KLA-Tencor's Earnings Increase 31% Year Over Year, It's A Buy

KLA-Tencor Corporation (KLAC) is engaged in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nano-electronics industries. The company reported earnings after the market closed on 23Jan14 and on the surface everything looked good with the company reporting fiscal second quarter non-GAAP earnings of $0.85 per share (beating analysts' estimates by $0.05) on revenue of $705.13 million (in-line with analysts' estimates). What I'd like to at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenue (thousands)	2FQ14	2FQ13	Y/Y
Product	$ 544,183	$ 523,023	4%
Service	$ 160,946	$ 149,988	7%
Total	$ 705,129	$ 673,011	5%

Compared to last year total revenue has increased by 5%. There isn't much to highlight that is eye-popping in this portion of the earnings report.

Income Statement

Income Statement (thousands)	2FQ14	2FQ13	Y/Y
Total Revenues	$ 705,129	$ 673,011	5%
Costs of revenues	$ 285,814	$ 303,915	-6%
Engineering, R&D	$ 134,587	$ 121,608	11%
Selling, General & Administrative	$ 96,746	$ 94,241	3%
Total costs and operating expenses	$ 517,147	$ 519,764	-1%
Income from operations	$ 187,982	$ 153,247	23%
Interest income and other, net	$ (11,237)	$ (8,373)	34%
Income before income taxes	$ 176,745	$ 144,874	22%
Provision for income taxes	$ 37,499	$ 38,244	-2%
Net Income	$ 139,246	$ 106,630	31%
Non-GAAP acquisition related charges	$ 3,599	$ 4,242	-15%
Non-GAAP restructuring, severance and other related charges	$ 2,002	$ -	N/A
Income tax effect of Non-GAAP adjustments	$ (1,777)	$ (1,392)	28%
Basic Shares	166,414	166,268	0%
Diluted Shares	168,206	169,076	-1%
Income per basic share	$ 0.84	$ 0.64	30%
Income per diluted share	$ 0.83	$ 0.63	31%
Non-GAAP Income per diluted share	$ 0.85	$ 0.65	31%

Spending in the engineering/R&D segment increased by 11% year over year which I don't consider to be a bad thing because engineering and R&D usually leads to increased revenue in the future. Despite the increase in engineering/R&D total costs and operating expenses managed to decrease by 1% which is always a good thing which in turn allowed income from operations to increase 23%! Interest income decreased 34% and total income before taxes was up 22%. Net income increased a total of 31% after all the addition and subtraction is complete. Because KLAC reports non-GAAP earnings the line item of non-GAAP acquisition related charges decreased by 15% and income tax effect of non-GAAP adjustments increased 28%. When all is said and done, KLAC managed to increase year over year earnings per share on a non-GAAP basis by 31%!

Balance Sheet

Balance Sheet (thousands)	2FQ14	2FQ13	Y/Y
Cash, cash equivalents and marketable securities	$ 2,950,661	$ 2,918,881	1%
Accounts receivable, net	$ 573,077	$ 524,610	9%
Inventories	$ 663,040	$ 634,448	5%
Other current assets	$ 320,756	$ 273,564	17%
Land, property and equipment, net	$ 325,856	$ 305,281	7%
Goodwill	$ 326,578	$ 326,635	0%
Purchased intangibles, net	$ 26,098	$ 34,515	-24%
Other non-current assets	$ 254,668	$ 269,423	-5%
Total Assets	$ 5,440,734	$ 5,287,357	3%
Accounts payable	$ 141,545	$ 115,680	22%
Deferred system profit	$ 243,603	$ 157,965	54%
Unearned revenue	$ 47,629	$ 60,838	-22%
Other current liabilities	$ 495,222	$ 527,049	-6%
Total Current Liabilities	$ 927,999	$ 861,532	8%
Long-term debt	$ 747,647	$ 747,376	0%
Pension Liabilities	$ 57,621	$ 57,959	-1%
Income tax payable	$ 62,777	$ 59,494	6%
Unearned revenue	$ 58,653	$ 42,228	39%
Other non-current liabilities	$ 35,830	$ 36,616	-2%
Total Liabilities	$ 1,890,527	$ 1,805,205	5%
Common stock and capital in excess of par value	$ 1,193,654	$ 1,159,565	3%
Retained earnings	$ 2,386,801	$ 2,359,233	1%
Accumulated other comprehensive income (loss)	$ (30,248)	$ (36,646)	-17%
Total Stockholders Equity	$ 3,550,207	$ 3,482,152	2%
Total liabilities & stockholders' equity	$ 5,440,734	$ 5,287,357	3%

The balance sheet shows that total liabilities increased 5% while total assets increased 3%. Other current assets increased by 17% while purchased intangibles decreased by 24%. From a near term liabilities perspective accounts payable increased 22%, deferred system profit increased 54%, and unearned revenue decreased 22%; all causing near term liabilities to increase by 8%. Long term unearned revenue increased by 39% and accumulated other comprehensive income decreased 17%.

Conclusion

The company reported earnings which were 31% higher than a year before on more revenue while the share price was up 22.55% in the past year excluding dividends. The share count has neither decreased nor increased for the entire year. I definitely love that both earnings per share and revenue were up year over year. On a fundamental basis this tech company is inexpensively valued with respect to 2014 earnings. The company reported good results in my opinion. Even though the company may pull back with the broader market this is one company I want to be buying up. The stock is in my Dividend Portfolio Super Bowl and has been smashing the competition by going through three rounds of action without ever having lost a game going 12-0 so far and will be playing against JPMorgan (JPM) in the Super Bowl.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: KLA-Tencor's Earnings Increase 31% Year Over Year, It's A Buy

Disclosure: I am long KLAC, JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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