Lam Research Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 25, 2016 (13 weeks); six-month results are for the period ended the same date. Comparatives are the quarter and six months ended December 27, 2015, and, where noted, the preceding quarter ended September 25, 2016. Lam supplies wafer fabrication equipment and services, including deposition, etch, and clean products.
Financial performance
| Metric | Quarter ended Dec. 25, 2016 | Prior-year quarter | Six months ended Dec. 25, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1.882 billion | $1.426 billion | $3.515 billion | $3.026 billion |
| Gross margin | $846.8 million; 45.0% | $626.5 million; 43.9% | $1.563 billion; 44.5% | $1.349 billion; 44.6% |
| Operating income | $439.8 million | $238.8 million | $755.8 million | $574.3 million |
| Net income | $332.8 million | $223.0 million | $596.6 million | $511.7 million |
| Diluted EPS | $1.81 | $1.28 | $3.28 | $2.94 |
| Cash dividends declared per share | $0.45 | $0.30 | $0.75 | $0.60 |
Cash flow: Six-month operating cash flow was $877.3 million, versus $743.5 million. Investing activities used $1.650 billion, including net purchases of available-for-sale securities; capital expenditures and intangible asset purchases were $78.5 million. Financing activities used $1.759 billion, primarily for $1.617 billion of debt principal payments and related issuance costs, $69.5 million of treasury-stock purchases, and $96.4 million of dividends paid. Cash and cash equivalents declined by $2.535 billion to $2.504 billion.
Liquidity and debt: Cash, investments, and restricted cash and investments totaled approximately $6.1 billion at quarter-end, down from approximately $7.1 billion at June 26, 2016. Debt was $2.950 billion at par and $2.720 billion at carrying value, compared with $4.550 billion and $4.318 billion, respectively, at June 26. The company had no borrowings under its $750 million revolving credit facility and was in compliance with its financial covenants. Management said available resources and expected operating cash flows should cover anticipated needs for at least 12 months.
Material changes and management commentary
- Quarterly revenue rose 32% year over year and 15% sequentially. Shipments increased 49% year over year and 13% sequentially. Management attributed the sequential improvement mainly to increased investment by memory customers, particularly DRAM customers.
- Gross margin increased to 45.0% from 43.9% in both the prior-year and preceding quarters; management cited favorable product mix and improved factory utilization. Six-month gross margin was slightly lower year over year, reflecting unfavorable product and customer mix, partly offset by improved utilization.
- Quarterly operating expenses were $407.0 million, including $246.8 million of R&D. R&D increased sequentially, while SG&A declined; SG&A included a $4 million litigation settlement expense and lower KLA-Tencor acquisition costs.
- The KLA-Tencor merger agreement was mutually terminated October 5, 2016, with no termination fee payable by either party. The termination triggered redemption of the 2023 and 2026 notes at 101% of principal and termination of a $1.530 billion term-loan commitment. Lam recorded a $36.3 million loss on extinguishment of debt in the quarter.
- Quarterly effective tax rate was 13.5%; the six-month rate was 11.9%. Management attributed the rates, which are below the 35% U.S. statutory rate, primarily to income earned in lower-tax jurisdictions, with quarter-to-quarter effects from foreign earnings and tax items.
- Management expects product demand to strengthen over the next quarter, but the filing gives no quantified revenue, margin, or EPS guidance. It sees longer-term opportunity from technology transitions including 3D NAND, FinFET, multiple patterning, and advanced packaging.
Risks, contingencies, and unusual items
- Semiconductor equipment demand is cyclical and can change rapidly with customer investment plans. Three customers accounted for 51% of revenue in the six months, creating customer-concentration risk.
- International sales represented approximately 93% of six-month revenue. Lam cited exposure to economic, political, trade, export-control, currency, and cash-repatriation risks. Approximately $3.8 billion of cash and investments was held outside the United States; substantially all of that amount would be subject to U.S.-rate tax if repatriated.
- Convertible notes were classified as current at quarter-end because the stock-price conversion condition was met. Lam received conversion notices for an additional $65.6 million principal amount, expected to settle in the March 2017 quarter. Convertible notes and related warrants can dilute EPS.
- Cash collateral of approximately $250 million supports certain property leases. Residual-value guarantees are generally up to approximately $220.4 million, with aggregate exposure not exceeding $250 million under specified default circumstances.
- Product warranty reserves were $119.3 million at quarter-end, up from $100.3 million at June 26, 2016. Lam reported no legal proceedings it considered material and did not believe material payments under its disclosed guarantees were probable.
- The board authorized up to $1.0 billion of share repurchases in November 2016. During the quarter, 619,000 shares were repurchased under the program for $65.0 million; the remaining authorization was $935.0 million.
Important facts for investors to verify
- Whether the anticipated demand strengthening materialized, especially in memory markets, and how customer and geographic mix affected subsequent margins.
- Actual cash generation and capital allocation after the significant debt redemptions, including the pace of dividends and share repurchases.
- Conversion and settlement of the convertible notes, including resulting share dilution and EPS effects.
- Tax consequences and practical availability of overseas cash, along with any changes in the company’s liquidity outlook.
- Whether customer concentration, semiconductor-industry cyclicality, or export and trade developments materially affected orders, shipments, and collections.