Lam Research Corporation — Q2 FY2023 Form 10-Q
Reporting period: Fiscal quarter and six months ended December 25, 2022; each quarter comprised 13 weeks. Comparisons are with the quarter and six-month period ended December 26, 2021 unless otherwise stated. Amounts are U.S. dollars.
Business context and results
Lam supplies wafer fabrication equipment and services, including deposition, etch and clean systems, to semiconductor manufacturers. It reports one business segment and serves memory, foundry, and logic/integrated device manufacturing markets.
- Quarter revenue: $5.278 billion, up 24.9% year over year and 4.0% sequentially. Systems revenue was $3.548 billion; customer support-related revenue and other was $1.730 billion.
- Quarter profitability: Gross profit was $2.376 billion and gross margin was 45.0%, versus 46.8% a year earlier and 46.1% in the September quarter. Operating income was $1.680 billion; net income was $1.469 billion, up 22.9% year over year. Diluted EPS was $10.77 versus $8.44.
- Six-month results: Revenue was $10.352 billion, up 21.3%; gross margin was 45.5% versus 46.4%. Operating income was $3.378 billion, net income $2.894 billion, and diluted EPS $21.16, compared with $2.710 billion, $2.375 billion, and $16.71, respectively, in the prior-year period.
- Costs and taxes: Six-month R&D expense was $896 million, up from $786 million. SG&A was $439 million, down from $458 million. The six-month effective tax rate was 12.5%, versus 12.0%.
Cash flow, liquidity and capital structure
- Six-month cash flow: Operating activities provided $2.330 billion, compared with $1.898 billion a year earlier. Investing used $395 million, including $303 million of capital expenditures and $120 million for acquisitions. Financing used $973 million, principally $566 million of share repurchases and $442 million of dividends.
- Liquidity: Cash, cash equivalents, investments, and restricted cash and investments totaled approximately $4.8 billion at December 25, 2022, compared with $3.9 billion at June 26, 2022. Current assets were $13.709 billion and current liabilities $4.547 billion. Management said anticipated resources were sufficient for at least the next 12 months.
- Debt: Long-term debt and finance lease obligations totaled approximately $5.003 billion, including the current portion. No borrowings were outstanding under the $1.5 billion revolving credit facility, and the company reported compliance with financial covenants. The credit agreement was amended to replace LIBOR with SOFR.
- Working capital and returns: Inventory increased to $4.820 billion from $3.966 billion at fiscal year-end. The company declared dividends of $3.45 per share for the six months and had $4.926 billion available under its share-repurchase authorization at quarter-end.
Changes, outlook and material items
- Sequential revenue improved as supply-chain conditions eased and Lam shipped critical parts. Deferred profit fell to $1.984 billion from $2.755 billion at the end of the September quarter as previously deferred revenue was recognized.
- Sequential gross margin declined mainly due to unfavorable customer and product mix. Management attributed the six-month year-over-year margin decline primarily to higher manufacturing-related spending and inflationary pressures.
- Management expected wafer fabrication equipment spending to decline in calendar 2023, particularly amid weaker memory demand. New U.S. export controls affecting China and a slowing economic environment were also expected to negatively affect 2023 results. The filing provides no quantified revenue or EPS guidance.
- In January 2023, Lam announced a planned reduction of approximately 1,300 employees, expected to begin in the March 2023 quarter, with estimated charges of approximately $80 million. It projected $150 million to $250 million of calendar-2023 spending on business process improvements and initiatives, inclusive of the restructuring.
- Management cited ongoing supply shortages and inflationary cost pressures despite recent supply-chain improvement. It also described longer-term growth opportunities from semiconductor complexity and technology shifts, including 3D scaling, multiple patterning and advanced packaging.
- Two acquisitions completed in November 2022 had a combined purchase price of $153.8 million; preliminary accounting recognized $100.4 million of goodwill and $81.2 million of intangible assets.
- The IRS had proposed approximately $50 million of additional tax for fiscal 2018, which Lam agreed to pay and had partially settled; further settlement was expected. The company reported no material probable loss from known legal proceedings. Lease residual-value guarantees had a maximum aggregate amount of $298.4 million; other guarantees and standby letters of credit had a maximum potential payment of $98.6 million, with no material payment considered probable.
Key facts for investors to verify
- How quickly weaker memory spending, the broader 2023 equipment downturn and U.S.-China export restrictions affect orders, revenue and margins.
- Whether supply constraints continue to ease, and whether elevated inventory converts into shipments and cash without material write-downs.
- The cost, timing and expected savings of the announced workforce reduction and broader business-improvement initiatives.
- Progress in converting deferred profit into recognized revenue, and the durability of customer-support revenue as systems demand changes.
- Cash deployment, including repurchases and dividends, alongside approximately $5.0 billion of debt and the company’s stated liquidity needs.
- Resolution of the IRS examination and any changes in tax exposures, guarantees or other contingencies.