(TM) on-line customer support technology,
which was netted against the above non-recurring charges, resulting in a
reported net gain of $9.4 million.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Facilities
KLA-Tencor leases certain of its facilities under operating leases, which
qualify for operating lease accounting treatment under SFAS 13, "Accounting for
Leases," and, as such, these facilities are not included on its Condensed
Consolidated Balance Sheet.
The following is a schedule of operating leases payments as of December 31,
2002 (in thousands):
Fiscal year ended June 30, Amount
--------------------------------------------------------------
2003 $ 5,630
2004 7,127
2005 4,469
2006 2,459
Thereafter 7,210
--------------------------------------------------------------
Total minimum lease payments $ 26,895
==============================================================
The lease agreement for certain Milpitas and San Jose, California
facilities had a term of five years ending in November 2002, with an option to
extend up to two more years. Under the terms of the lease, KLA-Tencor, at its
option, could acquire the properties at their original cost or arrange for the
properties to be acquired. In November 2002, the Company purchased these
facilities at the end of the lease term. The purchase transaction increased land
and property by approximately $120 million and decreased cash by the same
amount.
Factoring
KLA-Tencor has agreements with two banks to sell certain of its trade
receivables and promissory notes without recourse. During the three months and
six months ended December 31, 2002, approximately $26 million and $48 million,
respectively, of receivables were sold under these arrangements. As of December
31, 2002, approximately $34 million of receivables sold under these arrangements
were outstanding. The total amount available under the facility is the Japanese
yen equivalent of $92 million based upon exchange rates as of December 31, 2002.
KLA-Tencor does not believe it is materially at risk for any losses as a result
of this agreement.
Purchase Commitments
KLA-Tencor maintains certain open inventory purchase commitments with its
suppliers to ensure a smooth and continuous supply chain for key components.
KLA-Tencor's liability in these purchase commitments is generally restricted to
a forecasted time-horizon as mutually agreed upon between the parties. This
forecast time-horizon can vary amongst different suppliers. As such, it is
difficult to precisely report its true open commitments at any particular point
in time. However, the Company estimates its open inventory purchase commitment
as of December 31, 2002 to be no more than $49 million.
Derivative Instruments
KLA-Tencor's foreign subsidiaries operate and sell KLA-Tencor's products in
various global markets. As a result, KLA-Tencor is exposed to changes in foreign
currency exchange rates. KLA-Tencor utilizes foreign currency forward exchange
contracts to hedge against certain future movements in foreign exchange rates
that affect certain foreign currency denominated sales and purchase
transactions. KLA-Tencor does not use derivative financial instruments for
speculative or trading purposes. At December 31, 2002, KLA-Tencor had foreign
exchange forward contracts maturing throughout fiscal 2003 to sell and purchase
$172 million and $55 million, respectively, in foreign currency, primarily
Japanese yen.
Legal Matters
A discussion regarding certain pending legal proceedings is included in
Part I, Item 3, "Legal Proceedings," included in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2002. Since the fiscal year ended June 30,
2002, certain developments have occurred with respect to the legal proceedings
described in our Annual Report as follows:
ADE Corporation
On October 11, 2000, ADE Corporation ("ADE"), a competitor, filed a patent
infringement lawsuit against KLA-Tencor in the U.S. District Court in Delaware.
ADE claimed damages and sought an injunction under U.S. Patent No. 6,118,525
(`525 patent). We filed a counterclaim in the same court alleging that ADE has
infringed four of our patents. We are seeking damages and a permanent injunction
against ADE. In addition, we are seeking a declaration from the District Court
that ADE's patent is invalid and not infringed by KLA-Tencor. On October 22,
2001, we filed a separate action for declaratory judgment against ADE in the
Northern District of California requesting a declaration that U.S. Patent No.
6,292,259 (`259 patent) is invalid and not infringed. That action has now been
consolidated with the prior action in the Delaware proceeding, and ADE has
amended its complaint in that proceeding to allege that KLA-Tencor is infringing
the `259 patent. On August 8, 2002, the magistrate presiding over the action
issued a recommendation that the court enter summary judgment in favor of
KLA-Tencor on the issue of non-infringement under ADE's `525 patent. On the same
day, the magistrate issued recommendations that the court enter summary judgment
in favor of ADE on the issue of non-infringement of two of KLA-Tencor's patents.
Tokyo Seimitsu Co. Ltd.
On June 27, 2001, we sued Tokyo Seimitsu Co. Ltd. and TSK America Inc.
("TSK"), a competitor, in the U.S. District Court in the Northern District of
California alleging that TSK infringes on one of the Company's patents. The suit
seeks damages and an injunction under U.S. Patent No. 4,805,123 (`123 patent).
TSK filed a counterclaim in the same court seeking a declaration that the `123
patent is invalid, unenforceable and not infringed, and also alleged violations
of the antitrust and unfair competition laws.
Schlumberger, Inc. and Rigg Systems, Inc.
The Schlumberger, Inc. and Rigg Systems, Inc. actions have been dismissed
under circumstances that the parties have agreed to treat as confidential.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, KLA-Tencor adopted Statement of Financial
Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill
and Other Intangible Assets." Under these accounting standards, KLA-Tencor
ceased amortization of goodwill recorded for business combinations consummated
prior to July 1, 2001, and reclassified amounts attributed to workforce in
acquisitions made prior to July 1, 2001 that did not meet the criteria for
separate recognition as other intangible assets under SFAS 141 to goodwill.
