UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED DECEMBER 31, 1995 Commission File No. 0-12933 LAM RESEARCH CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 94-2634797 ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4650 CUSHING PARKWAY, FREMONT, CALIFORNIA 94538 - ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 659-0200 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ As of December 31, 1995 there were 27,402,323 shares of Registrant's Common Stock outstanding. 1
INDEX Page No. ------ PART I. FINANCIAL INFORMATION ..................................... 3 Item 1. Financial Statements (unaudited)........................... 3 Condensed Consolidated Balance Sheets............ 3 Condensed Consolidated Statements of Income...... 4 Condensed Consolidated Statements of Cash Flows.. 5 Notes to Condensed Consolidated Financial Statements.................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 8 Results of Operations............................ 8 Liquidity and Capital Resources.................. 10 PART II. OTHER INFORMATION.......................................... 11 Item 1. Legal Proceedings.......................................... 11 Item 4. Results of Vote of Stockholders............................ 12 Item 6. Exhibits and Reports on Form 8-K........................... 13 2
ITEM 1. FINANCIAL STATEMENTS LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands except per share data) <TABLE> December 31, June 30, 1995 1995 (Unaudited) (Note) ------------ -------- <S> <C> <C> Assets Cash and cash equivalents $ 17,785 $ 43,675 Short-term investments 91,807 57,334 Accounts receivable, net 228,597 195,682 Inventories 220,151 171,401 Prepaid expenses and other assets 11,768 25,263 Deferred income taxes 34,428 32,778 -------- -------- Total Current Assets 604,536 526,133 Equipment and leasehold improvements, net 130,243 117,571 Restricted cash 24,124 25,024 Other assets 19,554 13,921 -------- -------- Total Assets $778,457 $682,649 -------- -------- -------- -------- Liabilities and Stockholders' Equity Trade accounts payable $ 99,717 $ 82,542 Accrued expenses and other current liabilities 115,418 98,633 Current portion of long-term debt and capital lease obligations 6,983 7,572 -------- -------- Total Current Liabilities 222,118 188,747 Long-term debt and capital lease obligations, less current portion 93,420 95,928 Deferred income taxes 2,712 2,712 -------- -------- Total Liabilities 318,250 287,387 Preferred stock: 5,000 shares authorized; none outstanding Common Stock at par value of $.001 per share Authorized -- 90,000 shares; issued and outstanding 27,402 shares at December 31, 1995 and 27,275 shares at June 30, 1995 27 27 Additional paid-in capital 225,729 224,730 Retained earnings 234,451 170,505 -------- -------- Total Stockholders' Equity 460,207 395,262 -------- -------- $778,457 $682,649 -------- -------- -------- -------- </TABLE> - ------------------- Note -- The Condensed Consolidated Balance Sheet at June 30, 1995 has been derived from the audited financial statements at that date. See Notes to condensed consolidated financial statements. 3
LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited) <TABLE> Three Months Ended Six Months Ended ------------------------ ---------------------- December 31, December 31, ------------ ------------ 1995 1994 1995 1994 -------- -------- -------- ------- <S> <C> <C> <C> <C> Net sales $284,195 $169,777 $541,942 $328,697 Royalty income 6,322 2,962 11,819 5,555 -------- -------- -------- -------- Total revenue 290,517 172,739 553,761 334,252 Costs and expenses: Cost of goods sold 148,507 88,851 283,214 173,541 Research and development 39,054 26,813 75,037 52,137 Selling, general and administrative 52,578 30,136 100,162 59,255 -------- -------- -------- -------- Operating income 50,378 26,939 95,348 49,319 Other expense/(income), net 1,145 (106) 1,317 770 -------- -------- -------- -------- Income before income taxes 49,233 27,045 94,031 48,549 Income taxes 15,754 8,114 30,085 14,565 -------- -------- -------- -------- Net income $ 33,479 $ 18,931 $ 63,946 $ 33,984 -------- -------- -------- -------- -------- -------- -------- -------- Net income per share Primary $1.18 $0.68 $2.26 $1.29 -------- -------- -------- -------- -------- -------- -------- -------- Fully diluted $1.12 $0.64 $2.12 $1.22 -------- -------- -------- -------- -------- -------- -------- -------- Number of shares used in per share calculations Primary 28,300 27,935 28,350 26,350 -------- -------- -------- -------- -------- -------- -------- -------- Fully diluted 30,875 30,575 31,000 28,990 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> See Notes to condensed consolidated financial statements. 4
LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended ------------------------------------- December 31, December 31, 1995 1994 ---------------- ---------------- <S> <C> <C> Cash flows from operating activities: Net income $63,946 $33,984 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 14,803 9,790 Change in certain working capital accounts (47,898) (52,135) ---------------- ---------------- Net cash provided by (used in) operating activities 30,851 (8,361) Cash flows from investing activites: Capital expenditures (22,736) (25,187) Purchase of short-term investments (191,932) -- Sale of short-term investments 157,459 -- Restricted cash 900 (2,618) Proceeds from sales of securities 12,038 -- Other (5,633) (4,282) ---------------- ---------------- Net cash used in investing activities (49,904) (32,087) ---------------- ---------------- Cash flows from financing activities: Sale of stock, net of issuance costs 999 116,971 Principal payments on long-term debt and capital lease obligations (7,155) (4,484) Other (681) -- ---------------- ---------------- Net cash provided by (used in) financing activities (6,837) 112,487 ---------------- ---------------- Net increase (decrease) in cash and cash equivalents (25,890) 72,039 Cash and cash equivalents at beginning of period 43,675 24,092 ---------------- ---------------- Cash and cash equivalents at end of period $17,785 $96,131 ---------------- ---------------- ---------------- ---------------- </TABLE> See Notes to condensed consolidated financial statements. 5
LAM RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 (Unaudited) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Lam Research Corporation (the "Company") for the year ended June 30, 1995, which are included in the Annual Report on Form 10-K, File number 0-12933. The results of operations for the three and six month periods ended December 31, 1995 are not necessarily indicative of the results that may be expected for the entire fiscal year ending June 30, 1996. NOTE B -- INVENTORIES Inventories consist of the following: December 31, June 30, 1995 1995 ------------ -------------- (in thousands) Raw materials $99,349 $80,910 Work-in-process 96,333 73,183 Finished goods 24,469 17,308 ------------ -------------- $220,151 $171,401 ------------ -------------- ------------ -------------- NOTE C -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following: December 31, June 30, 1995 1995 ------------ -------------- (in thousands) Equipment $91,836 $80,910 Furniture & fixtures 32,791 25,372 Leasehold improvements 72,707 64,707 ------------ -------------- 197,334 170,989 Accumulated depreciation and amortization (67,091) (53,418) ------------ -------------- $130,243 $117,571 ------------ -------------- ------------ -------------- 6
NOTE D -- OTHER EXPENSE/(INCOME), NET The significant components of other expense, net are as follows (in thousands): Three Months Ended Six Months Ended December 31, December 31, 1995 1994 1995 1994 ------- ------- ------- ------- Interest Expense $2,131 $1,572 $4,099 $3,008 Interest Income (1,364) (1,593) (2,739) (2,090) Other 378 (85) (43) (148) ------- ------- ------- ------- $1,145 $(106) $1,317 $770 ------- ------- ------- ------- ------- ------- ------- ------- NOTE E -- INVESTMENTS In November, 1995, the Financial Accounting Standards Board staff issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities". In accordance with provisions in that Special Report, the Company elected to reclassify all of its held-to-maturity securities to available-for-sale. At December 31, 1995, the amortized cost of those securities (included in restricted cash on the Company's condensed balance sheet) was $24,124,000, which approximates the fair value. NOTE F -- NET INCOME PER SHARE For the three and six month periods ended December 31, 1995 and 1994, primary net income per share is calculated using the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The common stock equivalents include shares issuable upon the assumed exercise of stock options reflected under the treasury stock method. In addition, fully diluted net income per share reflects the assumed conversion of the Company's convertible subordinated debentures at the beginning of each period, and also adds the interest expense incurred on the debentures, net of income tax effect, to the net income amount for use in the fully diluted calculation. NOTE G -- LINE OF CREDIT During the quarter ended December 1995, the Company entered into a syndicated bank line of credit totaling $210.0 million, which expires in December 1998. NOTE H -- LITIGATION See Part II, item 1 for discussion of litigation. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information in this discussion contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the Safe Harbor created by that statute. Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The components of the Company's statements of income, expressed as a percentage of total revenue, are as follows: Three Months Six Months Ended Ended December 31, December 31, 1995 1994 1995 1994 --------------- -------------- Net Sales 97.8% 98.3% 97.9% 98.3% Royalty income 2.2 1.7 2.1 1.7 --------------- -------------- 100.0 100.0 100.0 100.0 Cost of goods sold 51.1 51.4 51.1 51.9 Research and development 13.5 15.6 13.6 15.6 Selling, general & administrative 18.1 17.4 18.1 17.7 --------------- -------------- Operating income 17.3 15.6 17.2 14.8 Other expense/(income), net 0.4 (0.1) 0.2 0.3 --------------- -------------- Income before income taxes 16.9 15.7 17.0 14.5 Income taxes 5.4 4.7 5.4 4.3 --------------- -------------- Net