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| LRCX > SEC Filings for LRCX > Form 10-Q on 31-Jan-2013 | All Recent SEC Filings |
31-Jan-2013
Quarterly Report
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
With the exception of historical facts, the statements contained in this discussion are forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified as forward-looking, by use of phrases and words such as "we believe," "we anticipate," "we expect," "may," "should," "could" and other future-oriented terms. The identification of certain statements as "forward-looking" is not intended to mean that other statements not specifically identified are not forward-looking. Forward-looking statements include, but are not limited to, statements that relate to: trends in the global economic environment and the semiconductor industry; the anticipated levels of, and rates of change in, future shipments, margins, market share, capital expenditures, revenue and operating expenses generally; volatility in our quarterly results; customer requirements and our ability to satisfy those requirements; customer capital spending and their demand for our products; our ability to defend our market share and to gain new market share; anticipated growth in the industry and the total market for wafer-fabrication equipment and our growth relative to such growth; levels of research and development ("R&D") expenditures; the estimates we make, and the accruals we record, in order to implement our critical accounting policies (including but not limited to the adequacy of prior tax payments, future tax liabilities and the adequacy of our accruals relating to them); our access to capital markets; our ability to manage and grow our cash position; and the sufficiency of our financial resources to support future business activities (including but not limited to operations, investments, debt service requirements and capital expenditures). Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value, and effect, including without limitation those discussed below under the heading "Risk Factors" within Part II Item 1A and elsewhere in this report and other documents we file from time to time with the Securities and Exchange Commission ("SEC"), such as our annual report on Form 10-K for the year ended June 24, 2012 (our "2012 Form 10-K"), our quarterly report on Form 10-Q for the quarter ended September 23, 2012, and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value, and effect could cause our actual results to differ materially from those expressed in this report and in ways not readily foreseeable. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on information currently and reasonably known to us. We undertake no obligation to release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances that occur after the date hereof or to reflect the occurrence or effect of anticipated or unanticipated events.
Documents To Review In Connection With Management's Discussion and Analysis Of Financial Condition and Results Of Operations
For a full understanding of our financial position and results of operations for the three months ended December 23, 2012, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations below, you should also read the Condensed Consolidated Financial Statements and notes presented in this Form 10-Q and the financial statements and notes in our 2012 Form 10-K.
Overview
Management's Discussion and Analysis of Financial Condition and Results of Operations consists of the following sections:
Executive Summary provides an overview of the Company's operations and a summary of certain highlights of our results of operations
Results of Operations provides an analysis of operating results
Critical Accounting Policies and Estimates discusses accounting policies that reflect the more significant judgments and estimates we use to prepare our Condensed Consolidated Financial Statements
Liquidity and Capital Resources provides an analysis of cash flows and financial position.
EXECUTIVE SUMMARY
We design, manufacture, market, refurbish, and service semiconductor processing equipment used in the fabrication of integrated circuits and are recognized as a major provider of such equipment to the worldwide semiconductor industry. Our customers include semiconductor manufacturers that make DRAM, flash memory, microprocessors, and other logic integrated circuits for a wide range of consumer and industrial electronics. Semiconductor wafers are subjected to a complex series of process and preparation steps that result in the simultaneous creation of many individual integrated circuits. We leverage our expertise in semiconductor processing to develop technology and productivity solutions that typically benefit our customers through lower defect rates, enhanced yields, faster processing time, and reduced cost as well as by facilitating their ability to meet more stringent performance and design standards.
The semiconductor capital equipment industry is cyclical in nature and has historically experienced periodic and pronounced changes in customer demand resulting in industry downturns and upturns. Today's leading indicators of change in customer investment patterns, such as electronics demand, memory pricing, and foundry utilization rates, may not be any more reliable than in prior years. Demand for our equipment can vary significantly from period to period as a result of various factors, including, but not limited to, economic conditions (both general and in the semiconductor and electronics industries), industry supply and demand, prices for semiconductors, customer capacity requirements, and our ability to develop, acquire, and market competitive products. For these and other reasons, our results of operations during any particular fiscal period are not necessarily indicative of future operating results.
Demand for our products declined during the second half of calendar year 2012 as certain semiconductor device manufacturers, particularly NAND memory manufacturers, reduced their investment levels. We believe demand for mobile products, which require semiconductor devices such as NAND memory, will continue to grow in calendar year 2013, eventually requiring additional investment in capital equipment. As a result, we believe capital equipment spending has the potential to increase in calendar year 2013, and currently believe that the second half of the year has greater potential than the first half of 2013. Further, we believe that, over the long term, demand for our products will increase as customers' capital expenditures rise to address the increasing complexity of semiconductor device manufacturing and meet growing demand for semiconductor devices, particularly in the mobility space.
