N🟁N

Fitch Affirms KLA-Tencor's IDR at 'BBB'; Outlook Stable

  //science-technology.news-articles.net/content/2 .. irms-kla-tencor-s-idr-at-bbb-outlook-stable.html
  Published in Science and Technology on Friday, February 11th 2011 at 13:45 GMT by Market Wire
          ^{🞛 This publication is a summary or evaluation of another publication}

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following ratings for KLA-Tencor Corp. (KLA-Tencor) (Nasdaq: KLAC):

--Issuer Default Rating (IDR) at 'BBB';

--Senior Unsecured Debt at 'BBB'.

Fitch's actions affect approximately $750 million of total debt. The Rating Outlook is Stable.

The Rating Outlook incorporates KLA-Tencor's strong operating performance within the context of a sharp rebound in semiconductor capital spending, particularly by foundry customers. Revenues in the latest 12 months ended Dec. 31, 2010 have grown 81% after declining 35% and 24% in calendar 2009 and 2008, respectively. Fitch believes end market demand will remain solid over at least the near term, supported by recent upward revisions of customers' capital spending forecasts, including foundry, logic, and NAND flash memory makers. Fitch estimates this demand environment positions KLA-Tencor to grow revenues more than 60% and approach a record $3 billion for fiscal year 2011.

Given substantial operating leverage, Fitch anticipates KLA-Tencor's operating profit should more than double and exceed $1 billion, further strengthening credit protections measures. Credit protection measures should remain cyclical and Fitch estimates total leverage (total debt/operating EBITDA) will range from 0.5x-3x with interest coverage (operating EBITDA to gross interest expense) of 5x-20x through a semiconductor equipment cycle. Fitch anticipates free cash flow (cash from operations less capital expenditures and common dividends) will exceed $400 million in fiscal 2011, driven by strong funds flow from operations (FFO). Over the longer term, Fitch expects annual free cash flow to range from $250 million to $500 million through a normalized cycle. The ratings incorporate Fitch's expectation that the company could use free cash flow to fund a combination of share repurchases and acquisitions.

The ratings for 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 expectations for a growing mix of less volatile services revenues;

--Fitch's belief that the company will maintain conservative financial policies, underpinned by a net cash position over the intermediate term; and

--Secular long-term growth trends, including increased technological complexity, shortened life cycles for semiconductor products (Moore's Law) and semiconductor makers' increased usage of 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 15%-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.

Positive ratings actions could most likely result from:

--Stronger mid-cycle annual free cash flow, likely driven by achieving the company's target operating model, including a richer sales mix.

Negative rating actions could occur if KLA-Tencor's:

--Profitability and free cash flow are eroded by ongoing technological complexity, most likely from structurally higher investments in R&D, sales and marketing, or customers' system qualification cycles;

--Revenues are sustained at meaningfully lower than anticipated levels, most likely from reduced pricing power associated with ongoing customer consolidation.

As of Dec. 31, 2010 Fitch believes KLA-Tencor's liquidity was solid although limited to the company's approximately $1.6 billion of cash, cash equivalents, and marketable securities (the majority of which was located in the U.S.), as the company currently has no bank credit facility. Total debt consists solely of $750 million of 6.9% of senior notes due 2018.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Criteria:

--'Corporate Rating Methodology', dated Aug. 13, 2010;

--'Revisions to Rating Definitions', dated April 9, 2009;

--'Evaluating Corporate Governance', dated Dec. 16, 2010;

--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007.

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Fitch Revisions to Rating Definitions: Sovereign Implications

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=432326 ]

Evaluating Corporate Governance

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405 ]

Liquidity Considerations for Corporate Issuers

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666 ]

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.