KLA-Tencor (NASDAQ:KLAC) reported fiscal fourth-quarter and full-year results last week, and the market approved -- sending its shares up 5%. KLA's products are found in semiconductor fabrication facilities around the world, as companies like Intel (NASDAQ:INTC) use its equipment to control manufacturing processes, as well as to diagnose and correct problems.

Unlike semiconductor equipment manufacturer Novellus Systems (NASDAQ:NVLS), KLA generated more revenue than a year ago. For the fourth quarter ending June 30, KLA reported sales of $492 million and net income of $105 million, although the income figure requires some clarification (which I will provide in just a second). For comparison purposes, a year ago the revenue figure was $450 million, with earnings of $96 million.

If you read quickly through the earnings release you might think that the core semiconductor business at KLA performed better than last year's fourth quarter -- but you would be wrong. Interest income this year was about $9 million higher than last year, and the tax rate fell to 20.5%, from 25%. An investor should be most concerned about how the company's core business performed, so it's always good to look at operating income, which is earnings from the core operations, excluding interest and taxes.

Glancing at KLA's income statement, we see "income from operations" at $115 million for Q4 2005, compared with $122 million in the year-ago period. That's a decrease of about 5%, even though revenue increased 10%.

The business was simply less efficient at turning sales into earnings during the final quarter. This was due in part to an increase in R&D that was larger than the sales increase, but the larger factor was a 28% increase in selling, general, and administrative expenses.

For the full 2005 fiscal year, KLA earned $467 million on $2.09 billion in revenue, and the tax rate was about the same as it was in 2004. The interest earnings were larger for the full year in 2005, but the increase was small relative to the $223 million increase in earnings from 2004 to 2005. Full-year operating income increased a whopping 96%, so the problem appears to be confined to the fourth quarter -- so far.

The jump in administrative expenses is worth watching. Nevertheless, this business is well-positioned for the future. As semiconductor device dimensions shrink, the effect and numbers of potential defects are increasing rapidly. Companies like KLA -- those that can help semiconductor manufacturers achieve high yields by finding and eliminating defects -- stand to benefit.

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Fool contributor Dan Bloom does not have any financial interest in any stock mentioned in this column.