Business context and reporting period
Lam Research supplies wafer-fabrication equipment and services, with core products in deposition, etch, and clean. Its fiscal 2018 Form 10-K covers the year ended June 24, 2018 (52 weeks), with comparisons to fiscal 2017 and 2016. The request metadata says “2017 Q4,” but the supplied filing is a fiscal 2018 annual report; its fourth-quarter results are for the three months ended June 24, 2018.
Financial performance and position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $11.08 billion | $8.01 billion | +38.2% |
| Gross margin | $5.17 billion; 46.6% | $3.60 billion; 45.0% | Margin +1.6 percentage points |
| Operating income | $3.21 billion | $1.90 billion | +68.9% |
| Net income | $2.38 billion | $1.70 billion | +40.2% |
| Diluted EPS | $13.17 | $9.24 | +42.5% |
| Cash from operations | $2.66 billion | $2.03 billion | Increased |
- Operating margin was approximately 29.0% and net margin approximately 21.5% in FY2018, based on reported revenue and income.
- Cash, cash equivalents, investments, and restricted cash/investments totaled about $5.2 billion, down from $6.3 billion. Cash and equivalents were $4.51 billion. About $4.1 billion of cash and investments was held outside the U.S.
- Working capital was $6.0 billion. Inventory rose to $1.88 billion from $1.23 billion, and accounts receivable increased to $2.18 billion from $1.67 billion.
- Debt outstanding was $2.49 billion at principal value ($2.37 billion carrying value); commercial paper was $360 million. The $1.25 billion revolving facility had no borrowings at year-end. The $2.1 billion principal amount of fixed-rate debt had a disclosed fair value of $3.5 billion.
- Operating cash flow was largely deployed toward $2.65 billion of share repurchases, $756 million of debt and capital-lease principal payments and related issuance costs, $308 million of dividends, and $273 million of capital expenditures and intangible assets.
Changes versus the prior comparable period
- Revenue growth reflected higher customer technology and capacity investment; shipments increased 30% to about $11.2 billion. Gross-margin improvement was attributed to favorable product/customer mix and higher revenue.
- Memory represented 78% of system shipments, up from 67%; foundry fell to 14% from 27%. Memory shipments rose, while foundry shipments declined amid lower leading- and trailing-edge investment.
- R&D expense rose 15% to $1.19 billion, though it declined to 10.7% of revenue from 12.9%. SG&A increased 14% to $762 million but fell to 6.9% of revenue from 8.3%.
- Cash and investments declined mainly due to repurchases. Backlog was approximately $2.0 billion versus $2.1 billion; the company cautions that cancellations and delivery-date changes make backlog an uncertain indicator of future revenue.
Outlook, commentary, risks, and unusual items
- Management said near-term demand could vary, but expects demand for its products and services to grow faster than overall wafer-fabrication-equipment spending over the longer term, supported by 3D scaling, multiple patterning, and advanced packaging. It targets market-share gains; the filing provides no specific numerical revenue or earnings guidance.
- The fiscal 2018 tax provision was $771 million, or a 24.5% effective rate, materially affected by U.S. tax reform. A provisional $883 million transition tax on accumulated foreign earnings, offset by reversal of previously accrued deferred taxes, added a net $595 million to tax expense. The estimate remained subject to measurement-period adjustments. The company intended to pay the transition tax over eight years.
- The December 2017 quarter included a provisional $757 million tax-reform charge; $116 million was reversed in the June 2018 quarter. The June quarter reported $1.02 billion net income, while the December quarter reported a $10 million net loss, primarily reflecting the tax charge and subsequent adjustment.
- A $42.5 million investment impairment arose from planned sales of selected foreign-held investments as part of the post-tax-reform cash-repatriation strategy. Lam acquired Coventor for $137.6 million in August 2017.
- Principal risks include semiconductor-cycle volatility; concentrated customers and products; international exposure (about 93% of revenue was outside the U.S.); memory/foundry spending shifts; competition and rapid technology change; supplier and outsourced-provider dependencies; export controls, tariffs, and geopolitical disruption; cyber incidents; and tax uncertainty. Five customers each contributed more than 10% of FY2018 revenue, with the largest at approximately 25%.
- Management stated that existing cash, investments, and expected operating cash flows should support operations, investment, debt service, capital expenditures, and distributions for at least the next 12 months. This is subject to industry and economic conditions.
- No material legal proceedings were identified. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended period: this filing reports FY2018 and includes Q4 ended June 24, 2018, not a standalone 2017 Q4 filing.
- Track the provisional U.S. tax-reform accounting, transition-tax payments, and the future effect of GILTI and other tax provisions.
- Assess whether elevated inventory and receivables convert to revenue and cash, and whether the approximately $2.0 billion backlog translates into shipments despite cancellation rights.
- Monitor customer concentration and the high memory exposure, particularly if customer capital spending or regional demand changes.
- Review convertible-note conversion and dilution exposure: the 2041 Notes were convertible at year-end, and related warrants could also dilute shareholders.
- Evaluate capital allocation: FY2018 repurchases were $2.65 billion, the board-authorized program had about $1.73 billion remaining at year-end, and dividends declared were $2.55 per share.