The net carrying value of goodwill recorded through acquisitions is $16.2
million as of December 31, 2002. In accordance with SFAS 142, KLA-Tencor
concluded there was no impairment of goodwill. The net carrying value of other
intangible assets as of December 31, 2002 is $7.0 million; the components of
which are as follows (in thousands):
Gross Carrying Accumulated Net
Amount Amortization Amount
- --------------------------------------------------------------------------------------------
Existing technology $ 6,062 $ 3,063 $ 2,999
Patents 4,761 1,231 3,530
Trademark 625 230 395
Favorable leases and other 270 149 121
- --------------------------------------------------------------------------------------------
Subtotal $ 11,718 $ 4,673 $ 7,045
============================================================================================
Other intangible assets are amortized on a straight-line basis over their
estimated useful lives. For the three months ended December 31, 2002 and 2001,
amortization expense for other intangible assets was $0.6 million and $0.6
million, respectively. For the six months ended December 31, 2002 and 2001,
amortization expense for other intangible assets was $1.2 million and $0.9
million, respectively. Estimated amortization expense for each of the five
succeeding fiscal years is as follows:
Fiscal year ended June 30:............................. Amount
2003 $ 2,454
2004 2,454
2005 2,195
2006 689
Thereafter 488
NOTE 8 - GEOGRAPHIC INFORMATION
KLA-Tencor is engaged primarily in designing, manufacturing, and marketing
yield management and process control systems for the semiconductor industry.
KLA-Tencor conducts business globally and has significant operations outside the
United States, which include a manufacturing facility in Israel and sales,
marketing and service offices in Europe, Japan, and the Asia Pacific region.
Geographical revenue is attributed to the geographic regions in which the
customer is located. The following is a summary of operations by the indicated
geographic regions for the three months and six months ended December 31, 2002
and 2001.
Three months ended Six months ended
December 31, 2002 December 31, 2002
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Revenue:
United States $ 91,959 $ 101,369 $ 182,057 $ 237,661
Europe 40,545 64,260 112,731 145,034
Japan 65,848 93,828 157,878 209,179
Taiwan 85,537 82,591 150,690 149,797
Asia Pacific 51,029 62,100 107,082 165,309
- ---------------------------------------------------------------------------------------------------------------
Total $ 334,918 $ 404,148 $ 710,438 $ 906,980
===============================================================================================================
Long-lived assets consist of net property and equipment, goodwill,
capitalized software and other intangibles, and other long-term assets,
excluding long-term deferred tax assets and are attributed to the geographic
region in which they are physically located:
December 31, June 30,
(in thousands) 2002 2002
- -----------------------------------------------------------------------------------------------------
Long-lived assets:
United States $ 478,378 $ 375,600
Europe 7,745 8,079
Japan 7,408 8,878
Taiwan 3,179 3,732
Asia Pacific 5,052 5,435
- -----------------------------------------------------------------------------------------------------
Total $ 501,762 $ 401,724
=====================================================================================================
The following is a summary of revenue by major products for the three
months and six months ended December 31, 2002 and 2001 (as a percentage of total
revenue).
Three months ended Six months ended
December 31, 2002 December 31, 2002
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Revenue:
Defect Inspection 56% 67% 61% 67%
Metrology 16% 15% 16% 16%
Service 20% 12% 18% 11%
Software and other 8% 6% 5% 6%
- ---------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100%
===============================================================================================================
In the three and six months ended December 31, 2002 and 2001, no single
customer accounted for more than 10 percent of revenue.
NOTE 9 - SUBSEQUENT EVENTS
On January 28, 2002, a second installment of 2.9 million options (2.7
million to non-executive employees and 0.2 million to executive employees) was
granted, as part of the fiscal year 2002 annual performance cycle review of
KLA-Tencor.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements included in or incorporated by reference in
this Quarterly Report on Form 10-Q, other than statements of historical fact,
are forward-looking statements. Such forward-looking statements include, among
others, those statements regarding the future results of our operations; the
allocation of capital spending by our customers; technological trends in the
semiconductor industry; our future product offerings and product features, as
well as market acceptance of new products; the growth in demand for process
controls; anticipated revenue from various domestic and international regions;
international sales and operations; maintenance of our competitive advantage;
success of our product offerings; creation of programs for research and
development; attraction and retention of employees; management of risks involved
in acquisitions of third parties, or the technology or assets thereof; benefits
received from any acquisitions and development of acquired technologies; the
outcome of any litigation to which we are a party; results of our investment in
leading edge technologies; our future income tax rate; the effects of hedging
transactions; sufficiency of our existing cash balance, investments and cash
generated from operations to meet our operating and working capital
requirements; and the adoption of new accounting pronouncements.
Our actual results may differ significantly from those projected in the
forward-looking statements in this report. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those set forth in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 1,
"Business" in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2002, filed with the Securities and Exchange Commission ("SEC") on
September 20, 2002. You should carefully review these risks and also review the
risks described in other documents we file from time to time with the SEC. You
are cautioned not to place undue reliance on these forward-looking statements.
