01—Abstract
Summary
Summary of the 10-K filed August 13, 2015. Cited figures are marked; the original filing is the authoritative source.
Lam Research's fiscal 2015 (ended June 28, 2015) was a strong year on the top line and in profitability, with revenue rising 14% to $5.26 billiona from $4.61 billion and GAAP diluted EPS climbing 2% to $3.70 (net income of $655.6 million).
Growth was driven by customer technology inflections (FinFET, 3D NAND, multiple patterning, advanced packaging) and share gains in deposition and etch. Gross margin was essentially flat at 43.4% versus 43.6% a year earlier, as less favorable product mix offset better factory utilization. Operating income rose 16% to $788 millionb, but was held back by an $79.4 million goodwill impairment on the single-wafer clean unit and $9.8 million of intangible impairment.
Net income growth was modest relative to operating income growth because of higher interest expense after the March 2015 issuance of $1 billionc in senior notes. The balance sheet grew more levered but remains liquid. Cash, short-term investments and restricted cash totaled roughly $4.2 billion, though about $2.2 billion of that sits offshore and would face U.S. tax if repatriated.
Total debt principal is about $3.6 billiond, and roughly $1.6 billion of convertible notes (2016 and 2018 notes) became current because their conversion options are currently exercisable, which pushes current liabilities up sharply. Management returned capital through $573 million of buybacks and $116 million of dividends, and it raised the quarterly dividend from $0.18 to $0.30 per share starting in fiscal 2016. Cash from operations was $786 million, which covered capex of $198 million with room to spare.
Risk factors centre on customer concentration and cyclicality. Three customers (Micron, Samsung and TSMC) accounted for 51% of fiscal 2015 revenue, non-U.S. sales were about 83%, and the company faces China-related trade and political exposure.
Backlog was $880 million, up modestly from $866 million. Investors should weigh the strong earnings momentum and capital returns against this concentration, the higher leverage and the potential for dilution from the convertible notes.
02—Key points
Key Highlights
- Revenue grew 14.2% to $5.26 billion (FY2014: $4.61 billion), with shipments up 20% to about $5.5 billion, reflecting technology-inflection spending and market share gains.
- GAAP diluted EPS rose 2.2% to $3.70 and net income reached $655.6 million, but this included a $79.4 million goodwill impairment on the single-wafer clean reporting unit.
- Gross margin held near 43.4% (vs. 43.6%), with R&D up 15% to $825 million, signalling continued heavy investment in next-generation deposition and etch technology.
- Cash, short-term investments and restricted cash reached about $4.2 billion, but roughly $2.2 billion is held offshore, and total debt principal rose to about $3.6 billion after the $1 billion March 2015 senior notes issuance.
- Capital returns increased: $573 million in share repurchases and $116 million in dividends in FY2015, with the quarterly dividend raised to $0.30 per share for FY2016 (from $0.18).
- Customer concentration remains high: three customers (Micron, Samsung, TSMC) represented 51% of revenue, and non-U.S. sales were roughly 83% of total revenue.
- Backlog stood at $880 million at fiscal year-end, up from $866 million, and deferred revenue rose to $518 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Lam Research Corp kept $0.12.
- Revenue$5.26B100.0%
- Cost of revenue−$2.97B56.6%
- Gross profit$2.28B43.4%
- Operating costs−$1.50B28.5%
- Operating income$788.0M15.0%
- Interest, other & tax−$132.5M2.5%
- Net income$655.6M12.5%
Where FY2015 revenue went
$5.26B- Cost of revenue: $2.97B, 57% of revenue
- R&D: $825.2M, 16% of revenue
- Net income: $655.6M, 12% of revenue
- SG&A: $591.6M, 11% of revenue
- Other operating costs: $79.4M, 1.5% of revenue
- Interest, other & tax: $132.5M, 2.5% of revenue
Kept 12% as net incomeOther operating costs $79.4M · 1.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed August 13, 2015Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $5.26B$4.61B | +14.2% |
| Cost of Revenue | $2.97B$2.60B | +14.4% |
| Gross Profit | $2.28B$2.01B | +13.8% |
| R&D Expenses | $825.24M$716.47M | +15.2% |
| SG&A Expenses | $591.61M$613.34M | −3.5% |
| Operating Expenses | $1.50B$1.33B | +12.5% |
| Operating Income | $788.04M$677.67M | +16.3% |
| Interest Expense | $73.68M$61.69M | +19.4% |
| Net Income | $655.58M$632.29M | +3.7% |
| EPS (Basic) | $0.41$0.38 | +7.0% |
| EPS (Diluted) | $0.37$0.36 | +2.2% |
| Shares Outstanding (Basic) | 1.60B1.65B | −3.1% |
| Shares Outstanding (Diluted) | 1.77B1.75B | +1.5% |
05—Questions
Frequently Asked Questions
Why did net income grow only modestly despite a 16% increase in operating income?
Operating income rose to $788 million from $678 million, but FY2014 included an $83 million one-time gain on sale of real estate that did not recur. Interest expense also climbed to $74 million from $62 million after the March 2015 senior notes issuance, and the effective tax rate was 11.5% versus 12.6%. Together these items moderated the increase in net income to 3.7%.
How significant is the goodwill impairment, and does it signal broader problems?
The $79.4 million non-cash charge fully eliminated goodwill tied to the single-wafer clean reporting unit, which management attributed to uncertainty about future revenue growth in certain products. It is not a cash expense and does not affect the company's liquidity, but it does indicate weaker expected cash flows in that product line. The company remains exposed to further impairments if its forecasts fall short.
What are the risks from the convertible notes and the higher debt load?
About $1.6 billion of convertible notes is classified as current because the conversion feature was exercisable at June 28, 2015, and the 2016 notes mature in 2016. Upon conversion, the company must pay principal in cash and may issue shares for any excess value, creating potential dilution. Total debt principal is about $3.6 billion against roughly $4.2 billion of gross cash and investments, though much of the cash is offshore.
How concentrated is the customer base, and what does that mean for revenue visibility?
Three customers accounted for 51% of fiscal 2015 revenue, up from 52% in fiscal 2014 and 45% in fiscal 2013. Micron, Samsung and TSMC are the largest. The concentration means that spending decisions by one or two customers can significantly affect quarterly results, and it gives those customers greater leverage on pricing and terms. The company's backlog of $880 million provides only partial visibility, since orders can be cancelled with limited penalties.
What is the outlook for capital returns after the dividend increase?
The board raised the quarterly dividend to $0.30 per share, payable in the first quarter of fiscal 2016, from $0.18 previously. About $316.6 million remained under the $850 million repurchase authorization at year-end. The company notes that dividends and buybacks depend on capital availability, board determinations, and debt covenants, and it cannot guarantee future amounts.
06—Continue