CHICAGO--(BUSINESS WIRE)--Fitch Ratings' 'BBB' Issuer Default Rating (IDR) and Stable Rating Outlook for KLA-Tencor Corp. (KLA-Tencor) (Nasdaq:KLAC) are unaffected by the company's increased share repurchase authorization. A complete list of KLA-Tencor's current ratings is provided at the end of this release.
KLA-Tencor's board of directors authorized a significant 13 million share increase to the company's share repurchase program. In addition to 2 million shares remaining under the prior share repurchase authorization, KLA-Tencor expects to repurchase approximately $1 billion of shares over the next 12-18 months. In addition, the company increased the quarterly dividend by 11% to $0.50 per share from $0.45 per share.
The ratings and Outlook have long incorporated headroom for acquisitions and more aggressive share repurchases with expectations KLA-Tencor will maintain cash balances of $1 billion or more. Acquisitions likely will be smaller and technology focused and, therefore, funded organically. Similar to historical patterns, Fitch expects KLA-Tencor to curtail share repurchases in a severe downturn.
Fitch expects solid operating results through the cycle, driven by yield challenges associated with increased complexity. The continuation of a multi-year technology upgrade cycle by leading edge semiconductor makers will drive strong near-term results. Beyond the near-term, operating performance will remain cyclical.
Fitch expects high single to low double digit revenue growth for calendar 2014, in-line with higher semiconductor capital spending, which is projected to be up 10% for the year. Intel Corp.'s transition to 20 nanometer (nm), foundries' 3D technologies pilot programs, memory's technology upgrades and DRAM capacity additions will drive top line growth.
Fitch forecasts operating EBITDA margin to expand to the upper 30s in the near term, driven by substantial operating leverage in the business model. Fitch expects longer-term operating EBITDA margin of 30% to 40% through the cycle. Research and development will remain fixed, given ongoing collaboration with customers developing next generation technologies.
Fitch expects annual free cash flow (FCF) of $250 million to $750 million through a typical cycle, driven by strong profitability and minimal capital intensity. Lower receivables and inventory support FCF in a downturn, as was the case in fiscal 2009 and fiscal 2013 when sales declined 40% and 10% respectively.
Fitch expects credit metrics will remain solid over the longer-term but range through the cycle. Fitch anticipates total leverage (total debt/operating EBITDA) and interest coverage (operating EBITDA to gross interest expense) below 2x and above 10x, respectively, but that leverage could range from 0.5x to 3x and coverage from 5x to 20x through the cycle. Fitch estimates leverage was 0.8x and coverage was 17.5x for the latest 12 months (LTM) ended March 31, 2014.
Key Ratings Drivers
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 expectation 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 leadership;
--Substantial customer concentration with expectations for ongoing customer consolidation; and
--The highly cyclical demand patterns associated with the semiconductor equipment market.
Ratings Sensitivities
Positive ratings actions could occur if:
--Fitch's expectations for credit protection measures remain solid with leverage below 2x, driven by technology leadership resulting in solid profitability.
--Fitch's expectations for mid-cycle annual free cash flow continue to strengthen, enabling KLA-Tencor to support stock buybacks and acquisitions with excess cash.
Negative rating actions could occur if:
--Leverage approaches and remains near 3x, likely from structurally weaker profitability or the use of debt to support stock buybacks.
--Sustained negative FCF from greater than anticipated customer concentration, meaningful share erosion or a fundamental slow-down in the transition at the leading edge; or
As of March 31, 2014, Fitch believes KLA-Tencor's liquidity was solid although limited to the company's approximately $3 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 2018.
Fitch currently rates KLA-Tencor as follows:
--IDR 'BBB';
--Senior unsecured debt 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Criteria:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Global Technology Companies Sector Credit Factors' (Sept. 20, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
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