We expressly disclaim any obligation to update or alter our forward-looking
statements, whether, as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
The preparation of our Condensed Consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. We based these estimates and
assumptions on historical experience, and evaluate them on an on-going basis to
ensure they remain reasonable under current conditions. Actual results could
differ from those estimates. We discuss the development and selection of the
critical accounting estimates with the audit committee of our board of directors
on a quarterly basis, and the audit committee has reviewed the Company's
critical accounting estimates as described in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002, filed with
the SEC on September 20, 2002. For the six months ended December 31, 2002 there
have been no changes to these critical accounting policies.
RESULTS OF OPERATIONS
KLA-Tencor Corporation is the world's leading supplier of process control
and yield management solutions for the semiconductor and related
microelectronics industries. Our comprehensive portfolio of products, software,
analysis, services and expertise is designed to help integrated circuit
manufacturers manage yield throughout the entire wafer fabrication process -
from research and development to final mass production yield analysis.
We continue to face a significant downturn in the semiconductor industry,
which started in early calendar year 2001. Although new orders grew sequentially
by more than $40 million in the three months ended December 31, 2002, compared
to the previous quarter, we still have very limited visibility as to the timing
of a broad based turnaround in the growth of demand for semiconductors.
Over the longer term, we expect process control to continue to represent a
higher percentage of our customers' capital spending. We believe this increase
in process control spending will be driven by the demand for more precise
diagnostics capabilities as a result of further shrinking of device feature
sizes, the transition to copper and other new materials, and the move toward 300
millimeter wafers. We anticipate these factors will drive increased demand for
our products and services when the semiconductor industry recovers.
New orders by region were as follows (in millions):
Three months ended Three months ended
December 31, 2002 September 30, 2002
- ----------------------------------------------------------------------------------------------------------
United States $ 92 $ 80
Europe 58 30
Japan 67 57
Taiwan 17 46
Asia Pacific 52 29
- ----------------------------------------------------------------------------------------------------------
Total orders $ 286 $ 242
==========================================================================================================
KLA-Tencor's backlog for unshipped orders as of December 31, 2002 was
approximately $463 million.
Revenue and Gross Margin
Product revenue decreased $87 million, or 24%, to $268 million for the
three months ended December 31, 2002 from $355 million for the three months
ended December 31, 2001. Product revenue declined $228 million, or 28%, to $581
million for the six months ended December 31, 2002 from $809 million for the six
months ended December 31, 2001. Our decline in product revenue resulted
primarily from reduced capital spending by our customers as a result of a
significant reduction in the demand for semiconductors over the last two years.
International revenue decreased to 73% of revenue, in the three months ended
December 31, 2002 from 75% in the same period of the prior fiscal year, due to
lower revenue in Japan and Europe partially offset by higher revenue in Taiwan.
International revenue remained relatively constant at 74% of revenue, for each
of the six months ended December 31, 2002 and 2001. In the three and six months
ended December 31, 2002 and 2001, no single customer accounted for more than 10%
of our revenue.
Service revenue is generated from maintenance service contracts, as well as
time and material billable service calls made to our customers after the
expiration of the warranty period. Service revenue were $67 million and $50
million for the three months ended December 31, 2002 and 2001, respectively.
Service revenue were $130 million and $98 million for the six months ended
December 31, 2002 and 2001, respectively. Service revenue continued to increase
throughout fiscal year 2002 and the first six months of fiscal 2003 as our
installed base of equipment at customer sites continued to grow. The amount of
service revenue generated is generally proportional to the number of
post-warranty systems installed at customer sites and the degree of utilization
of those systems. We expect service revenue to remain flat to slightly higher in
the next few quarters.
Gross margins as a percentage of revenue were 49% and 50% for the three and
six months ended December 31, 2002, compared to 50% and 51% for the same periods
in the prior fiscal year. Gross margin declined year over year primarily due to
our reduced capacity utilization resulting from lower production volume and an
increased percentage of sales in the service business, partially offset by
favorable warranty costs experienced by our latest generation products as they
continue to mature. In the near term, we expect our gross margin percentage to
remain relatively flat.
Engineering, Research and Development
Net engineering, research and development ("R&D") expenses were $72 million
and $143 million for the three and six months ended December 31, 2002, compared
to $74 million and $147 million for the same periods in the prior fiscal year.
As a percentage of revenue, R&D expenses were 22% and 20% for the three and six
months ended December 31, 2002, compared to 18% and 16% for the same periods in
the prior fiscal year. The absolute dollars for R&D investment decreased
primarily due to company mandated time-off, reductions in labor and
discretionary spending as well as other cost saving measures implemented over
the last several quarters in response to the industry slow down.
Gross engineering, research and development expenses were partially offset
by external funding received under certain strategic development programs
conducted with several of our customers and government grants. We received
external funding of $4 million and $10 million for the three and six months
ended December 31, 2002, respectively compared to $3 million and $6 million for
the three and six months ended December 31, 2001, respectively.
Our future operating results will depend significantly on our ability to
produce products and provide services that have a competitive advantage in our
marketplace. To do this, we believe that we must continue to make substantial
investments in our research and development efforts. We remain committed to
product development in new and emerging technologies as we address the further
shrinking of device feature sizes, the transition to copper and other new
materials, and the move toward 300-millimeter wafers. Our investments in new
technology and existing product enhancements are intended to enable our
customers to achieve a higher return on their capital investments and higher
productivity through cost-effective, leading edge technology solutions.
