Lam Research Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended September 25, 2022, Lam Research’s fiscal 2023 first quarter (not calendar-year 2022 Q1). Unless otherwise noted, comparisons are with the prior-year quarter ended September 26, 2021; sequential comparisons are with the quarter ended June 26, 2022. Amounts below are in U.S. dollars.
Business context
Lam supplies wafer fabrication equipment and customer support services to semiconductor manufacturers. It reports one operating segment and serves memory, foundry, and logic/integrated device manufacturing markets. Revenue was generated primarily outside the United States; China represented 30% of quarterly revenue.
Key financial results
| Metric | September 2022 quarter | Comparison |
|---|---|---|
| Revenue | $5.074 billion | Up 17.9% year over year; up 9.5% sequentially |
| Gross profit and margin | $2.337 billion; 46.1% | Margin was 45.9% a year earlier and 45.3% sequentially |
| Operating income | $1.698 billion | $1.372 billion a year earlier |
| Net income | $1.426 billion | $1.180 billion a year earlier |
| Diluted earnings per share | $10.39 | $8.27 a year earlier; $8.74 sequentially |
| Operating cash flow | $1.190 billion | $457.5 million a year earlier |
| Cash, cash equivalents, investments and restricted cash/investments | $4.6 billion | $3.9 billion at June 26, 2022 |
| Debt and finance lease obligations | Approximately $5.003 billion | Long-term debt comprised nearly all of the balance |
Quarterly system revenue was $3.182 billion and customer support-related revenue and other was $1.892 billion. Deferred revenue was $2.755 billion at quarter-end, compared with $2.198 billion at June 26, 2022. Inventory rose to $4.360 billion from $3.966 billion over that same period.
Material changes and cash flows
- Revenue increased year over year and sequentially as customer demand remained strong and factory output rose amid improving supply-chain conditions.
- Gross margin improved year over year and sequentially, with higher factory output and favorable customer and product mix partly offset by inflation-related manufacturing costs.
- Operating expenses were $639.0 million, up from $604.5 million a year earlier; R&D increased while SG&A declined. Management attributed higher R&D mainly to employee-related costs and supplies, and lower SG&A primarily to reduced acquired-intangible amortization.
- Operating cash flow was $1.190 billion. Working-capital uses included increases in inventory and receivables; higher deferred profit and accounts payable provided offsets.
- Investing activities used $127.8 million, including $140.1 million of capital expenditures. Financing activities used $310.9 million, including $205.6 million of dividends and $109.8 million of treasury-stock purchases.
Outlook, risks and unusual items
- Management said calendar 2022 remained a solid wafer-fabrication-equipment investment year, but weakening memory demand led it to expect lower industry equipment spending in calendar 2023. It expected U.S. export controls and a slowing economy to negatively affect results in the December 2022 quarter and calendar 2023, and expected deferred revenue to trend down in the December quarter.
- Supply conditions had improved, but management expected shortages and inflationary cost pressures to persist in the near term. The filing identifies supply constraints, COVID-19 effects, customer spending variability, and concentrated customers and products as risks to shipments, revenue, and margins.
- New U.S. export controls and licensing requirements affecting sales and services in China pose a significant risk. China generated 30% of quarterly revenue; Lam stated that regulatory changes could materially and adversely affect results.
- Management expected current cash, short-term investments and operating cash flows to be sufficient for anticipated needs for at least the next 12 months, while noting economic, industry and capital-market uncertainty.
- The effective tax rate was 13.8%, compared with 12.2% a year earlier. The company agreed to pay an approximately $50 million IRS adjustment previously reserved and made a partial cash settlement during the quarter; remaining payment timing is subject to IRS requirements.
- The company had $5.0 billion of senior unsecured notes outstanding. It reported no material loss as probable from known litigation matters. Lease-related guarantees include a maximum $298.4 million residual-value guarantee; the filing also reports $97.4 million of maximum potential future payments under certain guarantees and standby letters of credit.
- A May 2022 authorization permits up to $5.0 billion of additional share repurchases. The program had $5.410 billion available at quarter-end, reflecting remaining authorization including prior balances. The filing notes that repurchases may be suspended or discontinued.
Important facts for investors to verify
- How the new U.S. export restrictions and licensing decisions affect China-related sales, service revenue, and the company’s forward outlook.
- Whether expected declines in calendar 2023 wafer-fabrication-equipment spending, especially in memory, are reflected in subsequent revenue and deferred-revenue trends.
- Whether supply constraints and inflation continue to affect factory output, inventory levels, and gross margins.
- Cash conversion and working-capital movements, particularly inventory growth, receivables, and deferred profit.
- Future capital returns, debt-service needs, and any material developments in tax examinations or lease and other guarantees.