Lam Research Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter of 2019, the three months ended September 23, 2018. The comparable quarter ended September 24, 2017. Lam Research supplies wafer fabrication equipment and services to the semiconductor industry, including memory, foundry, and logic/integrated device manufacturers.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $2.331 billion | $2.478 billion | Down 6% |
| Gross margin | $1.058 billion; 45.4% | $1.149 billion; 46.4% | Margin down 1.0 percentage point |
| Operating expenses | $466 million | $456 million | Up 2% |
| Operating income | $592 million; 25.4% of revenue | $693 million; 28.0% | Down 15% |
| Net income | $533 million | $591 million | Down 10% |
| Diluted EPS | $3.23 | $3.21 | Up 1% |
| Operating cash flow | $720 million | $858 million | Down 16% |
Revenue comparability: Lam adopted ASC 606 on June 25, 2018 using the modified retrospective method; prior-period results were not restated. ASC 606 increased current-quarter reported revenue by $248 million and cost of goods sold by $106 million versus the previous accounting method. Revenue would have been $2.082 billion without ASC 606, so reported year-over-year revenue change is not directly comparable to the prior-year figure. Management said adoption did not otherwise significantly affect quarterly operating results.
Cash, liquidity, and debt: Cash and cash equivalents were $2.568 billion and investments were $1.051 billion at September 23; restricted cash and investments were another $256 million. Total cash, cash equivalents, investments, and restricted balances were approximately $3.9 billion, down from $5.2 billion at June 24, mainly due to repurchases and dividends. Current assets were $7.516 billion and current liabilities $2.825 billion. Debt at carrying value was $2.307 billion, including $360 million of commercial paper; the company also had no borrowings on its $1.25 billion revolving credit facility and was compliant with its financial covenants.
Operating cash flow of $720 million included $533 million of net income and was supported by lower accounts receivable. Investing activities used $672 million, mainly net purchases of securities and $56 million of capital expenditures. Financing activities used $2.0 billion, including $1.736 billion of treasury-stock repurchases, $174 million of dividends paid, and $80 million of debt principal payments.
Material changes and management commentary
- Revenue declined 6% year over year, which management attributed to lower semiconductor equipment demand. Revenue was down 25% from the June 2018 quarter. Gross margin declined year over year primarily due to lower factory utilization.
- System revenue mix was 77% memory, 17% foundry, and 6% logic/integrated device manufacturing. Japan and China represented 29% and 25% of revenue, respectively; Korea represented 16%.
- Management described near-term industry demand as variable, while expecting technology inflections, including 3D scaling and multiple patterning, to support longer-term growth in Lam’s served market. It expects its products and services to grow faster than overall wafer fabrication equipment spending over time, assuming continued market-share gains. The filing provides no specific numerical revenue or earnings guidance.
- Lam repurchased approximately 7.8 million shares under its program during the quarter. It entered into accelerated share repurchase agreements for $1.4 billion in August, with final settlement expected by February 15, 2019. The remaining authorization under the program was approximately $108 million at quarter-end.
- Approximately $79 million principal amount of 2041 convertible notes converted during the quarter; an additional $6 million conversion notice was received through October 19. The notes were classified as current because they were convertible at the holder’s option at quarter-end.
Taxes, risks, and contingencies
- Income tax expense was $58 million, an effective rate of 9.8%, compared with 14.1% in the prior-year quarter. The rate reflects U.S. tax reform, foreign earnings taxed at lower rates, and the new GILTI provision. The estimate of the one-time transition tax was revised to $919.5 million and remains subject to measurement-period adjustments; the filing says future adjustments could be material.
- Key risks include volatility in semiconductor capital spending, customer and product concentration, international exposure and potential trade disruptions, competition and technology transitions, dependence on key suppliers, and foreign-exchange, tax, cybersecurity, and debt-related risks.
- The company reported no legal proceedings it considered material and no accrual for known litigation matters, stating that a material loss was not considered probable. Lease-related residual-value guarantees were generally up to $220.4 million; guarantees and standby letters of credit could require up to $26.1 million in future payments, though management did not consider payment probable.
- Management stated that existing cash, short-term investments, and expected operating cash flows should be sufficient for at least the next 12 months. This assessment is subject to uncertainty in global markets and semiconductor demand.
Investor verification points
- Compare revenue trends using the ASC 606 adoption disclosure; prior-year results were not restated, and the accounting change added $248 million to current-quarter revenue.
- Monitor semiconductor demand, factory utilization, and customer and geographic mix for implications for revenue and gross margin.
- Track cash and investment balances alongside substantial repurchases, dividends, upcoming convertible-note settlements, and debt maturities.
- Review future updates to the provisional transition-tax estimate and the company’s GILTI accounting and tax assumptions.
- Check final settlement of the $1.4 billion accelerated repurchase agreements and whether the remaining buyback authorization or dividend policy changes.