LAM RESEARCH CORP quarterly report, Q1 FY2021

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

MetricQuarter ended Sep. 27, 2020Prior-year quarterChange
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.