01—Abstract
Summary
Summary of the 10-K filed September 25, 2003. Cited figures are marked; the original filing is the authoritative source.
Lam Research's fiscal 2003 (year ended June 29, 2003) was a difficult year marked by a steep revenue decline.
Total revenue fell 19.9% to $755.2 milliona from $943.1 million, and the company posted a net loss of $7.7 million, or $0.06 per share, compared with a $90.1 million loss in fiscal 2002. The semiconductor capital equipment downturn continued, with customers remaining cautious on capital spending, though demand was roughly flat through the year. Management's outlook for the September 2003 quarter called for revenue at roughly June-quarter levels and essentially flat gross margin percentage.
Profitability improved meaningfully on a cost basis. Gross margin rose to 40.2% from 28.2%, helped by outsourcing of manufacturing, lower excess inventory charges, and the absence of the prior year's $38.8 millionb Varian patent settlement charge. Management said the breakeven point had fallen to roughly $180 million in quarterly revenue.
Operating expenses also declined, with R&D down 10.4% and SG&A down 17.9%, though R&D rose to 21.3% of revenue. Restructuring charges were $15.9 millionc net for the year, and the company continued to cut headcount and vacate facilities. The balance sheet remains strong but shrinking.
Cash, equivalents, short-term investments and restricted cash totaled $625.9 milliond, down from $945.2 million, largely because the company repaid its $309.8 million 5% convertible notes in September 2002. The remaining $300 million 4% convertible notes due 2006 are hedged with a $300 million interest rate swap.
Operating cash flow was positive at $69.2 million. Investors should also note off-balance-sheet lease guarantees of up to $98.7 million tied to Fremont campus facilities, and about 47% export sales with Samsung accounting for roughly 15% of revenue.
02—Key points
Key Highlights
- Total revenue declined 19.9% to $755.2 million in fiscal 2003, from $943.1 million in fiscal 2002, reflecting continued semiconductor industry overcapacity and cautious customer capital spending.
- Gross margin improved to 40.2% of revenue from 28.2%, aided by outsourcing, lower inventory charges, and no repeat of the $38.8 million Varian patent settlement charge in cost of goods sold.
- Net loss narrowed to $7.7 million ($0.06 per share) from a $90.1 million loss ($0.71 per share) in fiscal 2002, with the year including a $16.4 million non-cash loss on equity derivatives and a net $24.9 million IRS-related tax benefit offset by a $17.0 million tax expense.
- Cash and investments (including restricted cash) fell to $625.9 million from $945.2 million after repaying $309.8 million of 5% convertible notes in September 2002.
- Operating cash flow was $69.2 million, and the company says its breakeven point is roughly $180 million in quarterly revenue after outsourcing and restructuring.
- Backlog declined to approximately $239 million at June 29, 2003, from $287 million a year earlier, and management expects September 2003 quarter revenue near June 2003 levels.
- Off-balance-sheet Fremont lease arrangements require residual value guarantees of up to $98.7 million, backed by $112.4 million of cash collateral, and Samsung represented about 15% of total revenue.
03—Questions
Frequently Asked Questions
Is Lam Research returning to profitability, and what is the near-term outlook?
The company narrowly lost money in fiscal 2003 ($7.7 million net loss), a major improvement over the prior year's $90.1 million loss. Management expects September 2003 quarter revenue to be roughly flat with June 2003 quarter levels and gross margin percentage to be essentially flat as well. Results depend heavily on semiconductor customers resuming capital spending, which management described as still cautious.
How much cash does Lam have, and is its balance sheet healthy?
Cash, equivalents, short-term investments and restricted cash totaled $625.9 million at June 29, 2003, down from $945.2 million. The decline is largely due to repaying the 5% convertible notes. The company still has $300 million of 4% convertible notes due June 2006, which are hedged with an interest rate swap, and management believes existing resources are sufficient for at least the next 12 months. Stockholders' equity was $649.1 million.
What risks should investors be aware of beyond the cyclical downturn?
Key risks include heavy reliance on a few high-priced systems and key customers (Samsung about 15% of revenue), international exposure (about 72% of revenue from non-U.S. sales), dependence on outsource providers and single-source suppliers, and ongoing restructuring costs. The company also guarantees residual values on Fremont leased facilities of up to $98.7 million, and its interest rate swap would generate higher expense if 6-month LIBOR rises above about 5%. Stock price volatility and competition from larger rivals such as Applied Materials and Tokyo Electron are also flagged.
Why did gross margin improve so much even though revenue fell?
Gross margin rose to 40.2% from 28.2% mainly because the prior year included large one-time charges: a $38.8 million Varian patent settlement and $24.1 million of excess and obsolete inventory charges. Outsourcing of manufacturing and assembly also converted fixed costs into variable costs and lowered the breakeven point. Lower inventory and restructuring-driven utilization improvements contributed as well.
Did the company have any unusual items affecting fiscal 2003 earnings?
Yes. Results included $15.9 million of restructuring charges (net), a $16.4 million non-cash loss on equity derivative contracts tied to Lam stock, and a net tax benefit of about $7.9 million. That tax figure reflects a $24.9 million benefit from closing an IRS examination, partly offset by roughly $17.0 million of expense for international tax structuring. Management also modified a CEO stock option award, creating deferred compensation of $3.4 million to be amortized over 16 quarters.
04—Continue