Lam Research Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 27, 2011 (13 weeks), with nine-month results compared with the periods ended March 28, 2010. Although the request metadata says “2010 Q3,” the filing is for fiscal Q3 2011. Dollar amounts below are in millions unless noted.
Business context and results
Lam designs, manufactures and services semiconductor processing equipment, with a focus on etch and single-wafer clean systems. Its results depend on semiconductor manufacturers’ capital spending and are subject to pronounced industry cycles.
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $809.1 | $632.8 | $2,485.7 | $1,438.5 |
| Gross margin | $374.0; 46.2% | $292.9; 46.3% | $1,158.8; 46.6% | $648.5; 45.1% |
| Operating income | $197.0 | $149.1 | $662.1 | $269.7 |
| Net income | $182.2 | $120.3 | $597.8 | $206.7 |
| Diluted earnings per share | $1.45 | $0.94 | $4.78 | $1.61 |
| Operating cash flow | Approximately $242 for the quarter, per management | Not provided in the cited comparison | $682.9 | $185.3 |
Q3 revenue increased 28% year over year but fell 7% sequentially from $870.7 million in the December 2010 quarter. Shipments were $813 million, down 9% sequentially and up 11% year over year. Q3 net income rose about 52% year over year, but declined from $221.9 million in the prior quarter. The nine-month comparisons reflect strong business growth; the prior-year period also included a substantial Section 409A-related credit, discussed below.
Liquidity, cash flow and debt
- At March 27, 2011, cash and cash equivalents were $942.7, short-term investments $312.9 and restricted cash and investments $165.2, totaling approximately $1.42 billion. Total cash and investments were $991.7 million at June 27, 2010.
- Nine-month operating cash flow was $682.9 million. Investing activities used $128.5 million, including $92.9 million of capital expenditures; financing activities used $173.0 million, including $157.6 million of treasury-stock purchases and a $50.0 million stock-repurchase-contract prepayment.
- Current assets were $2.37 billion and current liabilities $667.4 million. Long-term debt and capital leases totaled $20.2 million on the balance sheet, including $4.2 million current and $15.9 million long term.
- Management said available cash, cash equivalents and short-term investments, together with expected operating cash flows, should support anticipated operations, investments, debt service and capital expenditures for at least 12 months.
Material changes and unusual items
- Compared with the December 2010 quarter, Q3 revenue and shipments decreased as customer investment timing shifted. Gross margin declined to 46.2% from 46.8%, attributed to customer mix and lower factory utilization.
- Q3 operating expenses increased sequentially, chiefly due to higher R&D activity and customer-focused sales and marketing spending. Management expected this incremental expense trend could continue for one or two more quarters. Headcount rose to approximately 3,500 from 3,400.
- Nine-month 2011 restructuring results included a $5.2 million reversal after Lam decided to occupy previously restructured facilities. In the prior-year nine-month period, Lam recorded an approximately $44 million net Section 409A liability reversal/credit. This makes year-over-year operating income and earnings comparisons less directly comparable.
- The effective tax rate was 8.3% for Q3 and 9.9% for the nine months, primarily reflecting geographic income mix and R&D tax credits, with discrete tax items also affecting the rates. Gross unrecognized tax benefits were $204.4 million; the company said examinations could result in a significant change, but it could not estimate the amount or timing.
- A structured stock repurchase arrangement expired April 6, 2011 and was settled for its maturity cash value. The filing describes an option to receive 1.5 million shares or $50.4 million; verify settlement details and cash treatment in subsequent reporting.
Outlook, commentary and principal risks
Management believed the 2011 wafer-fabrication equipment market could expand compared with 2010 and that Lam’s shipments could increase. It cautioned that growth might not be linear and depended on global economic conditions and customer adoption of products such as tablets and high-end smartphones. The filing gives no specific revenue, earnings or shipment guidance.
Key risks include semiconductor-industry cyclicality; customer spending, acceptance and timing changes; reliance on a limited number of large customers and key products; competition and rapid technology shifts; supplier and outsourcing dependencies; foreign-exchange and international-market exposure; and disruption related to the earthquake, tsunami and nuclear disaster in Japan. Lam also cited patent and other intellectual-property claims, uncertain tax examinations, and possible impairment of goodwill or other assets. Its Fremont and Livermore operating leases carry residual-value guarantees generally up to approximately $141.7 million, supported by $164.9 million of restricted cash and investments. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the expected 2011 market expansion and shipment growth materialized, and how customer investment timing affected subsequent quarters.
- Whether gross margins recovered from the Q3 sequential decline and whether higher R&D and customer-project spending persisted.
- Cash generation and capital allocation, including the remaining $250 million repurchase authorization and settlement of the structured repurchase arrangement.
- Developments in tax examinations and the $204.4 million gross unrecognized tax benefits, including any settlements or changes in estimates.
- Exposure to Japan-related supply-chain or customer disruptions, patent claims, and operating-lease residual guarantees.