Selling, General and Administrative
Selling, general and administrative expenses were $65 million and $136
million for the three and six months ended December 31, 2002, compared to $72
million and $153 million for the same periods in the prior fiscal year. As a
percentage of revenue, selling, general and administrative expenses were 19% for
the three and six months ended December 31, 2002, compared to 18% and 17% for
the same periods in the prior fiscal year. The absolute dollars for selling,
general and administrative expenses decreased primarily due to company mandated
time-off, reductions in labor and discretionary spending as well as other cost
saving measures implemented over the last several quarters in response to the
industry slowdown and the ongoing global economic weakness. We expect our
selling, general and administrative expenses to continue to decrease in absolute
dollars as we continue to realize the benefits from these cost saving measures.
Restructuring and Other Costs
During the three months ended September 30, 2002, we restructured certain
of our operations and facilities to accommodate the planned occupancy of our
Livermore campus and as to streamline our operations due to the industry
downturn. Restructuring costs were classified into two main categories:
facilities and other charges of $4.6 million and severance and benefits of $1.1
million. As part of our facilities consolidation, we are exiting several of our
leased buildings and have included the remaining net book value of the related
leasehold improvements as well as the future lease payments, net of anticipated
sublease revenue, in the charge. If facilities rental rates continue to
deteriorate or if it takes longer than expected to sublease these facilities,
the actual loss could increase. Severance and benefits include involuntary
termination of approximately 70 personnel from manufacturing, engineering,
sales, marketing, and administration in the United States, Japan and Europe. The
following table shows the details of the facilities, severance and other
restructuring costs accrual as of December 31, 2002:
Balance at Non-recurring Balance at
(in thousands) June 30, 2002 charges Utilized December 31, 2002
- --------------------------------------------------------------------------------------------------------
Facilities and other $ 405 $ 4,623 $ (801) $ 4,227
Severance and benefits -- 1,127 (862) 265
- --------------------------------------------------------------------------------------------------------
Total $ 405 $ 5,750 $ (1,663) $ 4,492
- --------------------------------------------------------------------------------------------------------
In addition, during the first fiscal quarter of 2003, we received $15.2
million as a second installment on the sale of software and intellectual
property associated with our iSupport(TM) on-line customer support technology,
which we netted against the above non-recurring charges, resulting in a net
reported gain of $9.4 million.
Interest Income and Other, Net
Interest income and other, net, was $12 million and $22 million for the
three and six months ended December 31, 2002, compared to $10 million and $23
million in the same periods in the prior fiscal year. Interest income and other,
net is comprised primarily of gains realized on sales of marketable securities,
interest income earned on our investment and cash portfolio, as well as income
recognized upon settlement of certain foreign currency contracts and unrealized
gains and losses from marking to market investments classified as trading
securities.
Provision for Income Taxes
Our effective tax rate for the three months and six months ended December
31, 2002 was 24%. This was lower than the effective tax rate of 26% realized in
the same periods of the prior fiscal year. The overall reduction in our
effective tax rate was primarily the result of more R&D credits and tax-exempt
interest compared relatively to these same items as a percentage of pre-tax
income of the same periods during the prior fiscal year. There currently is
pending legislation to repeal export incentives provided by the United States
Tax Code. If the legislation were approved it would increase our effective tax
rate in future periods.
Stock Option and Incentive Plans
KLA-Tencor's stock option program is a broad-based, long-term retention
program that is intended to attract and retain qualified management and
technical employees ("knowledge employees"), and align stockholder and employee
interests. Under KLA-Tencor's stock option plans, options generally have vesting
periods of four or five years, are exercisable for a period not to exceed ten
years from the date of issuance and are granted at prices not less than the fair
market value of KLA-Tencor's common stock at the grant date. This program
consists of three plans: one under which non-employee directors may be granted
options to purchase shares of our stock, another in which officers, key
employees, consultants and all other employees may be granted options and one
other in which consultants and all employees other than directors and officers
may be granted options to purchase shares of our stock. Substantially all of our
employees that meet established performance goals and that qualify as "knowledge
employees" participate in one of our stock option plans. Options granted to
employees from fiscal year 2000 through the six months ended December 31, 2002
are summarized as follows (in thousands):
Six months ended
December 31 Fiscal years ended June 30,
2002 2002 2001 2000
---------------- --------------- --------------- ---------------
Weighted average number of shares outstanding 189,018 187,677 185,860 182,177
Total options granted during the period 1,912 9,760 10,274 8,166
Less options forfeited (1,013) (1,786) (2,418) (1,484)
---------------- --------------- --------------- ---------------
Net options granted 899 7,974 7,856 6,682
Net grants during the period as a percentage of
total shares outstanding 0.5% 4.2% 4.2% 3.6%
Grants to top five officers during the period as a
percentage of total shares outstanding 0.05% 0.3% 0.2% 0.2%
Grants to top five officers during the period as a
percentage of total options granted 5.0% 6.0% 4.0% 5.0%
During the six months ended December 31, 2002, the Company granted options
to purchase approximately 1.9 million shares of stock to employees. The net
options granted after forfeiture represented 0.5% of total outstanding shares of
approximately 189.0 million as of December 31, 2002.