The following table summarizes certain key financial information for the periods indicated below (in thousands, except percentage and per share data):
Three Months Ended
December 23, September 23, December 25,
2012 2012 2011
Revenue $ 860,886 $ 906,888 $ 583,981
Gross margin $ 315,414 $ 333,886 $ 234,826
Gross margin as a percent of revenue 36.6 % 36.8 % 40.2 %
Total operating expenses $ 311,372 $ 317,174 $ 187,280
Net income $ 6,408 $ 2,768 $ 33,212
Diluted net income per share $ 0.04 $ 0.02 $ 0.27
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In the quarter ended December 23, 2012, revenue decreased as compared to the quarter ended September 23, 2012 due to the decline in demand for semiconductor capital equipment. Gross margin as a percent of revenues decreased as compared to the September 2012 quarter due primarily to increased costs related to rationalization of certain product configurations, unfavorable factory utilization, as well as product mix changes, offset by a decrease in costs associated with Novellus acquisition-related inventory fair value adjustments. Operating expenses in the December 2012 quarter decreased as compared to the quarter ended September 2012, as a result of reductions in field and support group spending, lower integration costs, and lower variable compensation associated with the decline in operating income.
Our cash and cash equivalents, short-term investments, and restricted cash and investments balances totaled approximately $2.7 billion as of December 23, 2012 compared to $2.9 billion as of September 23, 2012. Cash generated by operations was approximately $193 million during the December 2012 quarter. We used cash during the December 2012 quarter to repurchase $355 million of our shares and purchase $39 million of property and equipment. As of December 23, 2012, employee headcount remained flat to the September quarter at approximately 6,600 people.
RESULTS OF OPERATIONS
Shipments
Three Months Ended
December 23, September 23, December 25,
2012 2012 2011
Shipments (in millions) $ 803 $ 935 $ 563
North America 29 % 18 % 19 %
Taiwan 22 % 29 % 18 %
Asia Pacific 14 % 22 % 8 %
Japan 14 % 8 % 10 %
Korea 12 % 16 % 37 %
Europe 9 % 7 % 8 %
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Shipments for the December 2012 quarter decreased 14% compared to the September 2012 quarter and increased 43% year over year. The year over year increase reflects operations post-acquisition of Novellus, which occurred on June 4, 2012. During the December 2012 quarter, applications below the 40 nanometer technology node were 78% of total systems shipments. The system shipments in the memory, foundry, and logic/integrated device manufacturing markets were approximately 20%, 51% and 29%, respectively. During the September 2012 quarter, applications below the 40 nanometer technology node were 81% of total systems shipments. The system shipments in the memory, foundry, and logic/integrated device manufacturing markets were approximately 42%, 48% and 10%, respectively.
Revenue
Three Months Ended Six Months Ended
December 23, September 23, December 25, December 23, December 25,
2012 2012 2011 2012 2011
Revenue (in millions) $ 861 $ 907 $ 584 $ 1,768 $ 1,264
Taiwan 26 % 28 % 17 % 27 % 15 %
North America 24 % 18 % 18 % 21 % 19 %
Korea 12 % 24 % 34 % 18 % 29 %
Asia Pacific 20 % 15 % 8 % 17 % 11 %
Japan 10 % 8 % 14 % 9 % 16 %
Europe 8 % 7 % 9 % 8 % 10 %
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Revenue for the December 2012 quarter decreased 5% compared to the September 2012 quarter due to the decline in demand for semiconductor capital equipment. Revenue for the three and six months ended December 23, 2012 increased 47% and 40%, respectively, as compared to the same periods last year, reflecting operations post-acquisition of Novellus. Our deferred revenue balance decreased to $282 million as of December 23, 2012 compared to $364 million as of September 23, 2012. Our deferred revenue balance does not include shipments to Japanese customers, to whom title does not transfer until customer acceptance. Shipments to Japanese customers are classified as inventory at cost until the time of acceptance. The anticipated future revenue value from shipments to Japanese customers was approximately $46 million as of December 23, 2012 compared to $21 million as of September 23, 2012.
