Lam Research Corporation — Q2 FY2011 Form 10-Q
Reporting period: Fiscal quarter ended December 26, 2010 (13 weeks); six-month period ended the same date. Lam designs, manufactures, and services semiconductor processing equipment, principally for etch and single-wafer clean applications.
Financial performance
| Metric | Q2 FY2011 | Comparable prior year |
|---|---|---|
| Revenue | $870.7 million | $487.2 million |
| Gross margin | $407.4 million; 46.8% | $221.2 million; 45.4% |
| Operating income | $241.1 million | $91.3 million |
| Net income | $221.9 million | $69.6 million |
| Diluted EPS | $1.78 | $0.54 |
- Quarterly revenue rose 79% year over year and 8% sequentially; shipments increased 72% year over year and 10% sequentially. Gross margin was unchanged sequentially and increased year over year, which management attributed mainly to improved factory and field utilization.
- For the six months, revenue was $1.677 billion versus $805.7 million; net income was $415.6 million versus $86.4 million. Six-month diluted EPS was $3.32 versus $0.67.
- Q2 operating expenses were $166.3 million, including $90.5 million of R&D and $75.9 million of SG&A. The six-month effective tax rate was 10.7%; Q2 rate was 8.4%.
- Six-month operating cash flow was $441.3 million, versus $76.0 million in the prior-year period. Investing used $81.3 million, including $57.2 million of capital expenditures; financing used $187.7 million, mainly reflecting treasury-stock purchases and the structured repurchase prepayment.
Financial position and material changes
- At December 26, 2010, cash and cash equivalents were $729.1 million, short-term investments $303.0 million, and restricted cash and investments $165.2 million. Total cash, investments, and restricted balances were about $1.2 billion.
- Total debt and capital leases were approximately $20.6 million; total liabilities were $848.4 million. Current assets were $2.180 billion and current liabilities $689.9 million.
- Compared with June 27, 2010, total assets increased to $2.933 billion from $2.487 billion, while accounts receivable rose to $689.4 million from $499.9 million, consistent with higher business volumes.
- Shares outstanding on the balance sheet declined to 123.3 million from 125.9 million. During the six months, Lam reported $148.9 million of treasury-stock purchases and prepaid $50.0 million under a structured repurchase arrangement. At maturity, the company may receive 1.5 million shares or $50.4 million in cash, at its option.
Outlook, commentary, and risks
- Management expected semiconductor-industry conditions to be relatively stable in calendar 2011 versus 2010, while identifying potential for wafer-fab-equipment market expansion. It cautioned that forecasts were uncertain and said customer input indicated first-half 2011 shipments at levels comparable to second-half 2010; shipments were expected to decline to some extent in the March 2011 quarter.
- Management linked Q2 growth to improved customer demand, foundry utilization, and production of next-generation memory devices. It expected higher R&D and sales-and-marketing spending could continue into calendar 2011.
- Lam said existing cash and short-term investments were expected to support anticipated operations, investments, debt service, and capital expenditures for at least 12 months. The business remains exposed to semiconductor-cycle volatility, customer spending and acceptance timing, concentrated customers and products, international markets, competition, supplier performance, and foreign-exchange movements.
- Tax matters include $202.9 million of gross unrecognized tax benefits and $19.2 million accrued for related interest and penalties. The IRS was examining fiscal 2007 and California was examining fiscal 2005–2006; no significant adjustments had been proposed as of the filing. Lam could not estimate whether unrecognized tax benefits would materially change in the next 12 months.
- Restricted cash of about $164.9 million secures certain facility leases. Residual-value guarantees are generally capped at about $141.7 million, but may reach the lessor’s investment in specified default circumstances, subject to stated limits. The filing also describes recurring third-party intellectual-property claims; it gives no specific material claim or quantified loss amount.
- No restructuring charge was recorded in Q2; the six-month period included a $5.2 million reversal after Lam decided to occupy previously restructured facilities. Prior-year comparisons also reflect the 2009 reversal of Section 409A-related liabilities, an unusual item affecting comparability.
Important facts for investors to verify
- Whether customer demand, system shipments, and customer acceptance support management’s 2011 outlook, particularly the expected March-quarter shipment decline.
- Whether elevated receivables and inventories convert to cash as volumes change, and whether gross margins remain near Q2 levels.
- How much cash is available for general use after accounting for restricted lease collateral, share repurchases, and operating commitments.
- Potential outcomes and timing of tax examinations and the company’s unrecognized tax positions.
- Exposure under facility residual guarantees, intellectual-property indemnities, and any subsequently disclosed litigation or contingencies.