How strong was Lam Research's fiscal 2005 financial performance?

Very strong. Revenue grew 61% to $1.50 billion, net income rose to $299.3 million from $83.0 million, and diluted EPS reached $2.10 versus $0.59. Gross margin expanded to 50.9%, and operating income more than tripled to $391.0 million, reflecting a cyclical upturn in semiconductor capital spending and share gains in etch.

Is demand for Lam's equipment still growing?

Demand appears to have peaked and stabilized. Customer orders improved from late 2003 through the September 2004 quarter, then declined and leveled off in the March and June 2005 quarters. Management guided September 2005 quarter new orders to be flat to down 5% and revenue to $310–$330 million, and backlog fell to $351 million from $403 million a year earlier.

What is management doing with excess cash?

Lam is returning capital through buybacks. Under a $250 million authorization announced in October 2004 and running through September 30, 2007, it repurchased 5.85 million shares for $167.1 million in FY2005, leaving $82.9 million available. The company paid no cash dividends and has no plans to do so.

What risks should investors consider?

Key risks include the cyclical semiconductor equipment market and softening orders, reliance on a small number of high-priced systems and key customers (Samsung about 13% of revenue), competition from Tokyo Electron and Applied Materials, exposure to Asia and Japanese yen hedging, and rising costs from expensing stock compensation under SFAS 123(R). The company also faces a $75 million guaranteed residual value on Fremont facility leases due in fiscal 2008.

Why might the tax rate and earnings quality matter?

The fiscal 2005 tax rate of about 25% benefited from R&D credits and lower-taxed foreign income, and the company recorded a $99.8 million tax expense. Deferred tax assets are substantial, with a $106.0 million valuation allowance, so future realization depends on taxable income. Also, FY2005 included a $14.2 million restructuring charge and an $8 million California sales tax refund, which investors should consider when assessing sustainable earnings.

LRCX 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed August 18, 2005. Cited figures are marked; the original filing is the authoritative source.

Lam Research (LRCX) reported a blockbuster fiscal 2005 (year ended June 26, 2005), with total revenue rising 61% to $1.50 billion^a from $935.9 million and net income more than tripling to $299.3 million, or $2.10 per diluted share, versus $83.0 million in fiscal 2004.

Gross margin expanded roughly five percentage points to 50.9%, driven by higher volume, improved product mix, and effective asset management. Management attributes the growth to a strong market upturn in semiconductor capital spending and to share gains in both dielectric and conductor etch, with particularly strong performance in Asia, where Asia Pacific and Korea together accounted for a large share of sales. Operating income reached $391.0 million^b, and the tax rate was about 25%, aided by R&D credits and lower-taxed foreign income.

The balance sheet and cash generation are strong. Cash, cash equivalents, short-term investments and restricted cash totaled $894.3 million^c, up from $541.9 million, and operating cash flow was $425.9 million. The company repurchased 5.9 million shares for $167.1 million under a $250 million authorization, leaving $82.9 million available through September 2007.

The valuation allowance on deferred tax assets rose to $106.0 million^d, and the company retired its 4% convertible notes in June 2004. Forward-looking indicators are more cautious. New orders in the March and June 2005 quarters declined and stabilized after peaking in the September 2004 quarter, and management guided September 2005 quarter new orders to be flat to down 5% and revenue to $310 million to $330 million.

Gross margin is expected near 47%, and quarterly operating expenses near $100 million, both including stock-based compensation expense from SFAS 123(R) that begins in the coming quarter. Backlog fell to $351 million from $403 million, and customer concentration remains meaningful, with Samsung at about 13% of revenue. Investors should weigh the strong FY2005 results against a demand plateau and a clear step-down in expected near-term revenue.

02—Key points

Key Highlights

Revenue rose 61% to $1,502.5 million in FY2005 from $935.9 million, with growth led by stronger customer demand and share gains in dielectric and conductor etch, particularly in Asia.
Net income increased to $299.3 million ($2.10 diluted EPS) from $83.0 million ($0.59), with operating income of $391.0 million versus $106.2 million a year earlier.
Gross margin improved to 50.9% of revenue from 46.1%, reflecting better product mix, higher volume, and asset management; R&D fell to 12.9% of revenue from 18.2%.
Cash and investments grew to $894.3 million and operating cash flow was $425.9 million; the company repurchased $167.1 million of stock during the year.
Orders have plateaued: new orders declined and stabilized in the March and June 2005 quarters, and Q1 FY2006 new orders are guided flat to down 5%, with revenue guided to $310–$330 million.
Backlog declined to $351 million from $403 million, and Samsung accounted for about 13% of FY2005 revenue, highlighting customer concentration.
Stock-based compensation expense will begin under SFAS 123(R) in the quarter ending September 2005, estimated at $8–$10 million pre-tax, pressuring margins going forward.

03—Questions

Frequently Asked Questions

How strong was Lam Research's fiscal 2005 financial performance?
Very strong. Revenue grew 61% to $1.50 billion, net income rose to $299.3 million from $83.0 million, and diluted EPS reached $2.10 versus $0.59. Gross margin expanded to 50.9%, and operating income more than tripled to $391.0 million, reflecting a cyclical upturn in semiconductor capital spending and share gains in etch.
Is demand for Lam's equipment still growing?
Demand appears to have peaked and stabilized. Customer orders improved from late 2003 through the September 2004 quarter, then declined and leveled off in the March and June 2005 quarters. Management guided September 2005 quarter new orders to be flat to down 5% and revenue to $310–$330 million, and backlog fell to $351 million from $403 million a year earlier.
What is management doing with excess cash?
Lam is returning capital through buybacks. Under a $250 million authorization announced in October 2004 and running through September 30, 2007, it repurchased 5.85 million shares for $167.1 million in FY2005, leaving $82.9 million available. The company paid no cash dividends and has no plans to do so.
What risks should investors consider?
Key risks include the cyclical semiconductor equipment market and softening orders, reliance on a small number of high-priced systems and key customers (Samsung about 13% of revenue), competition from Tokyo Electron and Applied Materials, exposure to Asia and Japanese yen hedging, and rising costs from expensing stock compensation under SFAS 123(R). The company also faces a $75 million guaranteed residual value on Fremont facility leases due in fiscal 2008.
Why might the tax rate and earnings quality matter?
The fiscal 2005 tax rate of about 25% benefited from R&D credits and lower-taxed foreign income, and the company recorded a $99.8 million tax expense. Deferred tax assets are substantial, with a $106.0 million valuation allowance, so future realization depends on taxable income. Also, FY2005 included a $14.2 million restructuring charge and an $8 million California sales tax refund, which investors should consider when assessing sustainable earnings.

04—Continue

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