During the six months ended December 31, 2002, there were 89,000 options
granted to the top five officers, who represent the chief executive officer and
each of the four other most highly compensated executive officers whose salary
plus bonus exceeded $100,000 for the fiscal year ended June 30, 2002. All stock
option grants to officers are made with a review by, and with the approval of
the Compensation Committee of the Board of Directors. All members of the
Compensation Committee are independent directors, as defined in the applicable
rules for issuers traded on the NASDAQ Stock Market.
The following table summarizes stock options exercised by the top five
officers during the six months ended December 31, 2002:
Total Number of
Securities Underlying Total Value of
Unexercised Options at Unexercised,
December 31, 2002 In-the-Money Options at
December 31, 2002 (1)
--------------------------------------------------------
Shares
Acquired on Value
Exercise Realized Vested Unvested Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
Kenneth Levy 0 0 907,130 84,961 $20,439,031 $426,622
Chairman of the Board
Kenneth L. Schroeder 0 0 833,774 450,356 $15,838,515 $3,016,962
Chief Executive Officer
Gary E. Dickerson 0 0 234,175 188,190 $2,054,688 $1,041,505
President & Chief Operating
Officer
John Kispert 0 0 75,625 105,075 $489,459 $587,828
Executive Vice President and
Chief Financial Officer
Dennis Fortino 0 0 100,384 105,033 $444,488 $541,694
Executive Vice President
(1) Total value of vested options based on fair market value of Company's Common
Stock of $37.36 per share as of December 31, 2002.
The following table summarizes KLA-Tencor's stock option plans as of
December 31, 2002:
Number of securities
remaining available
Number of securities to Weighted-average for future issuance
be issued upon exercise exercise price of under stock
of outstanding options outstanding options option plan
------------------------ ------------------- ----------------------------
Stock option
plan approved by
stockholders (3) 23,304,780 $ 27.43 13,172,266
Stock option plan
not approved by
stockholders(1)(2) 6,797,505 35.70 6,240,898 (1)
------------------------ ------------------- ------------------------
Total 30,102,285 $ 29.19 19,413,164
======================== =================== ========================
=
(1) In August 2002, the Board of Directors authorized an increase in the number
of securities reserved for additional future issuance under the Company's
stock option plans (other than the Company's Director Stock Option Plan) of
an aggregate of 7,589,102 shares.
(2) Officers and directors are not eligible to receive options granted under
this plan.
(3) In August 2002, the Company reserved an additional 5,691,826 shares of its
common stock in accordance with the provisions of the 1982 Stock Option
plan.
On November 8, 2002, the Compensation Committee of the Board of Directors
authorized approximately 5.5 million options as part of the fiscal year 2002
annual performance review cycle for KLA-Tencor. There were approximately 5.0
million options authorized to non-executive employees under the 2000 Stock
Option Plan, and 0.5 million options authorized to executive employees under the
1982 Stock Option Plan. KLA-Tencor intends to grant these options over the
course of the fiscal year ending June 30, 2003. The first installment of 1.4
million options (1.3 million to non-executive employees and 0.1 million to
executive employees) was granted on November 8, 2002. Additionally, 60 thousand
options were granted on November 8, 2002 to outside directors under the 1998
Outside Director Option Plan. The summary activity under the stock option plans,
was as follows:
Weighted-
Available Options Average
For Grant Outstanding Price
- ----------------------------------------------------------------------------------------------------------
Balances at June 30, 2000 5,146,702 22,355,712 $ 20.23
Additional shares reserved 11,216,391 --- ---
Options granted (10,273,504) 10,273,504 37.09
Options canceled/expired 2,418,485 (2,418,485) 36.15
Options exercised --- (3,921,145) 14.71
- ------------------------------------------------------------------------------------------------------------
Balances at June 30, 2001 8,508,074 26,289,586 $ 26.18
Additional shares reserved 5,610,752 --- ---
Options granted (9,760,303) 9,760,303 31.83
Options canceled/expired 1,786,295 (1,786,295) 32.55
Options exercised --- (4,173,887) 19.36
- ------------------------------------------------------------------------------------------------------------
Balances at June 30, 2002 6,144,818 30,089,707 $ 28.60
Additional shares reserved 13,280,928 --- ---
Options granted (1,911,216) 1,911,216 35.81
Options canceled/expired 1,012,374 (1,012,374) 35.00
Options exercised --- (886,264) 18.03
- ----------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 18,526,900 30,102,285 $ 29.19
- ----------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments balances during the three
months ended December 31, 2002 increased to $806 million from $673 million at
June 30, 2002. In addition marketable securities classified as long-term at
December 31, 2002 decreased to $504 million from $660 million at June 30, 2002.
KLA-Tencor has historically financed its operations through cash generated from
operations. Net cash provided by operating activities for the six months ended
December 31, 2002 was $98 million, compared to $55 million of net cash from
operating activities for the same period of the prior fiscal year. This increase
primarily resulted from a lower accounts receivable and inventories balance,
partially offset by a decrease in deferred profit. Accounts receivable declined
primarily due to strong collections, as well as lower product shipments.
