LAM RESEARCH CORPORATION — Q1 FY2016 Form 10-Q
Reporting period: Three months ended September 27, 2015 (13 weeks); comparisons are with the three months ended September 28, 2014 unless noted. Lam supplies wafer-fabrication equipment and services, including deposition, etch and clean products. Management attributed strong demand during calendar 2015 to semiconductor capacity investment and technology transitions, particularly in memory.
Financial performance
| Metric | Q1 FY2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,600.0 million | $1,152.4 million | +39% |
| Gross margin | $722.4 million; 45.1% | $505.5 million; 43.9% | +1.2 percentage points |
| Operating expenses | $386.9 million | $337.2 million | +15% |
| Operating income | $335.4 million | $168.3 million | +99% |
| Net income | $288.7 million | $141.1 million | +105% |
| Diluted EPS | $1.66 | $0.80 | +108% |
| Operating cash flow | $449.0 million | $141.2 million | +$307.8 million |
- Gross margin improved year over year on better factory efficiency and field absorption, along with favorable product mix. Sequentially, the margin rose from 43.3%, with management citing customer concentration and product mix; the prior quarter included a $10 million long-lived asset impairment.
- R&D was $234.2 million, or 14.6% of revenue, versus $188.9 million, or 16.4%, a year earlier. SG&A was $152.7 million, or 9.5% of revenue, versus $148.3 million, or 12.9%.
- Other expense, net, was $27.1 million, versus $5.6 million. Interest expense rose to $24.7 million from $15.7 million, mainly following the $1 billion senior-note issuance in March 2015. Losses on deferred-compensation-plan assets also contributed.
- Income tax expense was $19.6 million, for a 6.4% effective rate versus 13.3% a year earlier. The quarter included a $21.9 million discrete tax benefit related to the Altera Tax Court ruling; the Treasury had not withdrawn the relevant regulation, and Lam said it would continue monitoring the matter.
Cash, liquidity and debt
- Cash and cash equivalents were $1.744 billion at September 27, 2015, up from $1.502 billion at June 28. Cash, investments and restricted cash and investments totaled approximately $4.5 billion, versus $4.2 billion at fiscal year-end; approximately $2.5 billion was held outside the United States.
- Operating cash flow was $449.0 million. Investing activities used $79.2 million, including $49.5 million of capital expenditures and net purchases of available-for-sale securities. Financing activities used $123.2 million, including $98.4 million in treasury-stock purchases and $47.7 million in dividends.
- Total liabilities were $4.058 billion and stockholders’ equity was $5.358 billion. Balance-sheet current and long-term debt and capital-lease balances totaled approximately $2.370 billion; this includes convertible notes and capital leases. The filing also reports $178.7 million of temporary equity related to convertible notes.
- The company had no borrowings under its $300 million revolving credit facility and was in compliance with its covenants. The facility requires at least $1.0 billion of unrestricted or unencumbered cash and investments and limits consolidated indebtedness to capitalization to 0.5:1.
- Management said existing liquidity and anticipated operating cash flows were expected to fund operations, investments, debt service, capital expenditures, dividends and other needs for at least the next 12 months. It cautioned that industry conditions and capital-market access could affect future liquidity.
Business trends and changes
- Revenue increased 8% sequentially from $1.481 billion; shipments were $1.579 billion, down from $1.616 billion sequentially but up 42% year over year.
- Memory represented 72% of system shipments, compared with 60% sequentially and 44% a year earlier. Foundry accounted for 18%, and logic/integrated device manufacturing for 10%. Management said strong memory spending drove the sequential revenue increase.
- Three customers represented 48% of revenue in the quarter. Taiwan was the largest reported revenue region at 28%; non-U.S. sales were approximately 91% of revenue.
- Deferred revenue was $517 million, roughly unchanged from $518 million at June 28. Separately, the estimated future revenue value of systems shipped to Japanese customers but awaiting acceptance was $147 million, down from $164 million.
- Compared with the June 2015 quarter, operating expenses fell from $450.5 million, principally because that quarter included a $79 million goodwill impairment. Q1 FY2016 included approximately $7 million of clean-reporting-unit restructuring charges. Headcount rose by about 100 to approximately 7,300.
Outlook, material events and risks
- Management described customer demand as strong and said technology inflections—including FinFET, 3D NAND, multiple patterning and advanced packaging—were expanding deposition and etch opportunities. It expressed a longer-term expectation for demand to increase, but provided no specific numerical revenue or earnings guidance in the supplied filing text.
- On October 20, 2015, after quarter-end, Lam agreed to acquire KLA-Tencor for approximately $5.0 billion in cash and approximately 80 million Lam shares, valued at about $5.6 billion at announcement. Closing depends on shareholder, regulatory and other customary approvals. Lam intended to use cash on hand and debt financing; it had a $4.2 billion bridge-financing commitment, but definitive financing agreements had not been entered into as of the filing. The merger agreement was not subject to a financing contingency. Lam estimated post-merger external debt of approximately $8.6 billion.
- Key stated risks include semiconductor-equipment demand volatility, dependence on a concentrated customer base, international exposure, product and technology competition, supplier constraints, foreign-exchange and interest-rate movements, convertible-note dilution, and potential impairment charges. The proposed acquisition adds closing, integration, financing and leverage risks; a termination fee of up to $290 million may apply in specified circumstances.
- Lam reported no legal proceedings it considered material and stated that disclosure controls and procedures were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether memory-led demand and the unusually high memory share of shipments were sustained in subsequent periods, and how customer concentration affected orders and margins.
- Completion conditions, regulatory review, financing terms and final consideration for the KLA-Tencor transaction, as well as realized integration benefits and post-merger debt.
- The treatment and durability of the $21.9 million tax benefit, including developments in the Altera ruling and any changes to Lam’s effective tax rate.
- Convertible-note conversion status, upcoming maturities and any resulting share dilution; the 2041 Notes were convertible at holders’ option at quarter-end.
- Cash availability and repatriation considerations, particularly the substantial overseas cash balance and the company’s continued dividends and share repurchases.