Business context and reporting period
Lam Research Corporation is a global supplier of wafer fabrication equipment and services to semiconductor manufacturers. This unaudited Form 10-Q covers fiscal Q1 2018, the 13 weeks ended September 24, 2017; comparable quarter ended September 25, 2016. The company attributed demand to increased logic investment and continued memory investment, amid technology shifts including 3D architectures and multiple patterning.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $2.478 billion | $1.632 billion | +52% |
| Gross margin | $1.149 billion; 46.4% | $716.2 million; 43.9% | Margin +2.5 percentage points |
| Operating income | $693.2 million | $315.9 million | +119% |
| Net income | $590.7 million | $263.8 million | +124% |
| Diluted EPS | $3.21 | $1.47 | +118% |
| Operating cash flow | $858.3 million | $473.2 million | +81% |
- Operating margin was approximately 28.0%; net margin approximately 23.8% (calculated from reported figures).
- Cash and cash equivalents were $2.406 billion; investments $3.776 billion; restricted cash and investments $256.0 million. Management reported total cash, investments, and restricted balances of approximately $6.4 billion.
- Total debt at carrying value was $2.416 billion ($2.577 billion at par); $639.3 million was classified as current. The company had no revolver borrowings at quarter-end.
- Current assets were $9.229 billion and current liabilities $2.789 billion. Inventory was $1.328 billion, up from $1.233 billion at June 25, 2017.
- Quarterly dividends declared were $0.45 per share. Cash dividends paid were $72.7 million; share repurchases and related treasury-stock purchases used $155.4 million.
Material changes versus comparable periods
- Revenue rose 52% year over year, while shipments increased 39%. Sequentially, shipments declined 6% but revenue rose 6%; management attributed the difference mainly to timing of revenue recognition.
- Gross margin improved year over year and sequentially, principally from favorable customer and product mix.
- Operating expenses were $456.1 million, up from $400.3 million year over year but down from $461.0 million sequentially. R&D was $275.1 million and SG&A $181.0 million.
- Other expense, net, narrowed to $5.5 million from $23.2 million, principally reflecting lower interest expense after prior debt repayments and term-loan termination.
- The effective tax rate was 14.1%, versus 9.9% a year earlier. The filing cites income mix among tax jurisdictions and a deferred-tax accrual related to foreign earnings expected to be repatriated.
- Operating cash flow increased, while investing cash flow was a $303.9 million outflow and financing cash flow a $528.8 million outflow. Financing uses included $301.7 million of debt principal payments, primarily associated with convertible notes.
Outlook, commentary, risks, and unusual items
- No specific numerical revenue, margin, or EPS guidance is provided in this filing. Management said demand remained stable, with increased logic investment and continued memory investment, and expects demand for its products and services to grow faster than overall wafer fabrication equipment spending as technology inflections and market-share gains support demand.
- Management said current cash, investments, and expected operating cash flows should be sufficient for anticipated operations, investment, debt service, capital expenditures, repurchases, and dividends for at least the next 12 months. Future liquidity remains dependent in part on revenue, cost management, and market access.
- On October 13, 2017, after quarter-end, the company amended its revolving credit agreement, increasing capacity from $750 million to $1.25 billion and extending maturity to October 13, 2022; an option may permit total commitments of up to $1.85 billion.
- Convertible-note holders converted approximately $301.7 million principal during the quarter; the company anticipated conversions could continue as the 2018 Notes approach maturity. Conversion, warrants, and related share-count effects may dilute shareholders and affect EPS.
- The company acquired Coventor, Inc. on August 28, 2017, for $137.6 million. Preliminary allocation included $97.8 million of goodwill and $48.5 million of intangible assets; valuations remained subject to change.
- Key risks include cyclical and variable semiconductor-equipment demand, customer and product concentration, international exposure (about 94% of quarterly revenue), export and geopolitical risks, supplier constraints, currency movements, rapid technology change, and debt and dilution. The company reported no material legal proceedings or material litigation accrual.
- Adoption of stock-compensation guidance resulted in a $40.9 million cumulative adjustment to retained earnings. The company also noted that the forthcoming revenue-recognition standard could change timing, with certain system revenue generally expected to be recognized earlier; its impact remained under evaluation.
Important facts for investors to verify
- Whether revenue growth and higher margins are sustained, given the filing’s emphasis on revenue-recognition timing and favorable product and customer mix.
- How customer spending, memory-versus-logic mix, shipment trends, and deferred revenue develop; deferred revenue was $938 million, and estimated future revenue value of systems awaiting Japanese customer acceptance was $344 million.
- The pace and cash/share effects of convertible-note conversions, repurchases, and dividends, including the dilution impact of notes and warrants.
- Whether inventory growth, warranty reserves ($168.3 million), and acquisition-related goodwill and intangible valuations create future write-down or expense risks.
- Developments in tax examinations and unrecognized tax benefits; the filing says a $15 million to $50 million reduction may be possible over the next 12 months.
- Progress on revenue-standard adoption and any changes to reported revenue timing, business processes, or controls.