LAM Research Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal second quarter ended December 23, 2012 (13 weeks) and the six months then ended. Lam designs, manufactures, sells, and services semiconductor-processing equipment. Results include Novellus Systems from its June 4, 2012 acquisition, so year-over-year comparisons include a change in company scope.
Financial results and key metrics
| Metric | Quarter ended Dec. 23, 2012 | Comparable quarter ended Dec. 25, 2011 | Six months ended Dec. 23, 2012 | Six months ended Dec. 25, 2011 |
|---|---|---|---|---|
| Revenue | $860.9 million | $584.0 million | $1,767.8 million | $1,264.4 million |
| Gross margin | $315.4 million; 36.6% | $234.8 million; 40.2% | $649.3 million; 36.7% | $518.7 million; 41.0% |
| Operating income | $4.0 million | $47.5 million | $20.8 million | $146.9 million |
| Net income | $6.4 million | $33.2 million | $9.2 million | $105.1 million |
| Diluted EPS | $0.04 | $0.27 | $0.05 | $0.86 |
| Operating cash flow | Approximately $193 million | Not separately stated here | $442.5 million | $255.9 million |
- Sequentially, quarterly revenue declined 5% from $906.9 million in the September 2012 quarter; gross margin eased from 36.8% and net income rose from $2.8 million.
- Quarterly shipments were $803 million, down 14% sequentially and up 43% year over year. The year-over-year increase reflects Novellus being included in the results.
- Quarterly operating expenses were $311.4 million, including R&D of $166.0 million and SG&A of $144.4 million. R&D was 19.3% and SG&A 16.8% of revenue.
- At December 23, cash and cash equivalents were $1.190 billion, short-term investments $1.330 billion, and restricted cash and investments $166.2 million. Together these totaled approximately $2.7 billion; the restricted amount is not freely available.
- Total assets were $7.36 billion; total liabilities were $2.67 billion. Convertible-note debt had a carrying value of $1.275 billion, with no current portion at quarter-end. Capital lease obligations were also reported.
- Six-month investing cash outflow was $130.7 million, including $82.9 million of capital expenditures; financing cash outflow was $693.4 million, primarily $710.1 million of treasury-stock purchases. Cash and cash equivalents fell $374.6 million during the six months.
Material changes and unusual items
- Year-over-year revenue rose 47% for the quarter and 40% for the six-month period, largely reflecting the Novellus acquisition; these comparisons are not on a like-for-like basis.
- Gross margin was pressured by Novellus acquisition-related inventory fair-value adjustments ($27 million in the quarter), acquired-intangible amortization (approximately $21 million in the quarter), and $17 million of product-configuration rationalization costs. The company also cited unfavorable factory utilization and product mix. The six-month acquisition-related inventory adjustments were approximately $71 million.
- Inventory write-offs related to stopping future development of certain product configurations were $15.5 million for the quarter and $18.7 million for the six months, included in cost of goods sold.
- The quarter recorded an income tax benefit of $15.8 million despite a pretax loss of $9.3 million. The effective tax rate was unusually high at 168.6%, primarily reflecting a $30.5 million discrete tax benefit from tax matters and the tax effect of integration and impairment expenses for which little tax benefit was recognized.
- Interest expense increased year over year following assumption of Novellus’s 2.625% convertible notes due 2041. Total notes include $450 million due 2016, $450 million due 2018, and approximately $700 million due 2041.
- The company repurchased $698.0 million of shares under its program during the six months and reported $710.1 million in treasury-stock purchases in cash flows. The board-authorized program had $213.9 million remaining at quarter-end.
Outlook, management commentary, and risks
- Management said semiconductor-equipment demand weakened in the second half of calendar 2012, particularly as NAND manufacturers reduced investment. It saw potential for industry capital-equipment spending to increase in calendar 2013, with greater potential in the second half than the first; this was an expectation, not quantified guidance.
- Management expected cash, cash equivalents, and short-term investments at quarter-end, together with anticipated operating cash flows, to support operations, investment, debt service, and capital expenditures for at least the next 12 months.
- The business is cyclical and exposed to swings in semiconductor customer spending, customer concentration and acceptance timing, competitive and technology shifts, supplier constraints, international and foreign-exchange exposure, and the ability to integrate Novellus and achieve expected synergies.
- Other notable exposures include convertible-note interest, potential conversion dilution and warrants; uncertain tax positions and ongoing tax audits; inventory obsolescence and goodwill/intangible impairment risk; and facility lease residual-value guarantees. The company reported approximately $333.9 million of gross unrecognized tax benefits and $24.7 million accrued for related interest and penalties.
- Legal proceedings include routine matters and intellectual-property claims; management stated that any reasonably possible losses beyond amounts accrued were not expected to be material. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the year-over-year revenue and expense change reflects Novellus rather than organic demand, and how integration progress compares with expected synergies.
- Whether demand stabilizes or improves, particularly in NAND, and whether management’s expectation of stronger industry spending in the second half of calendar 2013 is borne out.
- Whether gross margins recover as acquisition-related inventory adjustments, product rationalization costs, and factory-utilization pressures change.
- How share repurchases, convertible debt and any conversion-related dilution affect cash, leverage, and per-share results.
- Developments in tax audits and uncertain tax benefits, and any effect of the retroactive extension of the U.S. R&D tax credit, whose impact management was still evaluating.