income 11.5% 11.0% 11.6% 10.2% --------------- -------------- --------------- -------------- RESULTS OF OPERATIONS Net sales for the three and six month periods ended December 31, 1995 increased by 67% and 65%, respectively, over the comparable prior year periods. Increased unit sales of Transformer Coupled Plasma-TM- (TCP-TM-) and Rainbow-TM- systems accounted for approximately 61% of the sales increase for the second quarter of fiscal year 1996 as compared to the comparable prior year period. The Company's Rainbow 4500 oxide etch and TCP 9600 metal etch products experienced the highest net sales increase during the quarter ended December 31, 1995 compared to the prior year quarter. Sales to foreign customers increased to 59% and 60%, respectively, of net sales, for the three and six months ended December 31, 1995, from 45% and 47%, respectively, of net sales for the same periods of the prior year. Increased sales of all Lam product lines in Europe accounted for 28% of the overall net sales increase during the quarter ended December 31, 1995; net sales in Japan and Asia Pacific were also much stronger than in 8
the year-ago period. In addition, service and spares revenue which represented approximately 21% of total revenue, increased 67% as compared to the same period of the prior fiscal year, as a result of increases in the Company's installed machine base. Royalty income increased by 113% from the year-ago quarter due to continued improvement in the Japanese semiconductor market which resulted in increased sales of products incorporating the Company's technology being licensed by Tokyo Electron Limited (TEL) and Sumitomo Metal Industries, Ltd. (SMI). The Company's gross margin percentage improved to 48.9% for both the three and six months periods ended December 31, 1995 as compared to 48.6 and 48.1%, respectively, in the comparable periods of fiscal 1995. The improvement in gross margin percentage resulted from increased shipments of Rainbow machines with a higher margin during the quarter ended December 31, 1995 as compared to the comparable period in the prior year. A favorable product mix within spares during the quarter ended December 31, 1995 also contributed to the increase in gross margin. Research and development (R&D) expense increased for the three and six month periods ended December 31, 1995 by 46% and 44% over the prior year periods, but as a percentage of total revenue was lower than the comparable prior year period. The increased expense was due to continued expenditures on advanced etch applications, continued development of CVD technologies including Deep SubMicron (DSM-TM-) 9800 (formerly Integrity-Registered Trademark-) and Deep SubMicron(DSM-TM-) 9900 (formerly Epic-TM-), further enhancements of the TCP, Alliance and Rainbow products and continued development of the Company's Flat Panel Display technology. Although the Company has significantly increased engineering headcount and spending, these expenditures have increased at a slightly slower rate than the Company's revenue. The Company believes it is critical to continue to make investments in R&D programs. During the quarter ended December 31, 1995, construction began on a new engineering facility at the Company's Fremont campus which the Company will occupy under an operating lease. This facility is expected to be operational by the end of the current fiscal year. Selling, general and administrative (S,G&A) expenses for the three and six month periods ended December 31, 1995 increased by 74% and 69%, respectively, over the prior year periods. The Company has added employees in all customer support, sales and administration areas to accommodate the increased sales volume. SG&A expenditures by the Company's foreign subsidiaries increased at a rate higher than that in the United States. The increase in the foreign expenditures for SG&A was needed to accommodate the increase in sales in all foreign regions. The Company opened a new manufacturing facility in Korea in July 1995 and is expanding its facilities at in Japan and Taiwan. The Company therefore projects that SG&A expenses in Asia Pacific and Japan will continue to increase over the remainder of the fiscal year. 9
The effective tax rate for the three month and six month fiscal 1996 periods is 32% compared to 30% for the prior year periods due primarily to the expiration of the federal research and development credit. