TEXT - Fitch affirms KLA-Tencor Corp 'BBB' issuer default rating
Feb 7 - Fitch Ratings has affirmed the ratings for KLA-Tencor Corp. (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 dynamics. 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 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. Sensitivity/Rating Drivers 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. Positive ratings actions are unlikely in the absence of: --A commitment to maintain higher cash balances or a back-up source of liquidity; --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 2018. Fitch affirms KLA-Tencor as follows: --Issuer Default Rating (IDR) at 'BBB'; --Senior Unsecured Debt at 'BBB'.