|[February 07, 2013]
Fitch Affirms KLA-Tencor's IDR at 'BBB'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the ratings for KLA-Tencor Corp. (News - Alert) (KLA-Tencor)
(Nasdaq: KLAC). Fitch's actions affect approximately $750 million of
total debt. The Rating Outlook is Stable.
The rating and Outlook reflect Fitch's expectations for solid operating
results within the context of a challenging operating environment
through over at least the near term. Fitch expects high single to low
double digit negative revenue growth for calendar 2013. This is line
with 2013 semiconductor capital spending, which is projected to be down
10% for the year.
Demand should remain weak through the first half of calendar 2013.
However, KLA-Tencor exited the recent quarter with strong order growth
and a 1.13x book-to-bill ratio (new orders to revenues), pointing to
recovery beginning in the back half of this calendar year.
Foundries and logic providers continue investing in process control
solutions to enable leading edge production for innovative new consumer
mobility products, which are fueling semiconductor growth at present.
Spending for memory makers also is expected to pick up in the second
half of calendar 2013, driven by expectations for improved supply
Fitch expects annual free cash flow (FCF) of roughly $500 million
through the intermediate-term, driven by the company's solid gross
margins (55% to 60%). FCF expectations incorporate steadily increasing
dividends and share repurchases. Similar to historical patterns, the
company would curtail share repurchases in a severe downturn.
Credit protection measures should remain solid for the rating with a
total leverage (total debt/operating EBITDA) and interest coverage
(operating EBITDA to gross interest expense) below 2x and above 10x,
respectively. The ratings incorporate headroom for modest incremental
debt. Through the cycle, metrics should range from 0.5x - 3x for
leverage and 5x - 20x for coverage.
The ratings on KLA-Tencor continue to be supported by:
--The company's technology leadership resulting in strong market share
positions in the process control market for semiconductors and a growing
mix of less volatile services revenues.
--Fitch's expectatin that the company will maintain conservative
financial policies; and
--Secular long-term growth trends, including increased technological
complexity and shortened life cycles for semiconductor products (Moore's
Law) and increased outsourcing to foundry partners.
Fitch's ratings concerns focus on:
--KLA-Tencor's need for substantial ongoing investments in R&D and sales
and marketing, each of which Fitch believes will continue to represent
10% - 20% of revenues (although capital spending for semiconductor
equipment makers is comparatively low) to maintain technology and market
--Substantial customer concentration with expectations for ongoing
customer consolidation; and
--The highly cyclical demand patterns associated with the semiconductor
Positive ratings actions are unlikely in the absence of:
--A commitment to maintain higher cash balances or a back-up source of
--Stronger mid-cycle annual free cash flow approaching $750 million,
likely driven by profitability growth.
Negative rating actions could occur if KLA-Tencor's:
--Low mid-cycle FCF from structural degradation of gross profit margins
or working capital efficiency, pointing to a potential loss in
technology leadership; or
--Meaningfully reduced liquidity from ongoing share repurchases and
dividends well in excess of annual FCF.
As of Dec. 31, 2012 Fitch believes KLA-Tencor's liquidity was solid
although limited to the company's approximately $2.6 billion of cash,
cash equivalents, and marketable securities (the majority of which was
located in the U.S.). The company currently has no bank credit facility.
Total debt consists solely of $750 million of 6.9% of senior notes due
Fitch affirms KLA-Tencor as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Senior Unsecured Debt at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Criteria:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Global Technology (News - Alert) Companies Sector Credit Factors' (Sept. 20,
Applicable Criteria and Related Research:
Corporate Rating Methodology
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