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $30.9 million for the six months ended December 31, 1995, derived from income before depreciation and amortization expenses totaling $78.7 million, offset by the increases in inventories and accounts receivable related to the sales volume increase. In addition, $47.7 million was provided from the sale of yen-denominated Japanese receivables to a bank (under an agreement entered into during fiscal 1995 whereby the Company may sell up to $50.0 million of yen-denominated Japanese receivables to the bank). The Company is currently renegotiating the agreement to sell yen-denominated Japanese receivables in an effort to increase the amount of receivables it may sell. Capital expenditures for the current three month period were $22.7 million, primarily for new facility leasehold improvements, and furnishings at both the Fremont campus, Japan facility and the new manufacturing facility in Korea. The Company had net purchases of short-term investments of $34.5 million. Cash receipts from investing activities of $12.0 million were provided from the sale of Brooks Automation, Inc. securities. In addition, contributing to the overall use of cash were payments of $7.2 million relating to long-term debt and capital lease obligations. As of December 31, 1995, the Company had $109.6 million in cash, cash equivalents and short-term investments compared with $101.0 million at June 30, 1995. The Company has a total of $210.0 million available under a syndicated bank line of credit which expires in December 1998. There were no borrowings on the line at December 31, 1995. The Company is currently renegotiating its pledge agreement in an effort to reduce the amount of restricted investments ($24.1 million) under a long term facility lease. The Company estimates that its cash, cash equivalents, short-term investments and available line of credit at the end of the second quarter of fiscal 1996 are adequate to support current levels of operations for at least the next twelve months. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 10
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In October 1993, Varian Associates, Inc. (Varian) brought suit against the Company in the United States District Court, Northern District of California, seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Varian. The lawsuit is in the late stages of discovery. No trial date has been set. The Company has asserted defenses of invalidity and unenforceability of the patents that are the subject of the lawsuit, as well as noninfringement of such patents by the Company's products. While litigation is subject to inherent uncertainties and no assurance can be given that the Company will prevail in such litigation or will obtain a license under such patents on commercially reasonable terms or at all if such patents are held valid and infringed by the Company's products, the Company believes that the Varian lawsuit will not have a material adverse effect on the Company's consolidated financial statements. In addition, the Company is from time to time notified by various parties that it may be in violation of certain patents. In such cases, it is the Company's intention to seek negotiated licenses where it is considered appropriate. The outcome of these matters will not, in management's opinion, have a material impact on the Company's consolidated financial position, operating results or cash flows. 11
ITEM 4. Results of Vote of Stockholders The Annual Meeting of Stockholders of Lam Research Corporation was held at the principle office of the Company at 4650 Cushing Parkway, Fremont, California 94538 on October 26, 1995. Out of 27,320,607 shares of Common Stock entitled to vote at such meeting, there were present in person or by proxy 25,140,610 shares. The vote for nominating directors, to serve for the ensuing year, and until their successors are elected, was as follows: NOMINEE IN FAVOR WITHHELD - ------- -------- -------- Roger D. Emerick 24,822,827 317,783 David G. Arscott 24,823,473 317,137 Jack R. Harris 24,822,576 318,034 Grant M. Inman 24,825,726 314,884 Osamu Kano 24,822,565 318,045 The results of voting on the following items were as set forth below: (a) Approval of amendment of the Company's 1984 Employee Stock Purchase Plan to increase the number of shares reserved for issuance thereunder by 150,000 shares to 1,337,500: BROKER IN FAVOR OPPOSED WITHHELD NON-VOTES ---------- ------- -------- --------- 24,546,652 209,190 24,589 360,179 (b) Approval of amendment of the Company's Amended 1991 Incentive Stock Option Plan to increase the number of shares reserved for issuance thereunder by 1,000,000 shares to 3,875,000: BROKER IN FAVOR OPPOSED WITHHELD NON-VOTES ---------- --------- -------- --------- 17,803,219 6,871,323 32,823 433,245 (c) Approval of the Performance-Based Restricted Stock Plan and the number of shares reserved for issuance thereunder by 150,000: BROKER IN FAVOR OPPOSED WITHHELD NON-VOTES ---------- ------- -------- --------- 23,748,464 996,066 35,901 360,179 (d) Ratification of appointment of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending June 30, 1996: BROKER IN FAVOR OPPOSED WITHHELD NON-VOTES ---------- ------- -------- --------- 25,101,818 17,583 21,209 none 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 4.3 Amended 1984 Employee Stock Purchase Plan Exhibit 4.4 Amended 1991 Stock Option Plan Exhibit 10.29 Credit Agreement dated December 20, 1995 between Lam Research Corporation and ABN AMRO Bank N.V. Exhibit 11.1 Statement Re: Computation of Earnings Per Share Exhibit 27 Financial Data Schedule (b) No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1995. 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 13, 1996 LAM RESEARCH CORPORATION By: \s\ Henk J. Evenhuis ---------------------- Henk J. Evenhuis, Executive Vice President, Finance & Chief Financial Officer 10