Lam Research Corporation — FY2019 Form 10-K
Period note: The filing is for the fiscal year ended June 30, 2019, not a standalone 2018 Q4 filing. It also reports the quarter ended June 30, 2019. Fiscal 2019 comprised 53 weeks versus 52 weeks in fiscal 2018.
Business context and reporting period
Lam supplies wafer fabrication equipment and services, with core offerings in deposition, etch, and clean. Its customers manufacture memory, foundry, and logic devices. Fiscal 2019 system revenue mix was 70% memory, 20% foundry, and 10% logic/IDM. Four customers each represented 10% or more of annual revenue; sales are heavily weighted to Asia.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $9.654 billion | $11.077 billion |
| Gross margin | $4.358 billion; 45.1% | $5.165 billion; 46.6% |
| Operating income | $2.465 billion | $3.213 billion |
| Net income | $2.191 billion | $2.381 billion |
| Diluted EPS | $13.70 | $13.17 |
| Cash from operations | $3.176 billion | $2.656 billion |
| Capital expenditures | $303 million | $273 million |
| Cash, investments and restricted cash/investments | Approximately $5.7 billion | Approximately $5.2 billion |
| Debt outstanding, principal | $4.512 billion | $2.487 billion |
| Working capital | $6.189 billion | $6.000 billion |
Fourth-quarter FY2019 revenue was $2.361 billion, operating income $617 million, net income $542 million, and diluted EPS $3.51. Cash from operations was primarily deployed to $3.781 billion of share repurchases, $678 million of dividends, and capital expenditures; debt issuance provided $2.477 billion of net proceeds. The quarterly dividend was $1.10 per share during FY2019; dividends declared for the full year were $4.40 per share.
Material changes versus the prior comparable period
- Revenue fell 12.9% year over year, reflecting lower customer demand for semiconductor equipment; gross margin rate declined 1.5 percentage points, primarily because of lower factory utilization.
- Operating expenses decreased 3.0%, mainly from lower employee-related costs and acquired-intangible amortization, partly offset by restructuring charges. R&D remained essentially flat at $1.191 billion.
- Net income declined 7.9%, while diluted EPS rose 4.0%, supported in part by a lower diluted share count. The effective tax rate fell to 10.4% from 24.5%; FY2018 included the U.S. tax reform transition-tax impact.
- Debt principal rose about $2.0 billion following a $2.5 billion senior-note offering in March 2019. The company also repurchased $3.8 billion of shares in FY2019.
- Backlog decreased to $1.6 billion at June 30, 2019, from $2.0 billion a year earlier. Orders may be cancelled or rescheduled, so backlog is not necessarily indicative of future revenue.
Comparability: Lam adopted ASC 606 in FY2019 using the modified retrospective method. The company reported FY2019 revenue $604 million higher than it would have under the prior standard, primarily due to timing of system-sale recognition; prior-year results were not restated. The 53-week FY2019 also differs from FY2018’s 52 weeks.
Outlook, commentary, risks, and unusual items
- Management expects near-term industry and customer-investment variability. Over the longer term, it believes 3D scaling, multiple patterning, advanced packaging, and market-share gains can expand Lam’s served market and support demand growing faster than overall wafer-fab-equipment spending. The filing provides no specific numerical revenue or earnings guidance.
- Principal risks include semiconductor-cycle volatility, concentrated customers and products, competition and technology transitions, reliance on international sales (92% of FY2019 revenue), trade restrictions and tariffs, export licensing, and dependence on key suppliers and outsourced providers.
- Liquidity was described as sufficient for anticipated operations, investment, debt service, capital expenditures, dividends, and repurchases for at least the next 12 months. The $1.25 billion revolving facility and $1.25 billion commercial-paper program had no borrowings outstanding at year-end.
- The $868.4 million U.S. tax-reform transition-tax liability is payable over eight years. A tax-court matter concerning Altera could have an estimated potential impact of approximately $75 million; outcome and timing remain uncertain.
- The $2.625% convertible notes due 2041 were convertible at the holder’s option at year-end and classified as current; $27.9 million additional principal was reported as converted after year-end for settlement in the following quarter. The filing also identifies $373 million of uncertain-tax-benefit liabilities whose ultimate settlement timing and amount could not be reasonably estimated.
- Lam reported no material pending legal proceedings and no goodwill or long-lived-asset impairment in FY2019. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether customer spending and factory utilization recover, and how memory-heavy revenue and the lower backlog affect future sales and margins.
- The effect of ASC 606 timing differences and the extra fiscal week when comparing reported growth across periods.
- Debt maturities, convertible-note dilution or cash settlement, interest costs, and the company’s continued use of borrowing to support capital returns.
- Customer concentration, export-control and trade developments, and supplier or outsourcing disruptions, particularly across Asia.
- Tax exposures, including the Altera matter, unrecognized tax benefits, and scheduled transition-tax payments.