LAM Research Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 29, 2019 (13 weeks); comparison periods are the quarter ended September 23, 2018 and, where noted, the quarter ended June 30, 2019. Lam supplies wafer fabrication equipment and services to semiconductor manufacturers.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Revenue | $2.166 billion | $2.331 billion |
| Gross margin | $981.7 million; 45.3% | $1.058 billion; 45.4% |
| Operating income | $537.5 million; 24.8% of revenue | $591.8 million; 25.4% |
| Net income | $465.8 million | $533.4 million |
| Diluted EPS | $3.09 | $3.23 |
| Operating cash flow | $464.0 million | $720.3 million |
Revenue fell 7% year over year and 8% sequentially. Net income declined about 13% year over year; diluted EPS declined about 4%, partly reflecting fewer diluted weighted-average shares. Gross margin was nearly flat year over year but down from 45.8% in the June quarter. Management attributed the sequential revenue decline to lower customer demand and the margin decline primarily to customer and product mix.
Operating cash flow was $464.0 million. Capital expenditures and intangible asset spending were $39.3 million, implying approximate free cash flow of $424.8 million. Working-capital changes used $112.0 million, including a $180.6 million increase in accounts receivable. Investing activities provided $750.7 million, mainly from net sales and maturities of investment securities; financing activities used $262.1 million.
Liquidity, debt, and capital allocation
At quarter-end, cash and cash equivalents were $4.607 billion, investments $983.7 million, and restricted cash and investments $254.7 million—$5.846 billion combined. Debt at carrying value was $4.417 billion, including $641.4 million reported as current debt; aggregate debt principal was $4.484 billion. The company had no commercial-paper or revolving-credit borrowings and reported compliance with its credit-facility covenants. Its $1.25 billion revolving facility matures in October 2022.
Lam paid $158.9 million in dividends and repurchased $78.1 million of treasury stock during the quarter. It declared a dividend of $1.15 per share. The remaining authorization under the November 2018 $5.0 billion repurchase program was $2.958 billion at quarter-end. A $750 million accelerated share repurchase agreement was scheduled for final settlement no later than November 20, 2019.
Business mix and material changes
- System revenue mix: memory 64%, foundry 25%, and logic/integrated device manufacturing 11%. Memory’s share was down from 77% a year earlier; foundry and logic/IDM shares increased.
- Revenue by customer location was concentrated in China (27%), Korea (21%), and Taiwan (18%). Japan represented 13%, down from 29% a year earlier.
- Interest expense was $44.0 million versus $21.8 million a year earlier, primarily reflecting the March 2019 issuance of $2.5 billion of senior notes.
- The effective tax rate was 11.2%, compared with 9.8% a year earlier; the filing attributes the year-over-year increase primarily to tax-related items in the comparative period.
- Lam adopted lease-accounting standard ASC 842 on July 1, 2019, recognizing $113.8 million of operating lease liabilities. Management said adoption did not materially affect the income statement and did not affect cash flows.
Outlook, risks, and contingencies
The filing gives no quantified revenue or earnings guidance. Management cited near-term variability in semiconductor capital investment but expressed a longer-term view that technology shifts, including 3D scaling and multiple patterning, could expand Lam’s served market. The company expected cash, short-term investments, and operating cash flows to be sufficient for anticipated operations, investment, debt service, capital expenditures, dividends, and repurchases for at least the next 12 months.
Key risks include cyclical and volatile customer demand, customer and product concentration, intense competition, reliance on key suppliers, and international exposure. Non-U.S. sales represented approximately 92% of revenue, leaving the business exposed to geopolitical and trade disputes, tariffs, export controls, and foreign-exchange movements. The company also highlighted debt-service and convertible-note dilution risks, as well as technology-transition, cybersecurity, tax, and potential impairment risks.
The $184.3 million principal balance of 2041 convertible notes was convertible at the holder’s option at quarter-end and classified as current. Approximately $28.1 million principal value converted during the quarter, and Lam received notice of an additional $7.3 million conversion through October 25, expected to settle in the December 2019 quarter. The company reported no material pending legal proceeding and no material litigation accrual. It disclosed lease-related residual-value guarantees generally capped at $220.4 million, with specified default circumstances potentially increasing exposure up to $250.0 million, and $42.5 million of maximum potential payments under certain guarantees and letters of credit.
Investor verification priorities
- Track customer demand, system revenue mix, and regional exposure, especially in China, Korea, Taiwan, and Japan.
- Assess whether cash conversion and working capital improve, given lower operating cash flow and the increase in receivables.
- Review debt maturities, interest costs, and settlement of the 2041 convertible notes and June 2019 accelerated repurchase.
- Monitor gross-margin sensitivity to utilization and customer/product mix, and the company’s ability to maintain R&D investment through industry cycles.
- Check developments in export controls, trade restrictions, and other international risks that could affect sales or supply.