1
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 MARCH 31, 1998
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 March 31, 1998, there were 38,218,676 shares of Registrant's Common Stock
outstanding.
2
INDEX
Page
No.
----
PART I. FINANCIAL INFORMATION................................... 3
Item 1. Financial Statements(unaudited)......................... 3
Condensed Consolidated Balance Sheets............ 3
Condensed Consolidated Statements of Operations.. 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..................... 10
Results of Operations............................ 12
Liquidity and Capital Resources.................. 14
Risk Factors..................................... 15
PART II. OTHER INFORMATION....................................... 18
Item 1. Legal Proceedings....................................... 18
Item 6. Exhibits and Reports on Form 8-K........................ 19
2
3
ITEM 1. FINANCIAL STATEMENTS
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31,
1998 June 30,
(unaudited) 1997
---------- ----------
Assets
Cash and cash equivalents $ 194,116 $ 140,872
Short-term investments 156,137 54,821
Accounts receivable, net 229,005 232,073
Inventories 240,905 261,738
Prepaid expenses and other assets 66,413 37,707
Deferred income taxes 75,509 75,935
---------- ----------
Total current assets 962,085 803,146
Equipment and leasehold improvements, net 186,389 196,992
Restricted cash 52,000 --
Other assets 33,766 34,911
---------- ----------
Total assets $1,234,240 $1,035,049
========== ==========
Liabilities and Stockholders' Equity
Trade accounts payable $ 71,546 $ 117,163
Accrued expenses and other
current liabilities 219,985 167,685
Line of credit borrowings -- 35,000
Current portion of long-term debt and
capital lease obligations 19,321 21,127
---------- ----------
Total current liabilities 310,852 340,975
Long-term debt and capital lease
obligations, less current portion 339,469 46,592
Preferred stock: 5,000 shares authorized;
none outstanding -- --
Common stock at par value of $.001 per share
Authorized -- 90,000 shares; issued and
outstanding 38,219 shares at March 31,
1998 and 37,334 shares at June 30, 1997 38 37
Additional paid-in capital 376,248 361,101
Retained earnings 207,633 286,344
---------- ----------
Total stockholders' equity 583,919 647,482
---------- ----------
$1,234,240 $1,035,049
========== ==========
See Notes to condensed consolidated financial statements.
3
4
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $ 239,487 $ 232,602 $ 820,170 $ 778,643
Royalty income 531 664 1,830 11,933
--------- --------- --------- ---------
Total revenue 240,018 233,266 822,000 790,576
Costs and expenses:
Cost of goods sold - on net sales 152,476 212,741 508,376 549,472
Cost of goods sold - restructuring
charge 19,553 -- 19,553 --
--------- --------- --------- ---------
Gross profit 67,989 20,525 294,071 241,104
Research and development 48,856 49,442 157,507 139,481
Selling, general and administrative 47,537 51,073 154,196 151,205
Merger costs -- -- 17,685 --
Acquired in-process research &
development 12,100 -- 12,100 --
Restructuring charge 65,343 -- 65,343 9,021
--------- --------- --------- ---------
Operating loss (105,847) (79,990) (112,760) (58,603)
Other (income) expense, net (1,605) (164) (341) 145
--------- --------- --------- ---------
Loss before taxes (104,242) (79,826) (112,419) (58,748)
Tax benefit (34,178) (35,601) (33,708) (29,548)
--------- --------- --------- ---------
Net loss $ (70,064) $ (44,225) $ (78,711) $ (29,200)
========= ========= ========= =========
Net loss per share
Basic $ (1.84) $ (1.20) $ (2.08) $ (0.79)
========= ========= ========= =========
Diluted $ (1.84) $ (1.20) $ (2.08) $ (0.79)
========= ========= ========= =========
Number of shares used in
per share calculations
Basic 38,025 36,928 37,930 36,781
========= ========= ========= =========
Diluted 38,025 36,928 37,930 36,781
========= ========= ========= =========
See Notes to condensed consolidated financial statements.
