What drove Lam Research's strong revenue growth in fiscal 1995?

Roughly two-thirds of the increase came from higher unit shipments of the Rainbow and TCP etch product lines, with TCP growing slightly faster. About half of the remainder came from first volume shipments of the Alliance cluster tool, and growing spares and service revenue from the expanding installed base made up most of the rest.

Is Lam Research's earnings quality strong given the cash flow figures?

Partly. Net income of $89.2 million includes a $10.4 million one-time pre-tax gain from selling Brooks Automation shares. Operating cash flow of $19.1 million was far below net income because rising receivables, inventories and prepaid expenses absorbed cash as sales expanded. Investors should watch whether cash conversion improves as growth moderates.

What are the main legal and concentration risks?

The Varian Associates patent infringement suit is in the late stages of discovery, and management believes it will not have a material adverse effect on the financial statements. Revenue is concentrated in etch systems (about 77% of total revenue) and in large semiconductor customers, with Intel at 11%. Export sales are 38% of net sales, and some Japanese sales are yen-denominated and hedged with forward contracts.

Does Lam Research pay dividends, and how is its debt structured?

No cash dividends have been declared or are anticipated, since funds are reinvested in the business and bank credit lines restrict dividend payments. Total long-term debt and capital leases were $103.5 million, including $66 million of 6% convertible subordinated debentures due 2003 convertible at $25 per share, plus yen-denominated bank loans and capital leases. The company had $50 million in unused bank lines of credit at June 30, 1995.

LRCX 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 26, 1995. Cited figures are marked; the original filing is the authoritative source.

Lam Research Corporation's fiscal 1995 (year ended June 30, 1995) was a breakout year.

Total revenue rose 64% to $810.6 million^a from $493.7 million, and net income more than doubled to $89.2 million, or $3.27 per primary share. Operating margin expanded to 14.6% from 12.2%, driven by higher volumes of its Rainbow and TCP etch systems, first volume shipments of the Alliance cluster tool, and a 3.6-point improvement in gross margin to 48.3%. Results also include a $10.4 million pre-tax gain from the sale of Brooks Automation shares, which lifted fourth-quarter earnings.

Etch systems still generated about 77% of revenue, so the company remains concentrated in one product family. The balance sheet strengthened considerably. Stockholders' equity nearly doubled to $395.3 million^b after a $115 million public offering in the first quarter, and cash, equivalents and short-term investments reached $101.0 million.

Backlog grew to $252.6 million^c from $145.9 million, supporting expectations for continued growth. Investors should note that working capital absorbed heavy investment: operating cash flow was only $19.1 million, with receivables and inventories rising sharply, and capital expenditures were $63.4 million. Customer concentration is notable, with Intel accounting for 11% of revenue, and export sales (mostly to Asia) make up 38% of net sales.

Key risks disclosed include a pending patent infringement lawsuit brought by Varian Associates, which management believes will not have a material adverse effect, plus exposure to semiconductor capital-spending cycles, yen-denominated sales and currency hedging, and the execution risk of new facilities in Korea and expanded Fremont operations. The company also has $66 million^d of 6% convertible subordinated debentures due 2003, which are convertible at $25 per share and are now deep in the money given the stock's trading range.

02—Key points

Key Highlights

Total revenue grew 64% to $810.6 million in fiscal 1995, up from $493.7 million in fiscal 1994.
Net income rose to $89.2 million ($3.27 primary EPS) from $37.8 million, with net margin improving to 11.0% from 7.7%.
Gross margin improved to 48.3% from 46.2%, reflecting lower unit manufacturing and warranty costs.
Backlog increased to $252.6 million at June 30, 1995, versus $145.9 million a year earlier.
A $115 million public offering in the first quarter strengthened equity to $395.3 million and cash plus short-term investments to $101.0 million.
Operating cash flow was weak at $19.1 million as receivables and inventories grew with sales, while capital spending reached $63.4 million.
Intel accounted for 11% of revenue, and foreign sales represented 54% of total revenue, the first year above half.

03—Questions

Frequently Asked Questions

What drove Lam Research's strong revenue growth in fiscal 1995?
Roughly two-thirds of the increase came from higher unit shipments of the Rainbow and TCP etch product lines, with TCP growing slightly faster. About half of the remainder came from first volume shipments of the Alliance cluster tool, and growing spares and service revenue from the expanding installed base made up most of the rest.
Is Lam Research's earnings quality strong given the cash flow figures?
Partly. Net income of $89.2 million includes a $10.4 million one-time pre-tax gain from selling Brooks Automation shares. Operating cash flow of $19.1 million was far below net income because rising receivables, inventories and prepaid expenses absorbed cash as sales expanded. Investors should watch whether cash conversion improves as growth moderates.
What are the main legal and concentration risks?
The Varian Associates patent infringement suit is in the late stages of discovery, and management believes it will not have a material adverse effect on the financial statements. Revenue is concentrated in etch systems (about 77% of total revenue) and in large semiconductor customers, with Intel at 11%. Export sales are 38% of net sales, and some Japanese sales are yen-denominated and hedged with forward contracts.
Does Lam Research pay dividends, and how is its debt structured?
No cash dividends have been declared or are anticipated, since funds are reinvested in the business and bank credit lines restrict dividend payments. Total long-term debt and capital leases were $103.5 million, including $66 million of 6% convertible subordinated debentures due 2003 convertible at $25 per share, plus yen-denominated bank loans and capital leases. The company had $50 million in unused bank lines of credit at June 30, 1995.

04—Continue

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