LAM Research Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 24, 2017. Each quarter comprised 13 weeks; comparisons are to the periods ended December 25, 2016, except where the prior quarter is identified.
Business context and results
Lam Research supplies wafer fabrication equipment and services to semiconductor manufacturers. Management attributed stronger demand primarily to increased investment by memory customers. Memory represented 77% of system shipments in the quarter, versus 61% a year earlier.
| Metric | Quarter ended Dec. 24, 2017 | Prior-year quarter | Six months ended Dec. 24, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $2.581 billion | $1.882 billion | $5.059 billion | $3.515 billion |
| Gross margin | $1.206 billion; 46.7% | $847 million; 45.0% | $2.355 billion; 46.5% | $1.563 billion; 44.5% |
| Operating income | $737 million | $440 million | $1.431 billion | $756 million |
| Income before taxes | $734 million | $385 million | $1.422 billion | $678 million |
| Income tax expense | $744 million | $52 million | $841 million | $81 million |
| Net income (loss) | $(10) million | $333 million | $581 million | $597 million |
| Diluted EPS | $(0.06) | $1.81 | $3.16 | $3.28 |
Cash flow, liquidity and debt
- Operating cash flow was $887 million for the six-month period, compared with $877 million a year earlier. Capital expenditures and intangible-asset purchases were $145 million; operating cash flow less these expenditures was approximately $742 million.
- Cash and cash equivalents were $1.745 billion at December 24, 2017. Investments were $3.955 billion and restricted cash and investments were $256 million, for total cash, investments and restricted balances of approximately $5.956 billion, down from $6.297 billion at June 25, 2017.
- Debt was $3.332 billion at principal value and $3.172 billion carrying value. This included $800 million of commercial paper; the company had no borrowings outstanding under its $1.25 billion revolving credit facility and reported compliance with its financial covenants.
- Current liabilities were $3.912 billion. Management said current cash, investments and anticipated operating cash flows should fund operations, investments, debt service, capital expenditures, share repurchases and dividends for at least the next 12 months.
- Six-month financing cash outflows included $1.267 billion of treasury-stock purchases and $146 million of dividends, partly offset by $799 million of net commercial-paper proceeds. The declared dividend was $0.50 per share for the quarter, versus $0.45 a year earlier.
Material changes and unusual items
- Quarterly revenue rose 37% year over year and 4% from the September 2017 quarter; six-month revenue rose 44% year over year. Quarterly shipments increased 37% year over year. Management cited stronger demand, particularly from memory customers, and favorable customer and product mix as contributors to improved gross margin.
- Despite higher operating income, the quarter recorded a net loss because the newly enacted U.S. tax law drove a $744 million tax expense and a 101.4% effective tax rate. The company provisionally recorded a $991 million transition-tax liability on foreign earnings, offset by reversal of $288 million of previously accrued deferred taxes, for a net $704 million increase in tax expense. The tax accounting was incomplete and could be materially adjusted.
- Six-month net income declined to $581 million from $597 million, principally reflecting the tax-law impact. The prior-year comparison also included a $36 million loss on extinguishment of debt, which was absent in the current period.
- The company acquired Coventor, a semiconductor-process simulation and modeling provider, for approximately $138 million in August 2017. Preliminary purchase accounting included $99 million of goodwill; valuations remained subject to adjustment.
- The board authorized an additional $2 billion of share repurchases in November. The company entered into $1 billion of accelerated share repurchase agreements and repurchased approximately $1.09 billion under the program during the December quarter.
Outlook, risks and contingencies
- Management said demand for Lam’s products and services should grow faster than overall wafer-fabrication-equipment spending, supported by technology inflections and anticipated market-share gains. This is qualitative commentary; the filing provides no specific revenue, earnings or margin guidance.
- Management highlighted the semiconductor equipment industry’s cyclical and variable demand, dependence on major customers, rapid technology changes, competitive pressure, supplier concentration, international and trade exposure, and foreign-currency risks. Actual customer spending and shipment timing may differ from expectations.
- Potential future tax expense remains uncertain, including the still-evolving accounting for U.S. tax reform and future GILTI provisions. The company intends to pay the transition tax over eight years. Tax examinations could change unrecognized tax benefits; a reduction of up to $94 million was described as reasonably possible over the next 12 months.
- The company reported no material legal proceedings and no recorded litigation accrual for existing matters, stating that a material loss was not considered probable based on available information. It disclosed residual guarantees, including operating-lease residual-value guarantees generally up to approximately $220 million, and $21 million of maximum potential payments under certain guarantees and standby letters of credit.
Important facts for investors to verify
- How the provisional U.S. tax-reform accounting, transition-tax estimate and future tax rate develop as the company completes its measurement-period work.
- Whether elevated memory-led demand and favorable product mix persist, and how customer spending, shipments and deferred revenue evolve.
- The timing and share impact of convertible-note conversions, including approximately $228 million of additional conversions notified after quarter-end, and the settlement of the $1 billion accelerated repurchase agreements.
- Cash generation and working-capital trends: receivables and inventory rose materially during the six-month period, while management’s liquidity assessment depends on continued operating cash flow.
- Whether the Coventor acquisition’s preliminary asset valuations and goodwill allocation change, and whether any material legal, tax, supply-chain or other contingencies arise.