Gross Margin
Three Months Ended Six Months Ended
December 23, September 23, December 25, December 23, December 25,
2012 2012 2011 2012 2011
(in thousands, except percentages)
Gross margin $ 315,414 $ 333,886 $ 234,826 $ 649,300 $ 518,709
Percent of revenue 36.6 % 36.8 % 40.2 % 36.7 % 41.0 %
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The decrease in gross margin as a percentage of revenue during the December 2012 quarter as compared to the September 2012 quarter is primarily due to costs incurred related to rationalization of certain product configurations, which increased from $3 million to $17 million, unfavorable factory utilization, as well as product mix changes. These declines were partially offset by costs associated with Novellus acquisition-related inventory fair value adjustments, which decreased from approximately $44 million to $27 million.
The decrease in gross margin as a percentage of revenue during the December 2012 quarter as compared to the December 2011 quarter is primarily due to $27 million in costs associated with Novellus acquisition-related inventory fair value adjustments, $21 million of amortization of acquired Novellus intangible assets, and $17 million of costs incurred related to rationalization of certain product configurations.
The decrease in gross margin as a percentage of revenue during the six months ended December 23, 2012 quarter as compared to the same period in the prior year is primarily due to acquisition-related inventory fair value adjustments of approximately $71 million and amortization of acquired intangible assets of approximately $41 million, which did not occur in the six months ended December, 25 2011.
Research and Development
Three Months Ended Six Months Ended
December 23, September 23, December 25, December 23, December 25,
2012 2012 2011 2012 2011
(in thousands, except percentages)
Research and development ("R&D") $ 165,951 $ 163,311 $ 104,024 $ 329,262 $ 206,583
Percent of revenue 19.3 % 18.0 % 17.8 % 18.6 % 16.3 %
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We continue to make significant R&D investments focused on leading-edge plasma etch, single-wafer clean, deposition, and other semiconductor manufacturing requirements. The increase in R&D expenses during the December 2012 quarter compared to the September 2012 quarter was primarily due to an increase in supplies and outside services costs offset by a reduction in variable compensation due to lower operating income levels.
While December 2011 reflects Lam standalone results, December 2012 reflects combined operations with Novellus. The increase in R&D expenses during the December 2012 quarter compared to the same period in the prior year was primarily due to a $27 million increase in employee compensation and benefits, mainly as a result of higher headcount, a $16 million increase in supplies and facilities costs, a $7 million increase in depreciation and amortization, and a $5 million increase in outside services.
While the six months ended December 25, 2011 reflect Lam standalone results, the six months ended December 23, 2012 reflect combined operations with Novellus. The increase in R&D expenses during the six months ended December 23, 2012 compared to the same period in the prior year was primarily due to a $57 million increase in employee compensation and benefits, mainly as a result of higher headcount, a $24 million increase in supplies and facilities costs, a $14 million increase in depreciation and amortization, and a $10 million increase in outside services.
Selling, General and Administrative
Three Months Ended Six Months Ended
December 23, September 23, December 25, December 23, December 25,
2012 2012 2011 2012 2011
(in thousands, except percentages)
Selling, general and administrative
("SG&A") $ 144,400 $ 153,863 $ 83,256 $ 298,263 $ 163,456
Percent of revenue 16.8 % 17.0 % 14.3 % 16.9 % 12.9 %
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The decrease in SG&A expenses during the December 2012 quarter compared to the September 2012 quarter was primarily due to an $8 million decline in salaries and benefits as a result of reduction in variable compensation on lower operating income and $5 million lower integration costs.
The increase in SG&A expenses during the December 2012 quarter compared to the same period in the prior year was primarily due to the impact of combined operations with Novellus. Increased expenses included $29 million in employee compensation and benefits, $19 million in intangible asset amortization, and $10 million in supplies and facilities costs.
The increase in SG&A expenses in the six months ended December 23, 2012 compared to the same period in the prior year was primarily due to the impact of combined operations with Novellus. Increased expenses included $63 million in employee compensation and benefits, $39 million in intangible asset amortization, $14 million in integration and acquisition-related expenses, and $18 million in supplies and facilities costs.
Restructuring and Asset Impairments
During the three and six months ended December 23, 2012 we incurred net restructuring charges of $1.0 million primarily related to changes in sublease assumptions for previously restructured buildings. During the six months ended December 25, 2011, the Company incurred asset impairment charges of $1.7 million related to a decline in the market value of certain facilities.
