LAM Research Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 27, 2015; the quarter and comparable prior-year quarter each included 13 weeks. Six-month results are for the periods ended December 27, 2015 and December 28, 2014. Amounts below are in U.S. dollars.
Business context and results
Lam supplies wafer-fabrication equipment and services, particularly in deposition, etch and clean. Management said 2015 demand had been strong, supported by customer capacity and technology investments, including FinFET, 3D NAND, multiple patterning and advanced packaging. It reported record calendar-year 2015 shipments and revenue of approximately $5.9 billion.
| Metric | Three months ended Dec. 27, 2015 | Prior-year quarter | Six months ended Dec. 27, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1.426 billion | $1.232 billion | $3.026 billion | $2.385 billion |
| Gross margin | $626.5 million; 43.9% | $536.7 million; 43.6% | $1.349 billion; 44.6% | $1.042 billion; 43.7% |
| Operating income | $238.8 million | $188.7 million | $574.3 million | $357.0 million |
| Net income | $223.0 million | $176.9 million | $511.7 million | $318.0 million |
| Diluted EPS | $1.28 | $1.00 | $2.94 | $1.80 |
Quarterly revenue rose 16% year over year, while it fell 11% sequentially from $1.600 billion. Management attributed the sequential decline mainly to slower memory and foundry investment; shipments declined 18% sequentially. Memory accounted for 65% of system shipments in the quarter. Gross margin declined from 45.1% in the prior quarter, primarily due to lower factory utilization, but was higher year over year on favorable product and customer mix. Six-month revenue increased 27% year over year, with management citing higher market spending and market-share gains.
Cash flow, liquidity and debt
- Operating cash flow was $743.5 million for the six months, versus $302.4 million in the prior-year period. Investing cash outflow was $64.8 million; financing cash outflow was $209.0 million. Cash and cash equivalents increased to $1.968 billion from $1.502 billion at fiscal year-end.
- Cash, investments and restricted cash and investments totaled approximately $4.7 billion at December 27, 2015. Current assets were $6.670 billion and current liabilities were $2.223 billion. Management said available cash and expected operating cash flows should support anticipated needs for at least 12 months.
- Reported current and long-term debt and capital-lease carrying amounts totaled approximately $2.378 billion; temporary equity associated with convertible notes was separately reported at $177.7 million. Interest expense was $38.6 million for the quarter and $63.2 million for six months, up substantially year over year, mainly due to the $1 billion senior-note issuance and bridge-financing cost amortization.
- The company had no borrowings under its $750 million revolving credit facility at quarter-end. A $900 million term-loan facility and a reduced $3.3 billion bridge commitment were arranged to help finance the proposed KLA-Tencor acquisition; term-loan funding was conditional on closing.
For the quarter, management reported approximately $295 million of cash generated from operations, $28 million of capital expenditures and $48 million of dividends paid. The company declared a $0.30 quarterly dividend per share. Six-month cash uses also included $111.2 million of treasury-stock purchases and $95.6 million of dividends paid.
Material changes, outlook and notable items
- Compared with the prior-year quarter, operating expenses rose to $387.7 million from $347.9 million. Research and development spending increased, reflecting higher headcount and product-development effort. SG&A included approximately $17 million of KLA-Tencor acquisition costs.
- The quarter recorded a $14.1 million income-tax benefit, producing a negative 6.7% effective tax rate; the six-month effective rate was 1.1%. Management cited geographic income mix, tax-credit extension, the Altera court ruling and acquisition-related tax effects, among other items.
- The proposed KLA-Tencor merger remained subject to shareholder and regulatory approvals and other closing conditions. Lam expected to fund the cash consideration, related costs and repayment of KLA-Tencor debt with cash and approximately $4.0 billion of financing, potentially including bridge borrowings, and expected to guarantee KLA-Tencor notes totaling $2.5 billion. The filing warns that financing, closing, integration, customer-retention and increased-leverage risks could adversely affect results. A termination fee of up to $290 million could apply in specified circumstances.
- Management gave no specific numerical revenue or earnings guidance in the supplied filing text. It described semiconductor-equipment demand as cyclical and reported a slowdown in memory and foundry investment in the second half of 2015, while expressing longer-term optimism about technology-driven demand and market-share opportunities.
- Other risks highlighted include dependence on a small number of customers (three customers represented 45% of six-month revenue), international sales (92% of six-month revenue), technology and product transitions, supply constraints, foreign-exchange exposure, debt covenants and potential goodwill or intangible-asset impairment. The company reported no legal proceeding it considered material and said any reasonably possible additional losses beyond accruals were expected to be immaterial.
Most important facts for investors to verify
- Whether the KLA-Tencor transaction received approvals, closed on the anticipated terms and obtained the planned financing; then verify the combined company’s actual debt, interest costs and covenant headroom.
- Whether the sequential decline in shipments and revenue continued, particularly in memory and foundry, and how factory utilization affected gross margin.
- Cash generation and liquidity after acquisition funding, debt service, dividends and share repurchases; distinguish unrestricted cash from restricted balances and assess the tax implications of offshore cash.
- The durability of reported earnings given acquisition expenses, higher interest costs and unusually low or negative effective tax rates.
- Customer concentration, Japanese customer acceptance timing and deferred revenue: the filing reported $395 million of deferred revenue and approximately $109 million of future revenue value on Japanese shipments awaiting acceptance at quarter-end.