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LRCX > SEC Filings for LRCX > Form 10-K on 26-Aug-2014All Recent SEC Filings

Show all filings for LAM RESEARCH CORP

Form 10-K for LAM RESEARCH CORP


26-Aug-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations contains forward-looking statements, which are subject to risks, uncertainties and changes in condition, significance, value and effect. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in "Risk Factors" and elsewhere in this 2014 Form 10-K and other documents we file from time to time with the Securities and Exchange Commission. (See "Cautionary Statement Regarding Forward-Looking Statements" in Part I of this 2014 Form 10-K).

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") provides a description of our results of operations and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in this 2014 Form 10-K. MD&A consists of the following sections:

Executive Summary provides a summary of the key highlights of our results of operations and our management's assessment of material trends and uncertainties relevant to our business.

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 used in the preparation of our consolidated financial statements.

Liquidity and Capital Resources provides an analysis of cash flows, contractual obligations and financial position.

Executive Summary

Lam Research has been an innovative supplier of wafer fabrication equipment and services to the semiconductor industry for more than 30 years. Our customers include semiconductor manufacturers that make memory, microprocessors, and other logic integrated circuits for a wide range of electronics; including cell phones, computers, storage devices and networking equipment.

Our market-leading products are designed to help our customers build the smaller, faster and more power-efficient devices that are necessary to power the capabilities required by end users. The process of integrated circuits fabrication consists of a complex series of process and preparation steps and Lam's product offerings in deposition, etch and clean address a number of the most critical steps in the fabrication process. 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 has been highly competitive and subject to business cycles that historically have been characterized by rapid changes in demand. More recently with consolidation in the customer base, the cyclical behavior appears to have diminished somewhat. With a reduced number of customers, variability in their business plans may lead to changes in demand for Lam's equipment and services over certain periods. The variability in our customers' investments during any particular period is dependent on several factors including but not limited to electronics demand, economic conditions (both general and in the semiconductor and electronics industries), industry supply and demand, prices for semiconductors, and our customers' ability to develop and manufacture increasingly complex and costly semiconductor devices.

Demand for our products increased steadily throughout fiscal year 2014 as semiconductor device manufacturers made capacity and technology investments. Technology inflections have been in industry inflection points that include FinFET transistors, 3-D NAND and multiple patterning. These technology inflections have led to an increase in the deposition, etch and clean market size. This increase, as well as market share gains in these inflections, have contributed to the increased revenue in fiscal 2014. We believe that, over the longer term, demand for our products should increase as the proportion of customers' capital expenditures rise in these technology inflection areas, and we continue to gain market share.


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The following summarizes certain key annual financial information for the periods indicated below:

                                              Year Ended
                             June 29,          June 30.          June 24,
                               2014              2013              2012                 FY14 vs. FY13                  FY13 vs. FY12
                                                        (in thousands, except per share data and percentages)
Revenue                     $ 4,607,309       $ 3,598,916       $ 2,665,192       $ 1,008,393          28.0 %     $ 933,724          35.0 %
Gross margin                $ 2,007,481       $ 1,403,059       $ 1,084,069       $   604,422          43.1 %     $ 318,990          29.4 %
Gross margin as a
percent of total revenue           43.6 %            39.0 %            40.7 %             4.6 %                        -1.7 %
Total operating expenses    $ 1,329,812       $ 1,284,988       $   846,336       $    44,824           3.5 %     $ 438,652          51.8 %
Net income                  $   632,289       $   113,879       $   168,723       $   518,410         455.2 %     $ (54,844 )       -32.5 %
Diluted net income per
share                       $      3.62       $      0.66       $      1.35       $      2.96         448.5 %     $   (0.69 )       -51.1 %

On June 4, 2012, we completed our acquisition of Novellus Systems, Inc ("Novellus"). Results for fiscal years 2014 and 2013 include Novellus operations. Results for fiscal year 2012 include Novellus operations from the acquisition date through June 24, 2012. Lam's primary reasons for this acquisition were to complement existing product offerings and to provide opportunities for revenue growth and cost synergies.

Fiscal year 2014 revenues increased 28% compared to fiscal year 2013, reflecting the increase in technology inflections' spending, as well as, incremental market share gains. The increase in gross margin as a percentage of revenue for the fiscal year 2014 compared to fiscal year 2013 was due primarily to a decrease in Novellus acquisition-related inventory fair value adjustments, improved business volumes and product mix. Operating expenses in fiscal year 2014 increased as compared to fiscal year 2013 primarily related to continued investments in the next-generation research and development and customer facing activities.