Inventories declined due to aggressive monitoring and control of inventory
purchases and lower manufacturing activity. Net cash provided by investing
activities for the six months ended December 31, 2002 was $16 million, compared
to $202 million used in investing activities for the same period of the prior
fiscal year, primarily from increased net sales of marketable securities
partially offset by our purchase of certain of the leased buildings in November
2002.
Net cash used in financing activities for the six months ended December 31,
2002 was $15 million as compared to $77 million for the same period of the prior
fiscal year. This decline was primarily due to decreases in stock repurchases.
We paid $48 million for the repurchase of our common stock under our stock
repurchase program during the six months ended December 31, 2002 compared to
$111 million for the same period of the prior year.
The lease agreement for certain Milpitas and San Jose, California
facilities had a term of five years ending in November 2002, with an option to
extend up to two more years. Under the terms of the lease, we, at our option,
could acquire the properties at their original cost or arrange for the
properties to be acquired. In November 2002, we purchased these facilities at
the end of the lease term. The purchase transaction increased land and property
by approximately $120 million and decreased cash by the same amount.
The following is a schedule summarizing our significant commitments as of
December 31, 2002 (in millions):
Payments Due by Period
---------------------------------------------------------------
Total 1 year 2-3 years 3-4 years Over 5 years
---------------------------------------------------------------
Operating leases $ 26.9 $ 5.6 $ 7.1 $ 4.5 $ 9.7
---------------------------------------------------------------
We have agreements with two banks to sell certain of our trade receivables
and promissory notes without recourse. During the three and six months ended
December 31, 2002, approximately $26 million and $48 million of receivables,
respectively, were sold under these arrangements. As of December 31, 2002,
approximately $34 million of receivables sold under these arrangements were
outstanding. The total amount available under the facility is the Japanese yen
equivalent of $92 million based upon exchange rates as of December 31, 2002. We
do not believe we are materially at risk for any losses as a result of this
agreement.
Additionally, we maintain certain open inventory purchase commitments with
our suppliers to ensure a smooth and continuous supply chain for key components.
Our liability in these purchase commitments is generally restricted to a
forecasted time-horizon as mutually agreed upon between the parties. This
forecast time-horizon can vary amongst different suppliers. As such, it is
difficult to precisely report our true open commitments at any particular point
in time. However, we estimate our open inventory purchase commitments as of
December 31, 2002 to be no more than $49 million.
Working capital increased to $1.06 billion as of December 31, 2002,
compared to $932 million at June 30, 2002. 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 business requirements
for the foreseeable future, including potential acquisitions or strategic
investments, capital expenditures for the expansion or upgrading of
manufacturing capacity and working capital requirements. 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.
FACTORS AFFECTING RESULTS, INCLUDING RISKS AND UNCERTAINTIES
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 those set
forth in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 1, "Business" in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2002, filed with the SEC on
September 20, 2002. In addition, future operating results may not follow any
past trends. We believe the factors that could make our results fluctuate and
difficult to predict include: o global economic uncertainty; o the cyclical
nature of the semiconductor industry; o changing international economic
conditions; o competitive pressure; o our ability to develop and implement new
technologies and introduction of new products; o our ability to manage our
manufacturing requirements; o intellectual property protection; o our ability to
attract, retain, and replace key employees; and o worldwide political
instability.
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 revenue, 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
affect the value of any investment in our stock.
Global Economic Uncertainty
Our business is ultimately driven by the global demand for electronic
devices by consumers and businesses. This end-user demand has been significantly
depressed over the last few quarters, and there has been very limited visibility
as to the timing of turnaround in demand growth, and from which sector this
growth will come. A protracted global economic slowdown will continue to
exacerbate this issue and may adversely affect our business and results of
operation.
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 the industry in which we operate affects our ability to accurately predict
future revenue and, thus, future 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 prevailing market conditions 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. If we
fail to respond to industry cycles, our business could be seriously harmed.
We are currently in an industry down cycle. We are not able to predict when
the semiconductor industry will recover. During a down cycle, the semiconductor
industry typically experiences excess production capacity that causes
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, as well as the
mix and quantities of products included in those orders, are factors beyond our
control. Insufficient orders, especially in our down cycles, will result in
under-utilization of our manufacturing facilities and infrastructure and will
negatively affect our operating results and financial condition.
International Trade and Economic Conditions
We serve an increasingly global market. A majority of our annual revenue is
derived from outside the United States, and we expect that international revenue
will continue to represent a substantial percentage of our revenue. Our
international revenue and operations are affected by economic conditions
specific to each country and region. Because of our significant dependence on
international revenue, a decline in the economies of any of the countries or
regions in which we do business could 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 in regions where we have operations, such as Israel, and
fluctuations in interest and currency exchange rates could negatively affect 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.
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 and services, 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, revenue, gross margin, and market share, any
of which would negatively affect our operating results and financial condition.
Our failure to compete successfully with these other companies would seriously
harm our business.
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, transition to copper and other new materials, and move
toward 300-millimeter wafers. While we expect these trends will increase our
customers' reliance on our diagnostic products, we cannot ensure that they will
directly improve our business. 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 accurately predict evolving industry standards,
to develop and introduce new products which successfully address changing
customer needs, to win market acceptance of these new products and to
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 revenue from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
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
seriously harmed if we are unable to sell our products at favorable prices or if
the market in which we operate does not accept our products.
