01—Abstract
Summary
Summary of the 10-K filed August 26, 2014. Cited figures are marked; the original filing is the authoritative source.
Lam Research's fiscal 2014 10-K (year ended June 29, 2014) shows a strong year of growth and profitability.
Revenue rose 28% to $4.61 billiona from $3.60 billion, driven by technology inflections in FinFET, 3D NAND, and multiple patterning, along with market share gains. Gross margin expanded to 43.6% from 39.0%, largely because Novellus acquisition-related inventory adjustments fell by about $78 million. Operating income rose to $677.7 million from $118.1 million, and diluted EPS reached $3.62 versus $0.66.
Memory customers were a larger share of shipments (60%, up from 36%), and backlog grew to about $866 millionb from $764 million. Cash generation and capital returns were also prominent. Operating cash flow was $717 million, and cash, short-term investments, and restricted cash totaled about $3.2 billion at year-end.
The company repurchased $245 millionc of stock, authorized a new $850 million buyback, and initiated a quarterly dividend of $0.18 per share. A $83 million pre-tax gain on the sale of Palo Alto real estate also boosted results, and the company sold Peter Wolters after year-end. Investors should weigh several risks.
Debt is significant, with about $1.6 billiond in convertible notes and a 2041 note that is convertible and classified as current, which creates dilution and refinancing considerations. Customer concentration is high, with three customers each above 10% of revenue, and the semiconductor equipment industry is cyclical. Gross unrecognized tax benefits total $352 million, and about $2.2 billion of cash is held offshore, with repatriation carrying potential U.S. tax costs.
02—Key points
Key Highlights
- Revenue grew 28% year over year to $4.61 billion, with shipments up 23% to about $4.55 billion, reflecting demand from memory node transitions and advanced logic inflections.
- Gross margin improved to 43.6% from 39.0%, helped by lower Novellus inventory fair value adjustments (down about $78 million) and higher volumes.
- Diluted EPS increased to $3.62 from $0.66, and net income reached $632 million, boosted by an $83 million real estate sale gain and a lower effective tax rate of 12.6%.
- Operating cash flow of $717 million funded $245 million in share repurchases, and year-end cash and investments were about $3.2 billion.
- The Board authorized an $850 million buyback and initiated a quarterly dividend of $0.18 per share, signaling a shift toward shareholder returns.
- Backlog rose to about $866 million from $764 million, and R&D spending increased 4.8% to $716 million (15.6% of revenue).
- Convertible debt totals about $1.6 billion principal, including a $700 million 2041 note whose conversion window is open and which is classified as a current liability, creating potential dilution and liquidity considerations.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Lam Research Corp kept $0.14.
- Revenue$4.61B100.0%
- Cost of revenue−$2.60B56.4%
- Gross profit$2.01B43.6%
- Operating costs−$1.33B28.9%
- Operating income$677.7M14.7%
- Interest, other & tax−$45.4M1.0%
- Net income$632.3M13.7%
Where FY2014 revenue went
$4.61B- Cost of revenue: $2.60B, 56% of revenue
- R&D: $716.5M, 16% of revenue
- Net income: $632.3M, 14% of revenue
- SG&A: $613.3M, 13% of revenue
- Interest, other & tax: $45.4M, 1.0% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed August 26, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $4.61B$3.60B | +28.0% |
| Cost of Revenue | $2.60B$2.20B | +18.4% |
| Gross Profit | $2.01B$1.40B | +43.1% |
| R&D Expenses | $716.47M$683.69M | +4.8% |
| SG&A Expenses | $613.34M$601.30M | +2.0% |
| Operating Expenses | $1.33B$1.28B | +3.5% |
| Operating Income | $677.67M$118.07M | +474.0% |
| Interest Expense | $61.69M$60.41M | +2.1% |
| Net Income | $632.29M$113.88M | +455.2% |
| EPS (Basic) | $0.38$0.07 | +473.1% |
| EPS (Diluted) | $0.36$0.07 | +448.5% |
| Shares Outstanding (Basic) | 1.65B1.69B | −2.5% |
| Shares Outstanding (Diluted) | 1.75B1.73B | +0.6% |
05—Questions
Frequently Asked Questions
What drove Lam Research's revenue growth in fiscal 2014?
Revenue rose 28% to $4.61 billion, reflecting customer capacity and technology investments in FinFET transistors, 3D NAND, and multiple patterning, as well as market share gains. Memory represented 60% of system shipments, up from 36% in fiscal 2013, due to node transitions and tight memory supply.
Why did profitability improve so much compared with fiscal 2013?
Fiscal 2013 was weighed down by Novellus acquisition-related costs, including inventory fair value adjustments and intangible amortization. Lower acquisition-related charges, higher volumes, and a more favorable product mix lifted gross margin to 43.6%. Operating income rose to $678 million from $118 million, and net income also benefited from a $83 million real estate gain and a lower tax rate.
What is the capital return policy and how much cash does the company have?
Lam initiated a quarterly dividend of $0.18 per share, paid starting July 2014, and authorized up to $850 million in share repurchases in April 2014, with about $831 million remaining at year-end. Cash, short-term investments, and restricted cash totaled about $3.2 billion at June 29, 2014, though about $2.2 billion is held outside the U.S., where repatriation could trigger significant taxes.
What are the main risks related to debt and dilution?
Lam carries about $1.6 billion in principal of convertible notes (2016, 2018, and 2041 notes). The 2041 notes, with a $700 million principal, are convertible and classified as current liabilities because the conversion window remains open. Conversion could dilute shareholders, although hedges and warrants were structured to mitigate dilution up to certain share prices. The company also has a $300 million revolving credit facility with no borrowings outstanding.
How concentrated is Lam's customer base and what are the associated risks?
In fiscal 2014, three customers, Samsung, SK Hynix, and TSMC, each represented more than 10% of revenue, and accounted for roughly 23%, 15%, and 14% of total revenue, respectively. Heavy concentration means the loss or reduced spending of a single customer could materially affect results, and the company also faces cyclical semiconductor capital spending and intense competition from Applied Materials and Tokyo Electron.
06—Continue