Lam Research Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the 13 weeks ended September 27, 2020. The comparable quarter ended September 29, 2019. The filing was signed October 27, 2020.
Financial performance
| Metric | Quarter ended Sep. 27, 2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $3.177 billion | $2.166 billion | +47% |
| Gross margin | $1.506 billion; 47.4% | $981.7 million; 45.3% | +2.1 percentage points |
| Operating income | $961.1 million | $537.5 million | +79% |
| Net income | $823.5 million | $465.8 million | +77% |
| Diluted EPS | $5.59 | $3.09 | +81% |
| Cash from operations | $642.5 million | $464.0 million | +$178.5 million |
Operating expenses were $545.1 million, including $355.4 million of R&D and $189.7 million of SG&A. The effective tax rate was 10.7%, versus 11.2% a year earlier. Other expense, net, was $38.8 million, including $52.1 million of interest expense and a reported loss on extinguishment of debt within “other, net.”
Liquidity, debt and capital allocation
- Cash and cash equivalents were $4.129 billion; investments were $2.529 billion; restricted cash and investments were $253.5 million. Together, these balances were approximately $6.9 billion, down slightly from $7.0 billion at June 28, 2020.
- Debt at carrying value was $5.783 billion. The company had no borrowings under its $1.25 billion revolving credit facility or commercial paper program and reported compliance with credit-facility covenants.
- Operating cash flow was partly offset by $801.7 million of investing cash outflow, mainly net purchases of available-for-sale securities, and $631.5 million of financing cash outflow. Capital expenditures were $62.8 million.
- The company paid $167.1 million in dividends and repurchased $448.6 million of shares during the quarter. It declared a quarterly dividend of $1.30 per share. Approximately $1.31 billion remained available under the $5.0 billion repurchase authorization.
Business context and changes
Lam supplies wafer fabrication equipment and customer support services, primarily in deposition, etch and clean. Revenue rose 14% from the June 2020 quarter, which management attributed mainly to higher foundry-customer investment. Compared with the prior-year quarter, system revenue increased to $2.148 billion from $1.365 billion; customer support-related revenue and other increased to $1.029 billion from $800.5 million.
Foundry represented 36% of revenue, up from 25% a year earlier; memory represented 58%, down from 64%; and logic/integrated device manufacturing represented 6%, down from 11%. China accounted for 37% of revenue, versus 27% a year earlier. Gross margin improved year over year on customer and product mix, partly offset by higher factory costs and lower field utilization associated with COVID-19 disruptions.
Outlook, commentary and risks
- Management described customer demand as strong and cited increased wafer fabrication equipment spending, supported by demand in high-performance computing, mobile phones and 5G. It expects semiconductor secular demand and technology changes—including 3D scaling, multiple patterning and advanced packaging—to support longer-term opportunity.
- No specific forward revenue or earnings guidance is provided in the filing. Management said current cash, short-term investments and expected operating cash flows should support anticipated operations, investment, debt service, capital expenditures, dividends and repurchases for at least the next 12 months.
- COVID-19 continued to affect operations and supply chains. Management cited higher freight and logistics costs and warned that ongoing disruptions could negatively affect revenue and gross margin.
- U.S.–China trade measures and export-license requirements create uncertainty for sales to China and for equipment used in transactions involving Huawei. China generated approximately 37% of quarterly revenue; management did not then anticipate a material impact from the cited rule but emphasized that its application and effects were uncertain.
- Other key risks include cyclical and variable semiconductor-equipment demand, dependence on large customers and key suppliers, international and currency exposure, intense competition, technology transitions, and the company’s debt obligations. The $800 million 2021 Senior Notes were classified as current; the 2041 convertible notes were also convertible at the holder’s option at quarter-end.
- The company reported no material legal proceedings or material litigation accrual. It disclosed a $298.4 million maximum residual-value guarantee for certain California facility leases and up to $64.5 million of potential payments under guarantees and standby letters of credit; management did not consider material payment probable.
Most important facts to verify
- Confirm quarterly growth and margin improvement against customer/product mix, foundry demand, factory output, field utilization and COVID-related costs.
- Monitor China revenue exposure and any changes in export-license requirements, including developments affecting Huawei-related demand.
- Review liquidity and debt maturities, particularly the $800 million 2021 Notes and potential settlement of the convertible notes.
- Track inventory growth, receivables and operating working-capital use, as well as the sustainability of operating cash generation.
- Assess the pace of share repurchases and dividends relative to cash generation, investment needs and debt service.