Our cash and cash equivalents, short-term investments, and restricted cash and investments balances totaled approximately $3.2 billion as of June 29, 2014 compared to $2.7 billion as of June 30, 2013. This increase was primarily the result of $717 million of cash flows from operating activities, offset by $245 million in share repurchases. This compares to $720 million in cash provided by operating activities during fiscal year 2013.

Results of Operations

Shipments and Backlog



                                                    Year Ended
                                     June 29,        June 30,        June 24,
                                       2014            2013            2012
          Shipments (in millions)   $    4,551      $    3,714      $    2,672

          Korea                             24 %            16 %            36 %
          Taiwan                            21 %            29 %            18 %
          Japan                             13 %            11 %            10 %
          China                             15 %             9 %             6 %
          United States                     15 %            20 %            17 %
          Europe                             7 %             8 %             8 %
          Southeast Asia                     5 %             7 %             5 %

Shipments for fiscal year 2014 were approximately $4.6 billion and increased by 23% compared to fiscal year 2013. Shipments for fiscal year 2013 were approximately $3.7 billion and increased by 39% compared to fiscal year 2012. The increase in shipments during fiscal year 2014 as compared to fiscal year 2013 related to continued strengthening of customer demand through fiscal year 2014. The increase in shipments during fiscal year 2013 as compared to fiscal year 2012 related to having a full year of combined operations with Novellus and the strengthening of customer demand in the second half of fiscal year 2013.


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The percentage of total semiconductor processing system shipments to each of the market segments we serve were as follows for fiscal years 2014, 2013, and 2012.

                                                           Year Ended
                                            June 29,        June 30,        June 24,
                                              2014            2013            2012
   Memory                                          60 %            36 %            45 %
   Foundry                                         30 %            49 %            46 %
   Logic/integrated device manufacturing           10 %            15 %             9 %

During fiscal year 2014, memory customer demand was higher due to node transitions in memory manufacturing, stable pricing for memory, and tight industry supply.

Unshipped orders in backlog as of June 29, 2014 were approximately $866 million and increased from approximately $764 million as of June 30, 2013. Our unshipped orders backlog includes orders for systems, spares, and services. Please refer to "Backlog" in Part I Item 1, "Business" of this report for a description of our policies for adding to and adjusting backlog.

Revenue



                                                   Year Ended
                                    June 29,        June 30,        June 24,
                                      2014            2013            2012
           Revenue (in millions)   $    4,607      $    3,599      $    2,665

           Korea                           24 %            17 %            33 %
           Taiwan                          23 %            29 %            18 %
           Japan                           14 %            10 %            12 %
           China                           14 %             9 %             5 %
           United States                   13 %            20 %            17 %
           Europe                           7 %             8 %             9 %
           Southeast Asia                   5 %             7 %             6 %

The revenue increase in fiscal year 2014 as compared to fiscal year 2013 reflected increased customer and industry demand. The revenue increase in fiscal year 2013 as compared to fiscal year 2012 reflected a full fiscal year of operations post-acquisition of Novellus. Our revenue levels are generally correlated to the amount of shipments and our installation and acceptance timelines. The overall Asia region continues to account for a majority of our revenues as a substantial amount of the worldwide capacity additions for semiconductor manufacturing continues to occur in this region. Our deferred revenue balance was $361.6 million as of June 29, 2014 compared to $389.2 million as of June 30, 2013. 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 customer acceptance. The anticipated future revenue value from shipments to Japanese customers was approximately $34 million as of June 29, 2014 compared to $70 million as of June 30, 2013.

Gross Margin



                                            Year Ended
                            June 29,         June 30,         June 24,
                              2014             2013             2012              FY14 vs. FY13              FY13 vs. FY12
                                                           (in thousands, except percentages)
Gross margin               $ 2,007,481      $ 1,403,059      $ 1,084,069      $ 604,422        43.1 %    $ 318,990        29.4 %
Percent of total revenue          43.6 %           39.0 %           40.7 %          4.6 %                     -1.7 %


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The increase in gross margin as a percentage of revenue for fiscal year 2014 compared to fiscal year 2013 was due to higher business volumes as well as a more favorable product mix. Additionally, the Novellus acquisition related inventory fair value impact and cost associated with rationalization of certain product configurations decreased by $78 million and $15 million, respectively, in fiscal year 2014 as compared to fiscal year 2013.