Other Expense, Net
Other expense, net consisted of the following:
Three Months Ended Six Months Ended
December 23, September 23, December 25, December 23, December 25,
2012 2012 2011 2012 2011
(in thousands)
Interest income $ 4,376 $ 3,800 $ 2,472 $ 8,176 $ 5,061
Interest expense (14,975 ) (15,144 ) (9,346 ) (30,119 ) (18,606 )
Gains (losses) on deferred
compensation plan related
assets 1,234 2,741 (348 ) 3,975 (2,213 )
Foreign exchange losses (3,274 ) (368 ) (142 ) (3,642 ) (1,232 )
Other, net (751 ) (967 ) (421 ) (1,718 ) (2,868 )
$ (13,390 ) $ (9,938 ) $ (7,785 ) $ (23,328 ) $ (19,858 )
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Interest expense increased in the three and six months ended December 23, 2012 as compared to the same periods in the prior year due to the 2041 Notes assumed in June 2012 in connection with the Novellus acquisition.
Foreign exchange losses in December 2012 were related to un-hedged portions of the balance sheet exposures, primarily in the Taiwan dollar and Korean Won.
In the three and six months ended December 23, 2012, we recognized gains on assets which are related to obligations under our deferred compensation plan, whereas during the same periods in the prior year we recognized losses on assets due to changes in the market value of securities in this portfolio.
Income Tax Expense
Our tax benefits for the three and six months ended December 23, 2012 were $(15.8) million and $(11.8) million, respectively, which yielded effective income tax rates of 168.6% and 456.4%, respectively. Our tax expenses for the three and six months ended December 25, 2011 were $6.5 million and $22.0 million, respectively, which yielded effective income tax rates of 16.5% and 17.3%, respectively. The increase in the effective tax rate for the three and six months ended December 23, 2012 compared to the three and six months ended December 25, 2011 was primarily due to the recognition of previously unrecognized tax benefits due to lapse of statute of limitations and the successful resolution of certain tax matters, the reduced level of income, an increase in the percentage of profits in jurisdictions with lower tax rates combined with a projected pre-tax loss in higher tax jurisdictions, and the treatment of integration and impairment expenses as a discrete event in determining the annual effective tax rate, offset by an increase in the non-deductible stock based compensation. In addition, the U.S. federal research and development (R&D) tax credit has expired as of December 31, 2011 and no tax benefit has been included in the calculation of the provision for income taxes for the three and six months ended December 23, 2012. On January 2, 2013 the "American Taxpayer Relief Act of 2012" was signed into law, which includes retroactive extension of the U.S. federal R&D tax credit through December 31, 2013. The Company is currently evaluating the impact of this R&D credit extension on the provision for income taxes for the remainder of fiscal year 2013.
The effective tax rate of 168.6% and 456.4% for the three and six months ended December 23, 2012 includes the tax impact of the following discrete items which are recorded in the period in which they occur: (1) a tax benefit of $30.5 million and $30.9 million for the three months and six months, respectively, due to the recognition of previously unrecognized tax benefits due to lapse of statute of limitations and successful resolution of certain tax matters, and (2) the effective tax rate impact of integration and impairment expenses of $28.3 million and $45.3 million for the three months and six months, respectively, for which little tax benefit is derived. The effective tax rate of 16.5% and 17.3% for the three and six months ended December 25, 2011 includes the tax impact of the following discrete items which are recorded in the period in which they occur: (1) a tax expense of $2.2 million and $3.8 million, respectively, related to the filing of prior year foreign tax returns, which resulted in provision to return true-ups, (2) a tax expense of $0.8 million and $1.7 million, respectively, of interest related to uncertain tax positions, (3) a tax benefit of $2.5 million and $3.7 million, respectively, related to the acquisition, restructuring and asset impairment related expenses, and (4) a tax benefit of $6.9 million and $7.1 million, respectively, related to the recognition of previously unrecognized tax benefits and the reversal of the related interest accruals due to finalization of certain foreign uncertain tax positions.
Deferred Income Taxes
We had gross deferred tax assets, related primarily to reserves and accruals that are not currently deductible and tax credit carryforwards, of $345.6 million and $253.7 million as of December 23, 2012 and June 24, 2012, respectively. The gross deferred tax assets were offset by deferred tax liabilities of $357.7 million and a valuation allowance of $55.2 million as of December 23, 2012. The gross deferred tax assets were offset by deferred tax liabilities of $285.6 million and a valuation allowance of $55.2 million as of June 24, 2012.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more likely than not that such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more-likely-than-not that the deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.
We evaluate the realizability of the deferred tax assets quarterly and will continue to assess the need for changes in valuation allowances, if any.
Uncertain Tax Positions
We reevaluate uncertain tax positions on a quarterly basis. This evaluation is . . .
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