Business context and reporting period
Lam Research Corporation designs, manufactures, and services semiconductor processing equipment, with a focus on etch and single-wafer clean tools. This Form 10-Q covers fiscal first-quarter 2012, the 13 weeks ended September 25, 2011. Comparisons below are to the 13 weeks ended September 26, 2010 unless otherwise noted.
Financial performance and position
| Metric | Quarter ended September 25, 2011 | Comparable period |
|---|---|---|
| Revenue | $680.4 million | $805.9 million |
| Gross profit / margin | $283.9 million / 41.7% | $377.3 million / 46.8% |
| Operating income | $99.4 million | $224.0 million |
| Net income | $71.8 million | $193.7 million |
| Diluted EPS | $0.58 | $1.55 |
| Operating cash flow | $86.9 million | $255.7 million |
- Revenue fell 15.6% year over year and 9.5% from the prior quarter; shipments fell 28% year over year. Management attributed the decline to the pace and timing of customer investments.
- Gross margin declined to 41.7% from 46.8% a year earlier and 45.0% in the prior quarter, reflecting less favorable product mix and lower factory utilization. R&D expense was $102.6 million, or 15.1% of revenue; SG&A was $80.2 million, or 11.8%.
- Cash and cash equivalents were $1.339 billion at quarter end; short-term investments were $713.1 million and restricted cash and investments were $165.2 million. Combined, these balances were approximately $2.218 billion, versus approximately $2.288 billion at June 26, 2011.
- Operating cash flow of $86.9 million was more than offset by $101.0 million used in investing and $137.6 million used in financing. Investing included $15.7 million of capital expenditures and net purchases of securities; financing included $75.0 million prepaid under a structured share-repurchase arrangement and $72.1 million of treasury-stock purchases.
- Convertible notes have $900 million aggregate principal: $450 million due 2016 at 0.50% and $450 million due 2018 at 1.25%. The balance sheet reports $743.3 million of long-term debt, convertible notes, and capital leases, plus $4.4 million current; the notes’ net carrying amount was approximately $729.0 million. Management expected available resources to support operations, investments, debt service, and capital expenditures for at least 12 months.
Material changes versus comparable periods
- Year-over-year revenue decreased $125.4 million; net income declined $121.9 million. The lower volume and margin contributed to weaker operating results.
- Operating expenses increased to $184.5 million from $153.3 million, primarily reflecting higher R&D and SG&A, while the comparable quarter included a $5.2 million restructuring and impairment reversal.
- Other expense increased to $12.1 million from $1.0 million, principally due to interest expense associated with the convertible notes, mutual-fund losses, and other items. Interest expense included $6.6 million of convertible-note discount amortization.
- Compared with June 26, 2011, revenue declined $71.6 million and gross margin fell 3.3 percentage points. Management cited lower business volume and product mix.
Outlook, commentary, risks, and unusual items
- Management estimated that the worldwide wafer-fabrication equipment market in calendar 2011 would be moderately higher than in 2010, but expected etch and single-wafer-clean tools’ share of total equipment spending to decline in 2011. It cautioned that near-term demand forecasts were uncertain and quarterly results could be volatile. No specific quarterly financial guidance was provided.
- Key risks include semiconductor-industry cyclicality, customer spending and acceptance timing, concentration in key customers and products, technology and competitive pressures, supplier and outsourcing dependencies, international operations and currency movements, and the possibility of lower margins or inventory and asset impairments.
- The company recorded a $1.7 million impairment of a strategic private-equity investment and $1.7 million of facility impairment charges. A $1.6 million tax expense related to prior-year returns and a $0.9 million tax expense for interest on uncertain tax positions contributed to the quarter’s tax provision.
- Gross unrecognized tax benefits were $185.1 million, with approximately $17.8 million accrued for related interest and penalties. IRS examinations of fiscal 2008–2009 and California examinations of fiscal 2005–2006 were ongoing; no significant adjustments had been proposed. Timing and amount of potential settlements were uncertain.
- The company had $225 million of prepayments outstanding under three structured share-repurchase arrangements at quarter end. Two settled in October 2011 for 2.6 million shares at aggregate prices of $100 million and $51 million; the third was scheduled to settle in January 2012 for either 2.5 million shares or $79.2 million.
- Operating leases carry residual-value guarantees of up to $164.9 million in aggregate under the described terms. The filing also discusses intellectual-property claims; management did not expect the matters described to have a material adverse effect, while noting outcomes cannot be assured.
Important facts for investors to verify
- Whether subsequent results confirm management’s expectation of a moderately higher 2011 equipment market, particularly given its forecast that etch and clean spending share would decline.
- Customer demand, shipment and acceptance timing, and whether factory utilization and product mix improve enough to stabilize gross margin.
- Cash generation and capital allocation, including settlement outcomes for the remaining structured repurchase arrangement and the effect of buybacks on liquidity and share count.
- Debt terms and potential dilution or cash obligations from conversion of the $900 million notes, including the operation of the related note hedges and warrants.
- Developments in tax audits and uncertain tax positions, and any changes to deferred-tax-asset valuation allowances or lease guarantees.