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. Our business would be harmed if we do not receive sufficient parts to
meet our production requirements in a timely and cost-effective manner.
Manufacturing Disruption
Most of our manufacturing facilities are located in the US, with a small
operation located in Israel. Operations at our manufacturing facilities and our
assembly subcontractors are subject to disruption for a variety of reasons,
including work stoppages, acts of war, terrorism, fire, earthquake, energy
shortages, 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 disruption could result in cancellation of orders or loss of customers and
could seriously harm our business.
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 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 may 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 secrets and other proprietary
information through confidentiality and other agreements with our customers,
suppliers, employees and consultants and through other security measures. 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 do 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 to
consider whether to seek licenses where appropriate. However, we cannot ensure
that licenses can be obtained or, if obtained, will be on acceptable terms or
that costly litigation or other administrative proceedings will not occur. The
inability to obtain necessary licenses or other rights on reasonable terms could
seriously harm our operating results and financial condition.
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. If we are unable to retain key personnel, or if we are not able to
attract, assimilate or retain additional highly qualified employees to meet our
needs in the future, our business and operations could be harmed. These factors
could seriously harm our business.
Acquisitions
In addition to our efforts to develop new technologies from internal
sources, we also seek to acquire new technologies from 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 the integration of the operations and personnel, technologies
and products of the acquired companies, the 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
From time to time we are involved in litigation of various types, including
litigation that alleges infringement of intellectual property rights and other
claims. Litigation tends to be expensive and requires significant management
time and attention and could have a negative effect on our results of operations
or business if we lose or have to settle a case on significantly adverse terms.
If we lose in a dispute concerning intellectual property, a court could require
us to pay substantial damages and/or royalties or could issue an injunction
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.
Terrorism and Political Instability
The threat of terrorism targeted at the regions of the world in which we do
business, including the United States, increases the uncertainty in our markets
and may delay any recovery in the general economy. Any delay in the recovery of
the economy and the semiconductor industry could seriously impact our business.
Increased international political instability, as demonstrated by the
September 2001 terrorist attacks, disruption in air transportation and further
enhanced security measures as a result of the terrorist attacks, and the threat
of war in Iraq, may hinder our ability to do business and may increase our costs
of operations. Such continuing instability could cause us to incur increased
costs in transportation, make such transportation unreliable, increase our
insurance costs, and cause international currency markets to fluctuate. This
same instability could have the same effects on our suppliers and their ability
to timely deliver their products. If this international political instability
continues or increases, our business and results of operations could be harmed.
Effects of Recent Accounting Pronouncements
We have adopted SFAS No. 143, "Accounting for Obligations Associated with
the Retirement of Long-Lived Assets" and SFAS No. 144 "Accounting for the
Impairment of Disposal of Long-Lived Assets". SFAS No. 143 establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. It also provides guidance
for legal obligations associated with the retirement of tangible long-lived
assets. SFAS No. 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. Adoption of
these pronouncements did not have a significant effect on our consolidated
financial statements.
In June 2002, the FASB issued Statement No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liabilities Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
This Statement requires that a liability for costs associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. SFAS 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002. The standard will in
certain circumstances change the timing of recognition of restructuring costs.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." This issue addresses determination of whether an arrangement
involving more than one deliverable contains more than one unit of accounting
and how arrangement consideration should be measured and allocated to the
separate units of accounting. EITF Issue No. 00-21 will be effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003 or we
may elect to report the change in accounting as a cumulative-effect adjustment.
We are reviewing EITF Issue No. 00-21 and have not yet determined the impact
this issue will have on our consolidated operating results and financial
position.
In December 2002, FASB issued SFAS 148, an Amendment of SFAS 123. This
Statement amends SFAS 123, to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure about those effects in
interim financial information. Since we are continuing to account for stock-
based compensation according to APB 25, our adoption of SFAS 148 will require us
to provide prominent disclosures about the effects of SFAS 123 on reported
income and will require us to disclose these affects in our interim consolidated
financial statements as well. SFAS 148 is effective for interim fiscal periods
beginning after December 15, 2002. We believe that the adoption of this standard
will have no material impact on our consolidated operating results and financial
position.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities", an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning after
June 15, 2003. We believe that the adoption of this standard will have no
material impact on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. To
mitigate these risks, we utilize derivative financial instruments. We do not use
derivative financial instruments for speculative or trading purposes. All of the
potential changes noted below are based on sensitivity analyses performed on our
financial position at December, 31, 2003. Actual results may differ materially.
As of December 31, 2002, we had an investment portfolio of fixed income
securities of $738 million excluding those classified as cash and cash
equivalents. These securities, as with all fixed income instruments, are subject
to interest rate risk and will fall in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of December 31, 2002, the fair value of our investment portfolio would
decline by $3 million.
As of December 31, 2002, we had net forward contracts to sell U.S. dollar
equivalent of $117 million in foreign currency in order to hedge our currency
exposures. If we had entered into these contracts on December 31, 2002, the U.S.
dollar equivalent would be $120 million. A 10% adverse move in currency exchange
rates affecting the contracts would decrease the fair value of the contracts by
$15 million. However, if this occurred, the fair value of the underlying
exposures hedged by the contracts would increase by a similar amount.
