KLA-Tencor™ Reports Fiscal 2011 Second Quarter Results

GAAP Results

Q2 FY 2011

Q1 FY 2011

Q2 FY 2010

Revenues

$ 766 million

$ 682 million

$ 440 million

Net Income

$ 185 million

$ 154 million

$ 22 million

Earnings per Diluted Share

$ 1.09

$ 0.91

$ 0.13

Non-GAAP Results

Q2 FY 2011

Q1 FY 2011

Q2 FY 2010

Net Income

$ 187 million

$ 169 million

$ 49 million

Earnings per Diluted Share

$ 1.10

$ 0.99

$ 0.28

KLA-Tencor Corporation

Condensed Consolidated Unaudited Balance Sheets

(In thousands)

December 31, 2010

June 30, 2010

ASSETS

Cash and marketable securities

$

1,636,400

$

1,534,044

Accounts receivable, net

531,453

440,125

Inventories, net

504,697

401,730

Other current assets

453,761

459,566

Land, property and equipment, net

249,468

236,752

Goodwill

328,147

328,006

Purchased intangibles, net

101,900

117,336

Other non-current assets

362,635

389,497

Total assets

$

4,168,461

$

3,907,056

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

123,166

$

107,938

Deferred system profit

241,494

204,764

Unearned revenue

33,193

37,026

Other current liabilities

396,084

422,059

Total current liabilities

793,937

771,787

Non-current liabilities:

Income tax payable

62,329

53,492

Unearned revenue

28,383

20,354

Other non-current liabilities

71,560

69,065

Long-term debt

746,018

745,747

Total liabilities

1,702,227

1,660,445

Stockholders' equity:

Common stock and capital in excess of par value

972,870

921,460

Retained earnings

1,506,747

1,356,454

Accumulated other comprehensive income (loss)

(13,383)

(31,303)

Total stockholders' equity

2,466,234

2,246,611

Total liabilities and stockholders' equity

$

4,168,461

$

3,907,056

KLA-Tencor Corporation

Condensed Consolidated Unaudited Statements of Operations

Three months ended

Six months ended

(In thousands, except per share data)

December 31, 2010

December 31, 2009

December 31, 2010

December 31, 2009

Revenues:

Product

$

627,857

$

314,946

$

1,178,466

$

544,197

Service

138,470

125,409

270,203

238,845

Total revenues

766,327

440,355

1,448,669

783,042

Costs and operating expenses:

Costs of revenues

311,398

207,286

575,367

379,178

Engineering, research and development

94,897

83,301

189,617

161,510

Selling, general and administrative

91,166

102,673

179,203

180,309

Total costs and operating expenses

497,461

393,260

944,187

720,997

Income from operations

268,866

47,095

504,482

62,045

Interest income and other, net

(17,675)

(9,079)

(29,979)

(1,237)

Income before income taxes

251,191

38,016

474,503

60,808

Provision for income taxes

65,699

16,222

134,815

18,609

Net income

$

185,492

$

21,794

$

339,688

$

42,199

Net income per share:

Basic

$

1.11

$

0.13

$

2.03

$

0.25

Diluted

$

1.09

$

0.13

$

2.00

$

0.24

Cash dividend paid per share

$

0.25

$

0.15

$

0.50

$

0.30

Weighted average number of shares:

Basic

166,886

171,408

167,052

171,053

Diluted

169,513

173,808

169,685

173,292

KLA-Tencor Corporation

Condensed Consolidated Unaudited Statements of Cash Flows

Three months ended

December 31,

(In thousands)

2010

2009

Cash flows from operating activities:

Net income

$

185,492

$

21,794

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

21,653

23,240

Asset impairment charges

6,800

10,592

Non-cash stock-based compensation expense

19,431

20,855

Net gain on sale of marketable securities and other investments

(430)

(1,582)

Gain on sale of real estate assets

(1,372)

(160)

Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:

