Lam Research Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 25, 2011. The quarter comprised 13 weeks. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Lam designs, manufactures, markets, refurbishes, and services semiconductor fabrication equipment, with a focus on etch and single-wafer clean processing. The semiconductor equipment market is cyclical. Management said customer demand weakened in the second half of calendar 2011 as manufacturers slowed capacity expansion amid macroeconomic uncertainty, although investment in leading-edge technologies continued.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $584.0 | $870.7 | $1,264.4 | $1,676.6 |
| Gross margin | $234.8 | $407.4 | $518.7 | $784.8 |
| Gross margin as % of revenue | 40.2% | 46.8% | 41.0% | 46.8% |
| Operating income | $47.5 | $241.1 | $146.9 | $465.1 |
| Net income | $33.2 | $221.9 | $105.1 | $415.6 |
| Diluted EPS | $0.27 | $1.78 | $0.86 | $3.32 |
- Compared with the September 2011 quarter, revenue fell 14% to $584.0 million; shipments fell 3% to $563 million. Revenue was down 33% year over year. Management attributed the decline primarily to the pace and timing of customer investments.
- Q2 gross margin declined to 40.2% from 41.7% in the prior quarter and 46.8% a year earlier. Management cited lower factory and field utilization and product mix.
- Q2 R&D expense was $104.0 million, up from $90.5 million a year earlier; SG&A was $83.3 million, up from $75.9 million. Higher R&D reflected product-development spending and headcount; SG&A included Novellus acquisition-related costs.
- Six-month operating cash flow was $255.9 million, versus $441.3 million a year earlier. Investing cash use was $131.5 million and financing cash use was $107.3 million. Capital expenditures and intangible-asset purchases were $42.4 million.
- At December 25, cash and cash equivalents were $1.507 billion, short-term investments $712.9 million, and restricted cash and investments $165.2 million. The restricted balance primarily collateralized facility lease obligations; total cash, short-term investments, and restricted investments were approximately $2.4 billion.
- Current assets were $3.213 billion and current liabilities $593.6 million. Total liabilities were $1.515 billion. Long-term debt, convertible notes, and capital leases were reported at $749.1 million long term and $2.8 million current. The two convertible note issues had $900 million aggregate principal outstanding, with $450 million due in 2016 and $450 million in 2018.
- Management said available cash and short-term investments were expected to support operations, investments, debt service, and capital expenditures for at least 12 months.
Material changes and notable items
- Six-month revenue fell 25% year over year and net income fell 75%. The lower business volume and utilization reduced gross margin; higher R&D and SG&A added expense.
- Lam announced a proposed all-stock acquisition of Novellus Systems on December 14, 2011, estimated at announcement at approximately $3.3 billion based on Lam’s share price. Completion remained subject to shareholder, regulatory, and other customary approvals.
- In connection with the transaction, the board authorized a new $1.6 billion share-repurchase program, replacing prior authorizations. During the six months, Lam repurchased $184.9 million of shares under the program; structured repurchase arrangements also involved cash settlements and a $75 million prepayment that settled in January 2012 for $79.2 million.
- Lam’s $900 million convertible notes carry coupon rates of 0.5% and 1.25%. Note hedges and warrants were designed to reduce potential dilution, but the notes, conversion terms, and warrants can affect future dilution and EPS. Six-month interest expense was $18.6 million, largely reflecting the notes.
- Other notable items included a $1.7 million impairment of a strategic private-equity investment, $1.7 million of facility impairment charges, and a $0.9 million restructuring-liability release. Foreign-exchange forward-contract losses and fair-value changes also affected other income and expense.
Outlook, risks, and contingencies
- Management provided no specific numerical revenue, margin, or EPS guidance in the supplied filing text. It cautioned that semiconductor-equipment demand forecasts are uncertain and that quarterly results could be volatile over the next several quarters.
- Key stated risks include semiconductor-industry cyclicality, changes in customer capital spending and acceptance timing, customer and product concentration, competition and rapid technology shifts, reliance on key suppliers and outsource providers, and international, export-control, and foreign-exchange exposures.
- The Novellus transaction could fail to close or encounter integration difficulties; the filing identifies both as risks. Integration and acquisition-related costs were already affecting SG&A.
- Gross unrecognized tax benefits were $182.0 million, with $17.1 million accrued for related interest and penalties. IRS and California tax examinations were ongoing; no significant adjustments had been proposed at the reporting date. The company could not estimate the timing or amount of future settlements.
- Facility leases included restricted collateral of approximately $164.9 million and residual-value guarantees generally up to approximately $141.7 million, potentially reaching the lessors’ aggregate investment of $164.9 million in specified default circumstances. Contractual obligations also included $260.0 million of purchase obligations and $28.9 million of operating lease payments.
- Lam reported periodic third-party intellectual-property claims and said it did not expect them to materially affect results, while noting that future litigation or licensing outcomes could be adverse. Management concluded disclosure controls were effective at a reasonable-assurance level; no material change in internal control was reported.
Important facts for investors to verify
- Whether the Novellus acquisition received required shareholder and regulatory approvals, its final transaction value, and expected integration costs and benefits.
- Whether the demand slowdown continued, particularly in customer capacity spending, shipments, revenue, factory utilization, and gross margins.
- How the $1.6 billion repurchase authorization was used and its effect on cash, share count, and capital available for the acquisition and operations.
- The terms and potential dilution of the convertible notes, hedges, and warrants, including the impact on interest expense and diluted EPS.
- Developments in tax audits and uncertain tax positions, foreign-exchange exposures, lease guarantees, and intellectual-property matters.