The decrease in gross margin as a percentage of revenue for fiscal year 2013 compared to fiscal year 2012 was due primarily to higher Novellus acquisition-related inventory fair value adjustments of approximately $77 million, amortization of acquired intangible assets of approximately $78 million, and $16 million of costs associated with rationalization of certain product configurations. Offsetting these higher Novellus acquisition and product configuration-related expenses was a favorable change in gross margin as a result of increased business volume.

Research and Development



                                               Year Ended
                                 June 29,       June 30,       June 24,
                                   2014           2013           2012            FY14 vs. FY13             FY13 vs. FY12
                                                             (in thousands, except percentages)
Research & development ("R&D")   $ 716,471      $ 683,688      $ 444,559      $ 32,783        4.8 %    $ 239,129        53.8 %
Percent of total revenue              15.6 %         19.0 %         16.7 %        -3.4 %                     2.3 %

We continued to make significant R&D investments focused on leading-edge deposition, plasma etch, single-wafer clean and other semiconductor manufacturing requirements. The increase in R&D expense during fiscal year 2014 compared to fiscal year 2013 was primarily due to a $41 million increase in salaries and benefits related to higher headcount and higher incentive and equity compensation offset by a reduction of $7 million in supplies.

The increase in R&D spending during fiscal year 2013 compared to fiscal year 2012 reflects a full year of combined operations with Novellus. Increased R&D expense included $111 million in salary and benefits mainly due to higher headcount, $46 million in supplies, $26 million in depreciation and amortization due to new product development, $15 million in outside services, and an additional $12 million in rent, utilities and repairs.

Selling, General and Administrative



                                            Year Ended
                              June 29,       June 30,       June 24,
                                2014           2013           2012            FY14 vs. FY13             FY13 vs. FY12
                                                          (in thousands, except percentages)
Selling, general &
administrative ("SG&A")       $ 613,341      $ 601,300      $ 401,777      $ 12,041        2.0 %    $ 199,523        49.7 %
Percent of total revenue           13.3 %         16.7 %         15.1 %        -3.4 %                     1.6 %

The increase in SG&A expense during fiscal year 2014 compared to fiscal year 2013 was due primarily to a net increase of $11 million in salaries, benefits and incentive compensation, $20 million increase in marketing expenses and outside services, $7 million in costs associated with rationalization of certain product configurations, $8 million of impairment of a long lived asset, and a $5 million cost related to the renewal of our Fremont and Livermore buildings' operating leases. This increase was offset by a $34 million reduction in integration costs and a $10 million reduction in amortization of intangible assets related to the Novellus integration.

The increase in SG&A expense during fiscal year 2013 compared to fiscal year 2012 was due primarily to the impact of combined operations with Novellus. Increased expense includes $108 million in salary and benefits


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due to a higher headcount, $73 million of intangible asset amortization, $29 million in integration cost, and $14 million in rent/repair/utilities, all offset by a $47 million decrease in Novellus acquisition-related cost.

Gain on Sale of Real Estate

During the fiscal year 2014, we sold our interest in nonessential property in Palo Alto, California, resulting in $135 million in net proceeds and a realized gain of $83 million from the transaction.

Other Expense, Net

Other expense, net, consisted of the following:



                                                                Year Ended
                                                June 29,         June 30,         June 24,
                                                  2014             2013             2012
                                                              (in thousands)
Interest income                                 $  12,540        $  14,737        $  12,141
Interest expense                                  (61,692 )        (60,408 )        (38,962 )
Gains (losses) on deferred compensation
plan related assets, net                            9,559            9,764             (914 )
Foreign exchange gains (losses), net                1,529           (6,808 )           (397 )
Other, net                                            668           (8,698 )         (5,183 )

                                                $ (37,396 )      $ (51,413 )      $ (33,315 )

The increase in interest expense during fiscal year 2013 as compared with fiscal year 2012 was primarily due to the 2041 convertible notes assumed in June 2012 in connection with the Novellus acquisition.

Foreign exchange gains in fiscal year 2014 and losses in fiscal years 2013 and 2012 were related to un-hedged portions of the balance sheet exposures.

Other income realized during fiscal year 2014 was primarily due to a gain on the disposition of a private equity investment. Other expenses during fiscal year 2013 included a $4 million other-than-temporary impairment of a public equity investment recognized during the March 2013 quarter. Other expenses during fiscal year 2012 included a $2 million other-than temporary impairment of a private equity investment recognized during the September 2011 quarter.