Increase in accounts receivable, net

(28,890)

(55,564)

Increase in inventories

(39,710)

(2,621)

Decrease (increase) in other assets

(10,151)

101,550

Increase (decrease) in accounts payable

(15,416)

12,328

Increase in deferred system profit

39,831

32,856

Increase in other liabilities

16,687

313

Net cash provided by operating activities

193,925

163,601

Cash flows from investing activities:

Capital expenditures, net

(11,552)

(10,735)

Proceeds from sale of assets

18,185

5,878

Purchase of available-for-sale securities

(189,361)

(337,025)

Proceeds from sale and maturity of available-for-sale securities

123,677

182,799

Purchase of trading securities

(12,397)

(15,001)

Proceeds from sale of trading securities

13,905

17,476

Net cash used in investing activities

(57,543)

(156,608)

Cash flows from financing activities:

Issuance of common stock

28,768

20,545

Tax withholding payments related to vested and released restricted stock units

(10,732)

(10,371)

Common stock repurchases

(57,017)

-

Payment of dividends to stockholders

(41,809)

(25,686)

Net cash used in financing activities

(80,790)

(15,512)

Effect of exchange rate changes on cash and cash equivalents

2,128

(876)

Net increase (decrease) in cash and cash equivalents

57,720

(9,395)

Cash and cash equivalents at beginning of period

538,384

540,839

Cash and cash equivalents at end of period

$

596,104

$

531,444

Supplemental cash flow disclosures:

Income taxes paid (refunds received), net

$

71,309

$

(68,491)

Interest paid

$

26,095

$

26,084

KLA-Tencor Corporation

Condensed Consolidated Unaudited Supplemental Information

(In thousands, except per share data)

Reconciliation of GAAP Net Income to Non-GAAP Net Income

Three months ended

Six months ended

December 31, 2010

September 30, 2010

December 31, 2009

December 31, 2010

December 31, 2009

GAAP net income

$   185,492

$  154,196

$   21,794

$  339,688

$   42,199

Adjustments to reconcile GAAP net income to non-GAAP net income

Acquisition related charges

a

8,178

8,178

8,104

16,356

16,199

Restructuring, severance and other related charges

b

(974)

-

14,450

(974)

10,041

Restatement related charges

c

1,147

-

7,077

1,147

12,265

Income tax effect of non-GAAP adjustments

d

(2,921)

(2,857)

(10,762)

(5,778)

(13,883)

Discrete tax items

e

(3,706)

9,154

8,693

5,448

8,693

Non-GAAP net income

$   187,216

$  168,671

$   49,356

$  355,887

$   75,514

GAAP net income per diluted share

$         1.09

$        0.91

$       0.13

$        2.00

$       0.24

Non-GAAP net income per diluted share

$         1.10

$        0.99

$       0.28

$        2.10

$       0.44

Shares used in diluted shares calculation

169,513

169,839

173,808

169,685

173,292

Pre-tax impact of items included in Consolidated Statements of Operations

Acquisition
related
charges

Restructuring,
severance and
other related
charges

Restatement
related charges

Total pre-tax
GAAP to non-
GAAP
adjustment

Three months ended  December 31, 2010

Costs of revenues

$   5,790

$            -

$           -

$    5,790

Engineering, research and development

898

-

-

898

Selling, general and administrative

1,490

(974)

1,147

1,663

Total in three months ended December 31, 2010

$   8,178

$      (974)