Accordingly, we believe that our hedging strategy should yield no material net
impact to net income or cash flows.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report (the Evaluation Date), the
Company's Chief Executive Officer (principal executive officer) and Executive
Vice President and Chief Financial Officer (principal financial officer),
carried out an evaluation of the effectiveness of the Company's "disclosure
controls and procedures" (as defined in the Securities Exchange Act of 1934
Rules 13a-14(c) and 15(d)-14(c)). Based on that evaluation, these officers have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Company and the Company's consolidated subsidiaries would be
made known to them by others within those entities and are effective to ensure
that the information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
Changes in internal controls
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A discussion regarding certain pending legal proceedings is included in
Part I, Item 3, "Legal Proceedings," included in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2002. Since the fiscal year ended June 30,
2002, certain developments have occurred with respect to the legal proceedings
described in our Annual Report as follows:
ADE Corporation
On October 11, 2000, ADE Corporation ("ADE"), a competitor, filed a patent
infringement lawsuit against KLA-Tencor in the U.S. District Court in Delaware.
ADE claimed damages and sought an injunction under U.S. Patent No. 6,118,525
(`525 patent). We filed a counterclaim in the same court alleging that ADE has
infringed four of our patents. We are seeking damages and a permanent injunction
against ADE. In addition, we are seeking a declaration from the District Court
that ADE's patent is invalid and not infringed by KLA-Tencor. On October 22,
2001, we filed a separate action for declaratory judgment against ADE in the
Northern District of California requesting a declaration that U.S. Patent No.
6,292,259 (`259 patent) is invalid and not infringed. That action has now been
consolidated with the prior action in the Delaware proceeding, and ADE has
amended its complaint in that proceeding to allege that KLA-Tencor is infringing
the `259 patent. On August 8, 2002, the magistrate presiding over the action
issued a recommendation that the court enter summary judgment in favor of
KLA-Tencor on the issue of non-infringement under ADE's `525 patent. On the same
day, the magistrate issued recommendations that the court enter summary judgment
in favor of ADE on the issue of non-infringement of two of KLA-Tencor's patents.
While we cannot predict the outcome, we believe that we have valid defenses and
further believe that our counterclaims have merit.
Tokyo Seimitsu Co. Ltd.
On June 27, 2001,we sued Tokyo Seimitsu Co. Ltd. and TSK America Inc.
("TSK"), a competitor, in the U.S. District Court in the Northern District of
California alleging that TSK infringes on one of the Company's patents. The suit
seeks damages and an injunction under U.S. Patent No. 4,805,123 (`123 patent).
TSK filed a counterclaim in the same court seeking a declaration that the `123
patent is invalid, unenforceable and not infringed, and also alleged violations
of the antitrust and unfair competition laws. While we cannot predict the
outcome of this matter, we believe that we have valid defenses to TSK's
counterclaim and believe that our suit has merit
Schlumberger, Inc. and Rigg Systems, Inc.
The Schlumberger, Inc. and Rigg Systems, Inc. actions have been dismissed
under circumstances that the parties have agreed to treat as confidential.
Although we cannot predict the outcome of these claims, we do not believe
that any of these legal matters will have a material adverse effect on
KLA-Tencor. Were an unfavorable ruling to occur in one or more of the pending
claims, there exists the possibility of a material impact on our operating
results for the period in which the ruling occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of KLA-Tencor Corporation was held on
November 8, 2002 at the Company's offices in Milpitas, California. Of the
189,113,780 shares of Common Stock outstanding as of September 16, 2002 (the
record date), 162,144,959 shares (85.74%) 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.
Votes
Votes for Withheld
Kenneth Levy 140,243,236 21,901,723
Jon D. Tompkins 160,412,904 1,732,055
Lida Urbanek 155,675,306 6,469,653
Stephen P. Kaufman 160,438,664 1,706,295
The terms of H. Raymond Bingham, Robert T. Bond, Richard J. Elkus, Jr.,
Edward W. Barnholt and Kenneth L. Schroeder as directors of the Company,
continued after the meeting.
2. The stockholders ratified the appointment of PricewaterhouseCoopers LLP as
the Company's independent accountants for the fiscal year ended June 30, 2003.
This proposal received 151,540,212 votes for, 9,781,014 votes against and
823,733 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Form 8-K
None
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 13, 2003 /s/ KENNETH L. SCHROEDER
- ------------------- -----------------------------------------
(Date) Kenneth L. Schroeder
Chief Executive Officer
(Principal Executive Officer)
February 13, 2003 /s/ JOHN H. KISPERT
- ------------------------------- -----------------------------------------
(Date) John H. Kispert
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
CERTIFICATIONS
I, Kenneth L. Schroeder certify that:
1. I have reviewed this quarterly report on Form 10-Q of KLA-Tencor
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
February 13, 2003 /s/ KENNETH L. SCHROEDER
- ------------------- --------------------------------------------
(Date) Kenneth L. Schroeder
Chief Executive Officer
(Principal Executive Officer)
I, John H. Kispert certify that:
1. I have reviewed this quarterly report on Form 10-Q of KLA-Tencor
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
February 13, 2003 /s/ JOHN H. KISPERT
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(Date) John H. Kispert
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)