Income Tax Expense (benefit)



                                                     Year Ended
                                       June 29,       June 30,       June 24,
                                         2014           2013           2012
                                                   (in thousands)
          Provision for income taxes   $  91,074      $ (47,221 )    $  35,695
          Effective tax rate                12.6 %        -70.8 %         17.5 %

The increase in the effective tax rate in fiscal year 2014 as compared to fiscal year 2013 was primarily due to the change in the level of income and geographic mix of income between higher and lower tax jurisdictions, U.S. income and applicable foreign withholding taxes on undistributed foreign earnings of certain of our foreign subsidiaries for 2014, reduced tax benefit in fiscal year 2014 due to the expiration of the federal research and development tax credit as of December 31, 2013, and tax benefits in fiscal year 2013 related to the recognition of previously unrecognized tax benefits due to the lapse of the statute of limitations and successful resolution of certain tax matters. The decrease in the effective tax rate in fiscal year 2013 as compared to fiscal year 2012 was


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primarily due to the level of income, tax benefits related to the recognition of previously unrecognized tax benefits due to the lapse of the statute of limitations and successful resolution of certain tax matters, the change in geographical mix of income between higher and lower tax jurisdictions, and tax benefit due to the retroactive reinstatement of the federal research and development tax credit in January 2013.

International revenues account for a significant portion of our total revenues, such that a material portion of our pre-tax income is earned and taxed outside the United States at rates that are generally lower than in the United States. Please refer to Note 15 to Consolidated Financial Statements.

Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Our gross deferred tax assets, composed primarily of reserves and accruals that are not currently deductible and tax credit carryforwards, were $343 million and $318 million at the end of fiscal years 2014 and 2013, respectively. These gross deferred tax assets were offset by deferred tax liabilities of $294 million and $259 million at the end of fiscal years 2014 and 2013, respectively, and a valuation allowance of $74 million and $77 million at the end of fiscal years 2014 and 2013, respectively. The change in the gross deferred tax assets and deferred tax liabilities between fiscal year 2014 and 2013 is primarily due to accrual for future tax liability due to the expected repatriation of foreign earnings of certain of our foreign subsidiaries for 2014 and amortization of convertible debt, offset by increase in deferred tax assets related to accounting allowances and reserves.

Our fiscal years 2014 and 2013 valuation allowance of $74 million and $77 million primarily relate to California and certain foreign deferred tax assets.

At our fiscal year end of June 29, 2014 we continue to record a valuation allowance to offset the entire California deferred tax asset balance due to the impact of the single sales factor apportionment election resulting in lower taxable income in California. We also continue to record valuation allowance on certain foreign entities' net operating losses.

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 based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make certain judgments, estimates and assumptions that could affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We based our estimates and assumptions on historical experience and on various other assumptions we believed to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates.

The significant accounting policies used in the preparation of our financial statements are described in Note 2 of our Consolidated Financial Statements. Some of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that has both a material impact on


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our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often regarding estimates about matters that are inherently uncertain.

We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Recognition: We recognize all revenue when persuasive evidence of an arrangement exists, delivery has occurred and title has passed or services have been rendered, the selling price is fixed or determinable, collection of the receivable is reasonably assured, and we have received customer acceptance or are otherwise released from our customer acceptance obligations. If terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. If the practices of a customer do not provide for a written acceptance or the terms of sale do not include a lapsing acceptance provision, we recognize revenue when it can be reliably demonstrated that the delivered system meets all of the agreed-to customer specifications. In situations with multiple deliverables, we recognize revenue upon the delivery of the separate elements to the customer and when we receive customer acceptance or are otherwise released from our customer acceptance obligations. We allocate revenue from multiple-element arrangements among the separate elements based on their relative selling prices, provided the elements have value on a stand-alone basis. Our sales arrangements do not include a general right of return. The maximum revenue we recognize on a delivered element is limited to the amount that is not contingent upon the delivery of additional items. We generally recognize revenue related to sales of spare parts and system upgrade kits upon shipment. We generally recognize revenue related to services upon completion of the services requested by a customer order. We recognize revenue for extended maintenance service contracts with a fixed payment amount on a straight-line basis over the term of the contract. When goods or services have been delivered to the customer but all conditions for revenue recognition have not been met, we record deferred revenue and/or deferred costs of sales in deferred profit on our Consolidated Balance Sheet.

Inventory Valuation: Inventories are stated at the lower of cost or market using standard costs that approximate actual costs on a first-in, first-out basis. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies, and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. . . .

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