Business context and reporting period
Lam Research Corporation is a global supplier of wafer fabrication equipment and services to semiconductor manufacturers. This unaudited Form 10-Q covers the quarter ended December 23, 2018 (13 weeks) and the first six months of fiscal 2019. The fiscal year ends June 30, 2019.
Key financial metrics
| Metric | Quarter ended Dec. 23, 2018 | Six months ended Dec. 23, 2018 |
|---|---|---|
| Revenue | $2.523 billion | $4.853 billion |
| Gross margin | $1.145 billion; 45.4% | $2.203 billion; 45.4% |
| Operating income | $690.4 million | $1.282 billion |
| Net income | $568.9 million | $1.102 billion |
| Diluted EPS | $3.51 | $6.73 |
| Operating cash flow | $642 million, per management | $1.363 billion |
Six-month capital expenditures and intangible asset purchases were $162.0 million. Cash, cash equivalents, and investments, including restricted balances, totaled approximately $3.9 billion at quarter-end, compared with $5.2 billion at June 24, 2018. Debt carrying value was $1.952 billion; gross debt principal was $2.042 billion, with no commercial paper outstanding at quarter-end. The company had a $1.25 billion revolving credit facility with no borrowings and reported compliance with its financial covenants.
Material changes versus comparable periods
- Quarterly revenue rose 8% from the September 2018 quarter but fell 2% year over year. Six-month revenue declined 4% year over year.
- Quarterly gross margin was 45.4%, unchanged sequentially and below 46.7% a year earlier. Management attributed the year-over-year decline to lower factory utilization and customer/product mix.
- Six-month net income increased to $1.102 billion from $580.7 million a year earlier. Comparisons are affected by U.S. tax reform: the prior-year periods included a substantial one-time tax charge, including $744.2 million in the prior-year quarter.
- Cash and investments declined from June, primarily due to share repurchases. Six-month financing cash outflows included $1.7 billion of treasury stock purchases, $445.9 million of debt repayments, and $342.3 million of dividends paid.
Outlook, management commentary, risks and unusual items
Management gave no numerical forward guidance in the provided filing text. It cited higher customer demand as the reason for sequential quarterly revenue growth, while cautioning that near-term semiconductor investment may remain variable. Over the longer term, it expects technology inflections to expand Lam’s served market and believes demand for its products and services can grow faster than overall wafer-fabrication-equipment spending. Management said cash resources and expected operating cash flows should support operations, investment, debt service, capital expenditures, repurchases, and dividends for at least 12 months.
Memory accounted for 79% of system revenue in the quarter; international sales represented approximately 95% of revenue for the six-month period. Principal risks include cyclical and concentrated customer demand, customer and product concentration, competition and technology shifts, supply disruption, international trade and export restrictions, foreign-exchange exposure, and tax uncertainty. The company finalized its U.S. tax-reform accounting during the quarter; the final one-time transition tax was $868.4 million, payable over eight years. Further regulatory clarification could still require material tax adjustments.
Adoption of ASC 606 increased reported quarterly revenue by $116.9 million and cost of goods sold by $53.1 million versus the amounts that would have been reported without adoption; the six-month increases were $365.2 million and $158.8 million, respectively. Adoption also increased opening retained earnings by $139.4 million. This limits direct comparability with prior periods, which were not restated.
The board authorized an additional $5.0 billion share-repurchase program in November 2018. The company also entered into $1.4 billion of accelerated share repurchase agreements in August; two settled during the quarter and the remainder in January 2019. There was no material litigation accrual; management said it did not consider a material loss from known proceedings probable. Operating-lease residual-value guarantees were generally capped at approximately $220.4 million, with specified default circumstances potentially increasing exposure, in aggregate, up to $250.0 million.
Important facts for investors to verify
- Assess revenue and margin trends against semiconductor equipment demand, especially the high memory mix and quarter-to-quarter geographic shifts.
- Review the effect of ASC 606 on revenue timing and comparisons with periods reported under the prior revenue standard.
- Track cash use from repurchases, dividends, and convertible-note settlements, alongside liquidity and debt maturities.
- Monitor tax-reform-related adjustments, tax examinations, and the remaining transition-tax payments.
- Evaluate exposure to customer concentration, international trade restrictions, and the lease guarantees and other contingencies.