LAM RESEARCH CORP quarterly report, Q1 FY2013

Business context and reporting period

Lam Research Corporation’s fiscal first quarter ended September 23, 2012; the quarter and comparable prior-year quarter each comprised 13 weeks. Lam designs, manufactures, and services semiconductor-processing equipment. Results now include Novellus Systems, acquired in an all-stock transaction on June 4, 2012, making this the first full quarter of combined operations. Management said semiconductor-equipment demand had declined during the calendar year as some manufacturers, particularly memory makers, reduced capital spending amid weaker macroeconomic conditions.

Financial performance and position

Amounts are in U.S. dollars; financial-statement figures are in millions unless otherwise stated.

• Revenue rose 33% year over year and 22% from the June 2012 quarter; management attributed the increase primarily to the Novellus acquisition and the first full quarter of combined operations. Shipments were $935 million, up 61% year over year.
• Gross margin was 36.8%, versus 40.2% in June 2012 and 41.7% a year earlier. Management cited acquisition-related inventory fair-value adjustments of approximately $44 million and acquired-intangible amortization of approximately $21 million in the September quarter.
• Operating expenses were $317.2 million, versus $184.5 million a year earlier. R&D was $163.3 million and SG&A was $153.9 million. Higher combined-company costs, compensation, and acquired-intangible amortization contributed to the increase.
• Cash and cash equivalents were $1.411 billion, short-term investments $1.313 billion, and restricted cash and investments $166.2 million at quarter-end. Together these totaled approximately $2.9 billion, compared with $3.0 billion at June 24, 2012.
• Operating cash flow of $249.3 million was supported in part by working-capital changes, including lower receivables and inventory. Investing activities used $60.5 million, including $44.0 million of capital expenditures; financing activities used $344.9 million, primarily for share repurchases of $355.1 million. Cash declined $153.3 million during the quarter.
• Total liabilities were $2.713 billion. Long-term debt, convertible notes, and capital leases on the balance sheet were $1.279 billion; the notes’ aggregate principal was approximately $1.600 billion. The 2041 notes, assumed with Novellus, moved from current to noncurrent classification after their conversion period ended in July.
• The company repurchased 11.970 million shares for $344.0 million under its repurchase authorization during the quarter; $567.9 million remained available. Outstanding shares were 175.341 million at September 23, compared with 186.656 million at June 24.

Changes, outlook, and material risks

• Despite higher revenue, net income fell sharply year over year as gross margin declined and operating expenses increased following the acquisition. The reported quarter included acquisition-related inventory adjustments, acquired-intangible amortization, and higher interest expense from the assumed 2041 notes.
• Management stated that current cash, cash equivalents, and short-term investments, together with anticipated operating cash flows, should be sufficient for operations, investment, debt service, and capital expenditures for at least the next 12 months. The filing provides no specific revenue, margin, or EPS forecast.
• Management described long-term demand as dependent on rising customer capital expenditure to address manufacturing complexity and demand for semiconductor devices, but emphasized the industry’s cyclical and unpredictable nature.
• Key risks include further semiconductor-industry or macroeconomic weakness; customer spending, acceptance, or payment delays; integration challenges and failure to realize Novellus synergies; product and technology competition; supplier constraints; international and export-control exposure; foreign-exchange movements; tax uncertainty; and debt service or potential note conversion and dilution.
• Gross unrecognized tax benefits were $352.9 million, with $28.2 million accrued for related interest and penalties. The IRS was examining U.S. returns through fiscal 2009; no significant adjustments had been proposed. Management said timing and amounts of potential tax settlements were uncertain.
• The company reported ordinary-course legal proceedings, including intellectual-property matters, and stated that any reasonably possible additional loss beyond accruals was believed to be immaterial. Operating leases required approximately $164.9 million of restricted collateral and included residual-value guarantees generally capped at approximately $141.7 million, with higher exposure possible under specified defaults.
• Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

1. How much of the reported revenue and shipment growth reflects Novellus consolidation versus changes in underlying demand, and how comparable periods are presented after the acquisition.
2. The expected duration and remaining impact of acquisition-related inventory fair-value adjustments, intangible amortization, and integration costs on gross margin and expenses.
3. Customer capital-spending trends and subsequent-period orders, shipments, acceptance timing, deferred revenue, and demand by memory, foundry, and logic markets.
4. Cash generation and working-capital sustainability, alongside the planned pace of share repurchases and remaining authorization.
5. Convertible-note principal, cash interest and maturity obligations, potential conversion or dilution, and the company’s ability to service debt through a downturn.
6. Developments in tax examinations and uncertain tax positions, acquisition-related contingencies, and any changes to lease guarantees or legal exposures.