4
5
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
-----------------------------
March 31, March 31,
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $ (78,711) $ (29,200)
Adjustments to reconcile net
(loss) to net cash provided by
operating activities:
Depreciation and amortization 48,365 44,779
Deferred income taxes 1,976 (3,105)
Acquired in-process research and
development expense 12,100 --
Change in certain working capital
accounts (7,876) 89,745
----------- -----------
Net cash provided by (used in)
operating activities (24,146) 102,219
Cash flows from investing activities:
Capital expenditures, net (30,447) (48,422)
Purchase of short-term investments (7,016,491) (485,703)
Sale of short-term investments 6,915,175 394,296
Restricted cash (52,000) --
Cash paid for acquisition of in-process
research and development (9,000) --
Other 7,934 (11,479)
----------- -----------
Net cash used in investing activities (184,829) (151,308)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings under
line of credit -- 60,000
Repayments of borrowings under
line of credit (35,000) (70,000)
Sale of stock, net of issuance
costs 15,148 10,443
Proceeds from issuance of
long-term debt 304,517 1,632
Principal payments on long-term debt
and capital lease obligations (22,446) (15,858)
----------- -----------
Net cash provided by (used in)
financing activities 262,219 (13,783)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 53,244 (62,872)
Cash and cash equivalents at beginning
of period 140,872 87,096
----------- -----------
Cash and cash equivalents at end of
period $ 194,116 $ 24,224
=========== ===========
See Notes to condensed consolidated financial statements.
5
6
LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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
supplemental consolidated financial statements of Lam Research Corporation (the
"Company", or "Lam") for the year ended June 30, 1997, which are included on
Form S-3, File number 333-39167.
The prior period amounts have been restated to reflect the Company's
merger with OnTrak Systems, Inc. ("OnTrak"), accounted for as a pooling of
interests. The results of operations for the three and nine month periods ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 1998.
NOTE B -- MERGER WITH ONTRAK
On August 5, 1997, the stockholders of each of Lam and OnTrak approved
the merger of Lam and OnTrak (the "Merger") and the issuance of Lam common
stock, par value $0.001 per share ("Lam Common Stock") under the Agreement and
Plan of Merger between Lam and OnTrak. The Company issued approximately 6.5
million shares of Lam Common Stock and options and rights to acquire
approximately two million shares of Lam Common Stock in connection with the
Merger. The transaction has been accounted for as a pooling of interests and was
structured to qualify as a tax-free reorganization. Costs associated with the
Merger were approximately $17.7 million, including investment advisory fees,
legal and accounting fees, financial printing costs and other merger-related
costs. Such costs associated with the Merger negatively impacted the results of
operations for the quarter ended September 30, 1997.
6
7
NOTE C -- INVENTORIES
Inventories consist of the following:
March 31, June 30,
1998 1997
-------- --------
(in thousands)
Raw materials $145,119 $136,698
Work-in-process 54,137 93,057
Finished goods 41,649 31,983
-------- --------
$240,905 $261,738
======== ========
NOTE D -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
March 31, June 30,
1998 1997
--------- ---------
(in thousands)
Equipment $ 176,400 $ 158,475
Furniture & fixtures 60,767 58,642
Leasehold improvements 110,619 100,222
--------- ---------
347,786 317,339
Accumulated depreciation and
amortization (161,397) (120,347)
--------- ---------
$ 186,389 $ 196,992
========= =========
NOTE E -- OTHER (INCOME)/EXPENSE, NET
The significant components of other (income)/expense, net are as follows
(in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Interest expense $ 5,263 $ 1,267 $ 13,281 $ 4,074
Interest income (6,647) (834) (16,126) (3,269)
Other (221) (597) 2,504 (660)
-------- -------- -------- --------
$ (1,605) $ (164) $ (341) $ 145
======== ======== ======== ========
NOTE F -- NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("FAS 128"). FAS 128
replaced the previously reported primary and fully diluted earnings
7
8
per share with basic and diluted earnings per share. All net loss amounts for
all periods have been presented and, where necessary, restated to conform to the
FAS 128 requirements. Basic net loss per share, is calculated using the weighted
average number of shares of common stock outstanding during the period. Diluted
net loss per share is calculated using the weighted average number of shares of
common stock outstanding during the period. The conversion of the convertible
subordinated notes to potential common shares were excluded from the diluted
earnings per share because their effect was antidilutive. Options were
outstanding during the three and nine month periods ended March 31, 1998 and
March 31, 1997, respectively, but were excluded from the computation of diluted
net loss per common share because the effect in periods with a net loss would be
antidilutive. The Company's basic and diluted net loss per share as calculated
according to FAS 128 are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands, except per share data)
NUMERATOR:
Net loss $(70,064) $(44,225) $(78,711) $(29,200)
-------- -------- -------- --------
Numerator for basic and diluted
net loss per share $(70,064) $(44,225) $(78,711) $(29,200)
======== ======== ======== ========
DENOMINATOR:
Basic net loss per share -
average shares outstanding 38,025 36,928 37,930 36,781
Denominator for diluted net loss
per share - average shares
outstanding and assumed conversions 38,025 36,928 37,930 36,781
======== ======== ======== ========
Basic net loss per share $ (1.84) $ (1.20) $ (2.08) $ (0.79)
======== ======== ======== ========
Diluted net loss per share $ (1.84) $ (1.20) $ (2.08) $ (0.79)
======== ======== ======== ========
NOTE G -- APPROVAL OF LAM RESEARCH CORPORATION 1997 STOCK INCENTIVE PLAN
On August 5, 1997, the stockholders of the Company approved the Lam
Research Corporation 1997 Stock Incentive Plan, which provides for the grant of
stock options, restricted stock, deferred stock and performance share awards to
participating officers, directors, employees, consultants and advisors of the
Company and its subsidiaries. Initially, 3,000,000 shares were reserved for
issuance. The number of shares to be issued will automatically be increased at
the beginning of each calendar quarter, subject to certain provisions and
restrictions, but in no event shall exceed 5,000,000 shares.