$   1,147

$  8,351

Three months ended September 30, 2010

Costs of revenues

$   5,790

$            -

$           -

$   5,790

Engineering, research and development

898

-

-

898

Selling, general and administrative

1,490

-

-

1,490

Total in three months ended September 30, 2010

$   8,178

$            -

$           -

$   8,178

Three months ended December 31, 2009

Costs of revenues

$   5,727

$    2,052

$           -

$    7,779

Engineering, research and development

898

566

-

1,464

Selling, general and administrative

1,479

11,832

7,077

20,388

Total in three months ended December 31, 2009

$   8,104

$   14,450

$   7,077

$  29,631

To supplement our condensed consolidated financial statements presented in accordance with GAAP, we provide certain non-GAAP financial information, which is adjusted from results based on GAAP to exclude certain costs and expenses, as well as other supplemental information. The non-GAAP and supplemental information is provided to enhance the user's overall understanding of our operating performance and our prospects in the future. Specifically, we believe that the non-GAAP information provides useful measures to both management and investors regarding financial and business trends relating to our financial performance by excluding certain costs and expenses that we believe are not indicative of our core operating results. The non-GAAP information is among the budgeting and planning tools that management uses for future forecasting. However, because there are no standardized or generally accepted definitions for most non-GAAP financial metrics, definitions of non-GAAP financial metrics (for example, determining which costs and expenses to exclude when calculating such a metric) are inherently subject to significant discretion.  As a result, non-GAAP financial metrics may be defined very differently from company to company, or even from period to period within the same company, which can potentially limit the usefulness of such information to an investor. The presentation of non-GAAP and supplemental information is not meant to be considered in isolation or as a substitute for results prepared and presented in accordance with United States GAAP.

a

Acquisition related charges include amortization of intangible assets, inventory fair value adjustments, and in-process research and development charges associated with acquisitions.  Management believes that the expense associated with the amortization of acquisition related intangible assets is appropriate to be excluded because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives, and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for both KLA-Tencor's newly acquired and long-held businesses.  Management believes that it is appropriate to exclude acquisition related inventory fair value adjustments and in-process research and development charges as they are not indicative of ongoing operating results and therefore limit comparability.  Management believes excluding these items helps investors compare our operating performance with our results in prior periods as well as with the performance of other companies.

b

Restructuring, severance and other related charges include gains and costs associated with the company's facilities divestment and consolidation program, reductions in force, and gains and losses from sales of facilities.  Management believes that it is appropriate to exclude those items as they are not indicative of ongoing operating results and therefore limit comparability.  Management believes excluding these items helps investors compare our operating performance with our results in prior periods as well as with the performance of other companies.

c

Restatement related charges include legal and other expenses related to the investigation regarding the company's historical stock option granting process and related shareholder litigation and other matters.  The Company paid or reimbursed legal expenses incurred in connection with the investigation of its historical stock option practices and the related litigation and government inquiries by a number of its current and former directors, officers and employees. The Company is currently paying defense costs a former officer and employee facing SEC civil actions to which the Company is not a party. Management believes that it is appropriate to exclude those items as they are not indicative of ongoing operating results and therefore limit comparability.  Management believes excluding these items helps investors compare our operating performance with our results in prior periods as well as with the performance of other companies.

d

Income tax effect of non-GAAP adjustments includes the income tax effects of the excluded items noted above.  Management believes that it is appropriate to exclude the tax effects of the items noted above in order to present a more meaningful measure of non-GAAP net income.

e

Discrete tax items include the tax impact of shortfalls in excess of cumulative windfall tax benefits recorded as provision for income taxes during the period. Windfall tax benefits arise when a company's tax deduction for employee stock activity exceeds book compensation for the same activity and are generally recorded as increases to capital in excess of par value.  Shortfalls arises when the tax deduction is less than book compensation and are recorded as decreases to capital in excess of par value to the extent that cumulative windfalls exceed cumulative shortfalls.  Shortfalls in excess of cumulative windfalls are recorded as provision for income taxes.  When there are shortfalls recorded as provision for income taxes during an earlier quarter, windfalls arising in subsequent quarters within the same fiscal year are recorded as a reduction to income taxes to the extent of the shortfalls recorded.  Management believes that it is appropriate to exclude these items as they are not indicative of ongoing operating results and therefore limit comparability.  Management believes excluding these items helps investors compare our operating performance with our results in prior periods as well as with the performance of other companies.