Currency Losses Further Weaken Bruised KLA-Tencor

KLA-Tencor Corp., a leading maker of inspection and measurement systems for semiconductor manufacturers, posted a consolidated loss of $434.3 million in the second-quarter 2009 as the weak economy continued to drive a slowdown in demand from its customers. In addition to the bad news that customer demand is forecasted to remain weak for the duration of 2009, as consumers in most countries slash discretionary spending for electronics and other goods that use chips, KLA-Tencor is being hit with another poke in the eye by volatile currency movements. Approximately 83 percent of its operations are concentrated in Europe and Asia, according to the chip equipment maker's 10-Q regulatory filing.

Although KLA-Tencor attempts to hedge its currency risk, its concentrated exposure to customers in Asia translates into lost profits when the dollar weakens against local currencies. The U.S. dollar emerged from a multi-year slump and gained 4.5 percent against the Euro, but lost 18 percent in value against the Yen last year. And, in China, the Renminbi has gone up 20 percent against the greenback in the past three years. By geographic region, Europe and Japan/China represent about 11 percent and 45 percent of total revenue. Consequently, for the three and six-months ended December 31, the company lost $17.9 million and $81.6 million on currency adjustments.

Chief Executive Rick Wallace told analysts on the second-quarter 2009 earnings call the company saw few signs of any meaningful recovery in business prospects for the third-quarter-and management was guarding against the possibility that chip maker demand-and sales-could actually decline further from already cyclical lows. In my opinion, continued economic weakness in the U.S., coupled with the printing of billions more in paper by the Treasury to prop up a mortally-wounded banking system, will likely weaken the U.S. dollar more against key currencies-translating to additional currency losses for KLA-Tencor in coming quarters.