8
9
NOTE H -- CONVERTIBLE SUBORDINATED NOTES
During August 1997, Lam completed an offering of $310.0 million of
Convertible Subordinated Notes (the "Notes"). The Notes bear interest at five
percent, mature on September 1, 2002 and are convertible into shares of Lam's
Common Stock at $87.77 per share. Expenses associated with the offering of
approximately $9.0 million were deferred and are included in other assets. Such
deferred costs will be amortized ratably over the term of the Notes.
NOTE I -- RESTRUCTURING CHARGE
During the third quarter of fiscal 1998, the Company announced a
restructuring of its operations to allow the Company to focus more on its core
etch and Chemical Mechanical Planarization ("CMP") product groups, and to reduce
its flat panel display ("FPD") and thermal Chemical Vapor Deposition ("CVD")
operations. As a result of the restructuring, the Company reduced its global
workforce by approximately 14% and downsized and consolidated its manufacturing
operations. The Company recorded a total restructuring charge of $84.9 million
for costs related to severance compensation and consolidation or closure of
facilities, as well as write-offs of the assets and leasehold improvements
previously utilized in the affected operations. Of the total restructuring
charge, $19.6 million relates to additional excess and obsolete inventory
provisions for the affected product lines and has therefore been classified as a
component of cost of goods sold. At March 31, 1998, $73.2 million of the charge
remains accrued on the balance sheet and the Company has made $5.2 million of
cash payments, relating primarily to severance. The Company anticipates that
there will be further charges against the restructuring reserves established in
the third quarter of fiscal 1998 during the remainder of calendar 1998, as the
Company completes its restructuring program.
Restructuring activity:
Reduction in All
(in thousands) Force Other
------- -------
Restructuring provision $14,251 $70,645
Amount utilized 5,173 6,490
------- -------
Balance at March 31, 1998 $ 9,078 $64,155
======= =======
NOTE J -- ACQUIRED IN-PROCESS TECHNOLOGY
During the third quarter of fiscal 1998, the Company announced the
purchase of a non-exclusive, worldwide license from Trikon Technologies, Inc.
("Trikon") for its MORI(TM) source technology. The Company recorded an acquired
in-process research and development ("R&D") charge of $12.1 million for the
license and for the purchase
9
10
of a Trikon system to be utilized for R&D. Additional royalty payments will be
required over the term of the license.
NOTE K -- DEBT
During the third quarter of fiscal 1998, the Company renegotiated its
Synthetic Lease Agreement (the "Synthetic Lease Agreement"), relating to certain
buildings at its Fremont campus, to obtain more favorable terms and to reduce
the amount of the obligation. As part of the collateral restrictions of the
Synthetic Lease Agreement, the Company is required to maintain $52.0 million of
cash in restricted specified interest-bearing accounts through March 2003
(unless the Synthetic Lease Agreement is otherwise terminated or the amount of
maintained cash is reduced, as the underlying obligation is paid down).
At March 31, 1998, the Company had a total of $210.0 million available
under a syndicated bank line of credit. The line of credit was renegotiated in
April 1998 on more favorable terms and reduced to $100.0 million, and is due to
expire in April 2001. Borrowings under the new line of credit bear interest at
the participating banks' prime rate, or 0.45% to 0.75% over London Interbank
Offered Rate. Borrowings under the line of credit are subject to the Company's
compliance with financial covenants. At March 31 1998, the Company received
waivers for its historical financial covenants under the then-existing credit
facility, and has since amended the applicable covenant requirements of its new
line of credit.
NOTE L -- LITIGATION
See Part II, item 1 for discussion of litigation.
