Business context and reporting period
Lam Research supplies wafer fabrication equipment and services to semiconductor manufacturers. This unaudited Form 10-Q covers the fiscal second quarter ended December 29, 2019 (13 weeks) and the six months then ended; the prior-year quarter ended December 23, 2018.
Key financial metrics
| Metric | Quarter ended Dec. 29, 2019 | Prior-year quarter | Six months ended Dec. 29, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $2.584 billion | $2.523 billion | $4.749 billion | $4.853 billion |
| Gross margin | $1.180 billion (45.7%) | $1.145 billion (45.4%) | $2.161 billion (45.5%) | $2.203 billion (45.4%) |
| Operating income | $686.5 million | $690.4 million | $1.224 billion | $1.282 billion |
| Net income | $514.5 million | $568.9 million | $980.3 million | $1.102 billion |
| Diluted EPS | $3.43 | $3.51 | $6.52 | $6.73 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $772.0 million | $1.363 billion |
At December 29, cash and cash equivalents were $3.036 billion, investments $1.648 billion, and restricted cash and investments $253.9 million. Total liabilities were $7.496 billion. Debt at carrying value was $4.403 billion (aggregate principal $4.467 billion); $500 million of senior notes were due March 2020. The company had no commercial-paper or revolving-credit-facility borrowings and reported compliance with its credit-facility covenants.
Material changes versus comparable periods
- Quarterly revenue rose 2% year over year and 19% sequentially, with management attributing the sequential increase primarily to higher foundry customer investment. Six-month revenue declined 2% year over year.
- Quarterly net income declined about 10% year over year; six-month net income declined about 11%. The quarterly effective tax rate rose to 23.5% from 13.8% in the prior-year quarter, including a $74.5 million tax-asset reversal associated with a court ruling on intercompany cost-sharing and stock-based compensation.
- Quarterly gross margin improved slightly year over year; sequential improvement was attributed to higher factory utilization. Operating expenses increased year over year in the quarter, including higher R&D spending.
- Six-month operating cash flow fell to $772.0 million from $1.363 billion, mainly reflecting a $508.6 million use of cash from changes in operating assets and liabilities, including higher receivables.
- System revenue mix shifted: memory represented 52% of quarterly system revenue versus 79% a year earlier, while foundry rose to 36% from 13%. China and Taiwan together accounted for 55% of quarterly revenue.
Outlook, commentary, risks and unusual items
Management gave no specific numerical revenue or earnings guidance in the provided filing text. It said near-term demand may remain variable but expects technology inflections, including 3D scaling, multiple patterning and advanced packaging, to support longer-term growth in its served markets. Management expects current cash, short-term investments and operating cash flows to cover anticipated operations, investment, debt service, capital expenditures, dividends and repurchases for at least the next 12 months.
- Capital returns were substantial: six-month treasury-stock purchases were $1.083 billion and dividends paid were $325.6 million. A November 2019 accelerated repurchase committed $1.0 billion, with final settlement due by May 27, 2020.
- After quarter-end, the company received conversion notices for an additional $116.6 million principal amount of 2041 convertible notes, expected to settle in the quarter ending March 29, 2020; settlement involves cash for principal and shares for any excess conversion value.
- Key risks include semiconductor spending cyclicality, customer and product concentration, international trade restrictions and export controls, competition and technology transitions, supply-chain dependencies, foreign-exchange exposure, and debt and convertible-note obligations.
- The company reported no legal proceedings it believed material and no material litigation loss considered probable. Other disclosed exposures include California lease residual-value guarantees generally capped at $220.4 million (up to $250 million in specified default circumstances) and $58.4 million of guarantees and standby letters of credit; management did not consider material payments probable.
- The company adopted lease accounting standard ASC 842 on July 1, 2019, recording $106.9 million of operating lease liabilities at quarter-end; adoption did not materially affect earnings or cash flows.
Most important facts for investors to verify
- Whether the foundry-driven sequential revenue recovery continues, and how memory, foundry and logic demand evolve.
- Whether receivables and working-capital movements normalize enough to restore operating cash flow.
- The cash and share impact of the 2041 note conversions and the March 2020 maturity of $500 million senior notes.
- The effects of the $74.5 million tax-asset reversal, future tax examinations and any further tax-law or court developments.
- Repurchase and dividend pace relative to liquidity needs, including the final settlement of the November 2019 accelerated repurchase.