UPDATE: S&P Lifts Rating on KLA-Tencor Corp. (KLAC) to 'BBB+'; Cites Stable FOCF Generation

Standard & Poor's Ratings Services today raised its corporate credit rating on Milpitas, Calif.-based KLA-Tencor Corp. (Nasdaq: KLAC) to 'BBB+' from 'BBB'. The outlook is stable.

At the same time, we raised our issue-level rating on the company' $750 million senior unsecured notes due 2018 to 'BBB+' from 'BBB'.

The upgrade reflects KLA-Tencor's stable FOCF generation over the past five years, and our belief that the company will maintain a financial policy consistent with a "modest" financial risk profile. Despite ongoing consolidation in the semiconductor capital equipment industry and widespread pressures across technology companies to increase shareholder returns, we now expect that KLA-Tencor is likely to meet its growth and shareholder return objectives while keeping adjusted leverage under 2x.

The rating on KLA-Tencor reflects our view of the company's business risk profile as "satisfactory," incorporating its leading position in the semiconductor metrology and inspection equipment industry, high barriers to entry, and long-term customer relationships. However, the company operates in an industry with significant inherent industry cyclicality, risk of technology obsolescence and with significant customer concentration risk, which partly offsets those advantages. We view the company's financial risk profile as "modest," reflecting its net cash position and exceptional liquidity, but also its high cash flow volatility. We view the industry risk as "moderate" and the country risk as "low." Our assessment of the company's management and governance is "satisfactory."

KLA-Tencor is a leading supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industry. Its products and services support semiconductor manufacturers throughout the semiconductor fabrication process, from research and development (R&D) to final volume production by providing equipment, software, and support that enable semiconductor manufacturers to identify, resolve, and manage manufacturing process challenges to achieve yields at lower overall costs.

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