Business context and reporting period
Lam Research designs, manufactures and services semiconductor-processing equipment. This Form 10-Q covers the quarter ended March 31, 2013, the third quarter of fiscal 2013; the quarter comprised 14 weeks versus 13 weeks in the prior-year comparison. The nine-month period also ended March 31, 2013. Lam acquired Novellus in June 2012, so current-period results include its operations while the prior-year comparisons do not.
Financial performance and liquidity
Unless noted otherwise, amounts are in U.S. dollars.
- Quarter revenue: $844.9 million, up 28% year over year but down from $860.9 million in the December 2012 quarter. Management attributed the year-over-year increase largely to the Novellus acquisition. Shipments were $896 million, up 12% sequentially and 26% year over year.
- Quarter profitability: Gross margin was 40.2%, compared with 40.5% a year earlier and 36.6% sequentially. Operating income was $10.8 million, versus $58.1 million a year earlier; net income was $19.0 million, versus $45.6 million. Diluted EPS was $0.11 versus $0.38.
- Nine-month results: Revenue was $2.613 billion, up 36%; gross margin was 37.9% versus 40.9%. Net income was $28.2 million versus $150.7 million, and diluted EPS was $0.16 versus $1.24.
- Cash flow: Nine-month operating cash flow was $544.9 million, compared with $402.3 million. Investing activities used $177.9 million, including $117.7 million of capital expenditures; financing activities used $914.7 million, principally due to $953.4 million of treasury-stock repurchases. Cash and cash equivalents declined $545.6 million to $1.019 billion.
- Liquidity and debt: Cash, short-term investments and restricted cash/investments totaled approximately $2.523 billion at March 31, 2013; about $1.7 billion was held outside the United States. Current assets were $3.670 billion and current liabilities $801.0 million. Debt carrying value was $1.282 billion, consisting of convertible notes due 2016, 2018 and 2041; no current portion of debt was reported at quarter-end.
- Balance sheet: Total assets were $7.146 billion, down from $8.005 billion at June 24, 2012. Inventory fell to $545.0 million from $632.9 million. Goodwill was $1.446 billion and intangible assets were $1.117 billion.
Material changes versus comparable periods
- Quarter revenue was nearly flat sequentially and higher year over year; management said demand began improving as memory makers invested in next-generation technology and foundry customers continued leading-edge investment.
- Sequential gross-margin improvement reflected $17.2 million lower costs from product-configuration rationalization and $19.4 million lower Novellus acquisition-related inventory fair-value charges. Year-over-year and nine-month margins remained pressured by acquired-inventory adjustments, acquired-intangible amortization and product rationalization costs.
- Research and development and selling, general and administrative expenses rose substantially year over year, primarily reflecting combined Novellus operations, higher headcount and acquired-intangible amortization. Integration-related costs also contributed.
- The nine-month effective tax benefit was unusually large: $35.8 million on a pretax loss of $7.6 million, reflecting discrete tax benefits, including previously unrecognized tax benefits and retroactive reinstatement of the federal R&D tax credit. This substantially affects comparisons of net income.
- Lam repurchased $953.4 million of shares in the nine-month period and completed the then-existing $1.6 billion authorization during the March quarter. On April 22, 2013, the board authorized a further $250 million repurchase program.
Outlook, risks and unusual items
- Management expected product demand to strengthen over the next quarter and stated that available cash and short-term investments should support operations, investment, debt service and capital expenditures for at least 12 months. No specific revenue or earnings guidance was provided in the supplied filing text.
- The semiconductor equipment market is cyclical; results are exposed to swings in customer spending, product mix, shipment timing and customer acceptance. The filing also highlights competition, technology transitions, customer and supplier concentration, international and foreign-exchange exposure, and the risk of failing to realize Novellus integration benefits.
- Inventory write-offs of $18.7 million were recorded during the nine months for product configurations moved to sustaining mode. A $3.7 million impairment of a public equity investment was also recorded.
- Gross unrecognized tax benefits were $343.3 million; the company said these could change significantly over the next 12 months, but the amount or range was not estimable. Tax audits were ongoing. Management stated that reasonably possible additional losses from legal proceedings were not expected to be material.
- Approximately $164.9 million of restricted cash and investments secured operating leases. Lease residual-value guarantees were generally capped at approximately $141.7 million, with specified default circumstances potentially increasing exposure up to $164.9 million.
Important facts for investors to verify
- Confirm the expected trajectory of semiconductor-equipment demand and whether the projected strengthening materialized.
- Track margins and operating expenses as acquisition-related inventory charges, intangible amortization and integration costs change.
- Assess underlying earnings apart from the unusually large discrete tax benefit, and monitor tax audits and unrecognized tax benefits.
- Review cash deployment, the new $250 million repurchase authorization, and the balance of cash held offshore versus domestic liquidity needs.
- Monitor convertible-note obligations and potential dilution, Novellus integration progress, inventory valuation and lease-guarantee exposure.