Lam Research Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 28, 2014 (13 weeks); six-month period also compared with the corresponding 2013 periods. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Business context and results
Lam supplies wafer-fabrication equipment and services to semiconductor manufacturers, with products in deposition, etch and clean. Management said demand was strong during calendar 2014, supported by capacity investment and technology transitions including FinFET, 3D NAND and multiple patterning. In the December quarter, memory spending was strong while foundry spending declined slightly from the prior quarter.
| Metric | Quarter ended Dec. 28, 2014 | Year-over-year | Six months ended Dec. 28, 2014 | Year-over-year |
|---|---|---|---|---|
| Revenue | $1,232.2 | +$116.2; +10% | $2,384.6 | +$253.5; +12% |
| Gross profit / margin | $536.7 / 43.6% | $487.8 / 43.7% | $1,042.2 / 43.7% | $919.6 / 43.2% |
| Operating income / margin | $188.7 / 15.3% | $164.5 / 14.7% | $357.0 / 15.0% | $269.9 / 12.7% |
| Net income | $176.9 | $149.0 | $318.0 | $234.5 |
| Diluted EPS | $1.00 | $0.87 | $1.80 | $1.37 |
Quarterly revenue was up 7% sequentially from $1,152.4 million; diluted EPS rose from $0.80. Gross margin eased from 43.9% sequentially, primarily due to product mix. Sequential shipments increased 12% to $1.247 billion. Memory accounted for 53% of system shipments, foundry 32%, and logic/integrated device manufacturing 15%.
Cash flow, liquidity and debt
- Cash flow: For six months, operating cash flow was $302.4 million, investing cash outflow $371.0 million, and financing cash outflow $396.6 million. Capital expenditures were $103.2 million; operating cash flow less capex was approximately $199.2 million.
- Cash and investments: Cash and equivalents were $981.3 million and short-term investments $1,902.4 million at quarter-end. Including $155.5 million of restricted cash and investments, total cash and investments were approximately $3.039 billion, versus approximately $3.212 billion at June 29, 2014. About $2.4 billion was held outside the U.S.; most was U.S.-dollar denominated and generally subject to U.S. tax if repatriated.
- Liquidity: Current assets were $4.915 billion and current liabilities $1.709 billion. Management said operating cash flows and existing cash and investments should be sufficient for anticipated operations, investment, debt service, capital expenditures and distributions for at least 12 months.
- Debt: Convertible-note principal totaled approximately $1.600 billion: $450 million due 2016, $450 million due 2018 and approximately $699.9 million due 2041. The 2041 notes were classified as current because holders could convert under the disclosed stock-price condition. The $300 million revolving facility, maturing in 2019, had no borrowings; Lam reported covenant compliance. The facility requires at least $1.0 billion of unrestricted or unencumbered cash and investments.
Material changes, distributions and unusual items
- Six-month revenue and net income increased 12% and 36%, respectively, year over year. Higher operating income reflected revenue growth; research and development spending rose while SG&A declined over the six-month comparison.
- Quarterly R&D expense was $196.8 million, up from $174.5 million a year earlier, reflecting increased product-development compensation and supplies. Management cited continued investment in technology inflections.
- The effective tax rate was unusually low: 1.1% for the quarter and 6.9% for six months. Management attributed the rate primarily to geographic income mix, the R&D tax credit and recognition of previously unrecognized tax benefits, partly offset by other tax items.
- Lam sold substantially all of Peter Wolters, a Novellus-acquired subsidiary, during the six months and recorded a pretax gain of approximately $7.3 million.
- Six-month financing cash outflow included $374.0 million of treasury-stock purchases and $58.6 million of dividends paid. The company declared dividends of $0.18 per share for the quarter and $0.36 per share for six months. The April 2014 repurchase authorization had $488.5 million remaining at quarter-end.
- Inventory increased to $913.4 million from $740.5 million at June 29; accounts receivable rose to $944.0 million from $800.6 million. Management identified working-capital increases, particularly receivables and inventory, as uses of operating cash.
Outlook, risks and contingencies
The filing gives no specific numerical revenue, margin or EPS guidance. Management expressed a positive longer-term view based on technology transitions and potential market-share gains, but noted that quarterly demand is subject to semiconductor-industry cycles and customer spending variability. Management also cited product mix as a near-term influence on margins and continued elevated R&D investment.
- Key risks include cyclical customer capital spending, dependence on a limited number of large customers, competition and technology shifts, and the need to develop products that meet evolving manufacturing requirements.
- International sales and operations expose Lam to export restrictions, geopolitical and trade disruption, currency movements and tax consequences of repatriating offshore cash.
- Customer acceptance affects revenue timing; shipments to Japanese customers remain inventory until acceptance. Deferred revenue was $374 million, and anticipated future revenue value of Japanese shipments awaiting acceptance was approximately $53 million.
- Convertible debt may affect dilution and reported EPS. The company also disclosed operating-lease residual-value guarantees generally capped at about $191.2 million, potentially up to $220 million in aggregate under specified default circumstances.
- Routine litigation includes intellectual-property matters; the company stated that any reasonably possible additional loss beyond accrued amounts was not expected to be material. No material liability was recorded for specified other guarantees.
- Management identified the single-wafer clean reporting unit as potentially more exposed to goodwill impairment if actual performance falls short of projections. No significant goodwill change was reported in the quarter.
Important facts for investors to verify
- Whether semiconductor equipment demand and memory/foundry spending trends sustain revenue growth, and how much revenue depends on major customers and technology transitions.
- Whether higher inventory and receivables convert to shipments, customer acceptance and cash collection without margin or write-down pressure.
- The sustainability of the low effective tax rate and the potential tax cost of repatriating offshore cash.
- The timing and potential dilution or cash requirements associated with convertible-note conversion, particularly the 2041 notes classified as current.
- Future capital returns: dividend declarations, repurchases, and remaining authorization, in light of investment needs and debt covenants.
- Progress and expected financial impact of the Peter Wolters divestiture and adoption of the new revenue-recognition standard, for which Lam had not yet selected a transition method or determined the impact.