Lam Research Corporation — Form 10-Q summary
Period clarification: The filing covers the fiscal quarter ended March 27, 2016 (fiscal Q3 2016), and the nine months then ended. This differs from the request metadata’s “2015 Q3.” Comparisons are with the quarter ended March 29, 2015, and the comparable nine-month period, unless noted otherwise. Amounts are in U.S. dollars.
Business context and reporting period
Lam supplies wafer-fabrication equipment and services, particularly for deposition, etch, and clean processes. Results are exposed to semiconductor manufacturers’ capital-spending cycles and to demand concentrated among a small number of customers. The March 2016 quarter had 13 weeks.
Financial performance and position
| Metric | Quarter ended March 27, 2016 | Comparable period / change |
|---|---|---|
| Revenue | $1.314 billion | $1.393 billion; down 6% year over year and 8% sequentially |
| Gross margin | $571.3 million; 43.5% of revenue | 43.1% a year earlier; 43.9% in the prior quarter |
| Operating income | $190.8 million | $240.0 million a year earlier |
| Net income | $143.5 million | $206.3 million a year earlier |
| Diluted EPS | $0.82 | $1.16 a year earlier; $1.28 in the prior quarter |
For the nine months ended March 27, 2016, revenue was $4.340 billion, up 15% year over year; gross margin was $1.920 billion (44.2% of revenue), compared with $1.643 billion (43.5%); and net income was $655.1 million, compared with $524.3 million. Diluted EPS was $3.76 versus $2.96.
- Cash flow: Nine-month operating cash flow was $926.5 million, up from $493.4 million. Capital expenditures and intangible-asset purchases were $123.6 million. Cash and cash equivalents increased to $2.232 billion from $1.502 billion at June 28, 2015.
- Liquidity: Cash, investments, and restricted cash and investments totaled approximately $4.8 billion at March 27, 2016. Management said available liquidity and expected operating cash flows should support anticipated needs for at least 12 months. Approximately $2.8 billion of these balances was held outside the United States.
- Debt: The balance sheet reported $979.0 million of current convertible notes and capital leases and $1.407 billion of senior notes, convertible notes, and capital leases, less current portion. The $450 million 2016 convertible notes were nearing May 2016 maturity; $700 million of 2041 notes were classified as current because they were convertible at holders’ option. A $900 million term-loan facility was arranged subject to conditions tied to the proposed KLA-Tencor acquisition; it was not reported as funded. The $750 million revolving facility had no borrowings outstanding.
- Capital returns: The company declared a $0.30 quarterly dividend per share, versus $0.18 a year earlier. Nine-month dividends paid were $143.1 million. No purchases were made under the board-authorized repurchase program in the December or March quarters; shares withheld for employee tax obligations were separate from that program.
Material changes and management commentary
- Quarterly shipments rose 12% sequentially to $1.446 billion, driven mainly by increased 3D NAND capacity investment, but were down 3% year over year. Management said demand began to improve in the March quarter and expected it to strengthen over the next quarter.
- Quarterly revenue nevertheless declined sequentially and year over year. Management attributed the sequential gross-margin decline to customer concentration and less favorable product mix, partly offset by improved factory utilization.
- Memory accounted for 70% of system shipments in the quarter, compared with 65% in the prior quarter; foundry accounted for 23% and logic/integrated device manufacturing for 7%.
- Research and development expense was $221.5 million for the quarter and $676.5 million for nine months. Management cited investment in 3D NAND, FinFET, multiple patterning, and support for its installed equipment base. Nine-month SG&A included $31.7 million of acquisition-related costs.
- The effective tax rate was 10.9% for the quarter and 3.4% for the nine months. The filing attributes the low rates to factors including geographic income mix, tax credits, the Altera court ruling, acquisition-related tax effects, and other tax items; these rates may not be indicative of future periods.
Outlook, risks, and unusual items
- KLA-Tencor transaction: The proposed merger remained subject to regulatory and other closing conditions. Both companies’ stockholders had approved relevant merger matters. Lam expected to fund the cash consideration, related expenses, and repayment of KLA-Tencor’s term loan using cash and approximately $4 billion of financing; Lam also expected to become obligated for approximately $2.5 billion of KLA-Tencor notes. The filing highlights financing, regulatory, integration, customer-retention, leverage, and potential termination-fee risks; a termination fee could reach $290 million in specified circumstances.
- Debt-related costs: Interest expense for the quarter was $38.1 million, versus $17.6 million a year earlier. The increase primarily reflected the $1 billion senior-note issuance and amortization of bridge-financing costs. Nine-month interest expense was $101.3 million, versus $49.1 million.
- Market and operating risks: Semiconductor-equipment demand is cyclical and customer spending is concentrated. Other disclosed risks include competition and technology transitions, dependence on key customers and suppliers, international and export-control exposure, foreign-exchange and interest-rate movements, and possible impairment of goodwill or other assets.
- Lam reported no legal proceedings it believed to be material and no material change in internal control over financial reporting during the quarter. It reported no goodwill impairment in the quarter; a $79.4 million goodwill impairment had been recorded in fiscal 2015.
- No specific revenue, margin, or EPS guidance was provided in the supplied filing text. Management’s stated near-term outlook was that demand was expected to strengthen over the next quarter.
Important facts for investors to verify
- Whether the proposed KLA-Tencor merger received required regulatory approvals, closed on expected terms, and obtained the planned financing—and the resulting combined debt and integration costs.
- Whether the anticipated strengthening in demand materialized, particularly in 3D NAND, and how customer concentration and product mix affected revenue and margins.
- The repayment, conversion, or refinancing outcome for the 2016 convertible notes and the status of other convertible debt and related dilution.
- Whether the unusually low effective tax rate and associated discrete tax benefits recur, and how repatriation of offshore cash would affect taxes and usable liquidity.
- Whether cash generation, dividends, and any future repurchases remain consistent with acquisition financing needs and debt covenants.