Lam Research Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 25, 2016 (13 weeks). Comparisons are with the quarter ended September 27, 2015 unless noted. Lam supplies wafer fabrication equipment and services, including deposition, etch and clean products, to semiconductor manufacturers.
Key financial results
| Metric | Quarter ended Sep. 25, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1.632 billion | $1.600 billion | +2% |
| Gross margin | $716.2 million; 43.9% | $722.4 million; 45.1% | Margin down 1.2 percentage points |
| Operating income | $315.9 million | $335.4 million | Down about 6% |
| Net income | $263.8 million | $288.7 million | Down about 9% |
| Diluted EPS | $1.47 | $1.66 | Down about 11% |
| Operating cash flow | $473.2 million | $449.0 million | Up about 6% |
Research and development expense was $235.2 million. Selling, general and administrative expense was $165.0 million and included $10.0 million of KLA-Tencor acquisition-related costs. The effective tax rate was 9.9%, versus 6.4% a year earlier; management attributed the increase primarily to the geographic mix of income and a prior-year tax benefit.
Cash flow, liquidity and debt
- Cash and cash equivalents were $5.862 billion; investments were $1.353 billion and restricted cash and investments were $255.6 million. Together these totaled about $7.47 billion at quarter-end, up from $7.08 billion at June 26, 2016.
- Operating cash flow was $473.2 million. Investing activities provided $376.8 million, principally reflecting net sales and maturities of available-for-sale securities; capital expenditures were $42.0 million. Financing activities used $29.5 million, including $48.1 million of dividends paid.
- Total debt at carrying value was $4.324 billion ($4.550 billion at par). The company had no borrowings under its $750 million revolving credit facility and reported compliance with its financial covenants. Current liabilities were $2.486 billion against current assets of $9.599 billion.
- The board-declared dividend was $0.30 per share. The company suspended repurchases under its authorized program; $229.1 million remained available under that authorization.
Material changes and management commentary
- Shipments were $1.708 billion, up 8% from both the prior quarter and year-ago quarter. Revenue rose 6% sequentially, with management citing stronger foundry customer investment and technology and capacity spending.
- Gross margin fell to 43.9% from 45.2% in the prior quarter and 45.1% a year earlier, mainly due to unfavorable customer and product mix. Foundry represented 36% of system shipments, up from 27% in the prior quarter; memory represented 56%, down from 66%.
- Deferred revenue increased to $704 million from $566 million at June 26, 2016, primarily due to shipment timing. This excludes Japanese systems for which revenue is not recognized until customer acceptance; their estimated future revenue value was about $65 million at quarter-end.
- Management said demand had strengthened and expected it to strengthen further over the next quarter, but the filing provides no quantified revenue, margin or EPS guidance. Management expected available cash, investments and operating cash flows to fund anticipated needs for at least 12 months.
Outlook, risks and unusual items
- On October 5, 2016, after quarter-end, Lam and KLA-Tencor mutually terminated their merger agreement; neither party owed a termination fee. The related $1.530 billion term-loan commitments automatically terminated.
- Following the merger termination, Lam redeemed its $600 million 2023 Notes and $1.0 billion 2026 Notes on October 13, 2016, at 101% of principal plus accrued interest of about $21 million. The filing says the redemption reduced cash and investments by approximately $1.6 billion. It also anticipated about $2.5 million of debt issuance-cost expense and $3.7 million of term-loan issuance-cost expense in the following quarter.
- Key risks include semiconductor-equipment demand cyclicality, dependence on a limited number of customers, customer and product mix effects on margins, competition and technology shifts, supplier constraints, international and foreign-exchange exposure, and debt service and convertible-note dilution. Three customers accounted for 51% of quarterly revenue; about 92% of revenue was from outside the United States.
- The company disclosed ordinary-course legal matters, including intellectual-property claims, but said it was not party to any material legal proceeding and did not expect reasonably possible additional losses to be material. Operating-lease residual-value guarantees were generally capped at about $220.4 million, with specified default circumstances potentially increasing exposure up to $250 million in aggregate.
Important facts for investors to verify
- Whether the expected demand strengthening materialized, and whether foundry growth and customer mix support revenue and margins.
- The cash and debt effects of the $1.6 billion note redemption, including related interest and issuance-cost charges.
- How convertible notes and warrants affect diluted share count and EPS; diluted average shares were 180.0 million versus 160.6 million basic shares.
- Whether customer concentration, international exposure and deferred revenue or Japanese customer acceptance timing change materially.
- Whether dividends and any future repurchases remain sustainable given onshore cash availability, capital needs and debt obligations.