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
With the exception of historical facts, the statements contained in this
discussion are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, and are subject to the Safe
Harbor provisions created by that statute. Such forward-looking statements
include, but are not limited to, statements that relate to the Company's future
revenue, royalty income, gross margins, levels of research and development and
operating expenses, management's plans and objectives for future operations of
the Company, the sufficiency of financial resources to support future operations
and capital expenditures and the Company's application and software systems.
Such statements are based on current expectations that involve risks and
uncertainties, including those discussed below and under the heading Risk
Factors, as well as those disclosed in the Company's most recent Annual Report
on Form 10-K which are herein incorporated by reference, that could cause actual
results to differ materially and in ways not anticipated from those expressed,
and in a manner or degree not currently foreseeable. Readers are cautioned not
to place undue reliance on these forward-looking
10
11
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release publicly 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.
This discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes presented thereto on pages 3 to 10 of this Form
10-Q for a full understanding of the Company's financial position and results of
operations for the quarter ended March 31, 1998.
All financial data of the Company included herein reflect the
combination of the historical financial information of both Lam and OnTrak, as
described in Note A.
The following table sets forth, for the fiscal periods indicated,
certain income and expense items as a percentage of total revenue:
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
Net sales 99.8% 99.7% 99.8% 98.5%
Royalty income 0.2 0.3 0.2 1.5
------ ------ ------ ------
100.0 100.0 100.0 100.0
Cost of goods sold - on net sales 63.5 91.2 61.8 69.5
Cost of goods sold - restructuring 8.2 -- 2.4 --
------ ------ ------ ------
Gross profit 28.3 8.8 35.8 30.5
Research and development 20.4 21.2 19.1 17.6
Selling, general
& administrative 19.8 21.9 18.8 19.1
Merger costs -- -- 2.2 --
Restructuring charge 27.2 -- 7.9 1.2
Acquired in-process research &
development 5.0 -- 1.5 --
------ ------ ------ ------
Operating loss (44.1) (34.3) (13.7) (7.4)
Other (income)/expense, net (0.7) (0.1) -- --
------ ------ ------ ------
Loss before taxes (43.4) (34.2) (13.7) (7.4)
Income tax benefit (14.2) (15.2) (4.1) (3.7)
------ ------ ------ ------
Net loss (29.2%) (19.0%) (9.6%) (3.7%)
====== ====== ====== ======
11
12
Results of Operations
Total revenue for the three and nine month periods ended March 31, 1998
was 3% and 4% higher, respectively, compared to the year ago periods. The
Company continues to experience a shift in its product sales from single-chamber
to multi-chamber cluster products. Increased sales of the Company's Alliance(TM)
cluster system, which utilizes from one to four Transformer Coupled Plasma(TM)
("TCP") etch chambers each, were more than offset by a decrease in stand-alone
TCP system sales for both the three and nine month periods ended March 31, 1998,
compared to the year ago period. Sales of the Company's Advanced Capability
Rainbow(TM) decreased for the three month period ended March 31, 1998 compared
to the year ago period, and increased for the nine month period ended March 31,
1998 compared to the year-ago period. Sales of the Company's CMP cleaning
systems were higher than the year ago periods.
Total international sales were 57% and 55% of the Company's total
revenue, respectively, for the three and nine month periods ended March 31,
1998, compared with 51% and 62% for the year ago periods. Regionally, the
Company experienced increases in revenue for its Europe and Taiwan regions,
which were offset by decreases in revenues for its North America, Korea and
Japan regions for the three month period ended March 31, 1998 compared to the
year ago period. For the nine month period ended March 31, 1998, the Company
experienced increases in revenues from its North America and Taiwan regions,
offset by decreases in revenues for its Europe, Korea and Japan regions. The
Asian regions are currently experiencing uncertainty surrounding their financial
markets and economies. The Company anticipates that its revenues for the
remainder of the current calendar year, and specifically for the fourth quarter
of fiscal 1998, will be adversely affected, compared to the three and nine month
fiscal periods ended March 31, 1998, by the uncertainty in the Asian regions,
particularly in Korea, which has historically comprised a significant portion of
the Company's revenue base.
Total spares and service revenue increased 47% and 31%, respectively,
during the three and nine month periods ended March 31, 1998 compared to the
year ago periods due primarily to the Company's increasing installed base.
Royalty income for the three and nine month periods ended March 31, 1998
decreased 20% and 85%, respectively, from the year ago periods. The reduction in
royalty income is due in large part to the operation of an extended royalty
agreement with Tokyo Electron Limited whereby the applicable royalty rate was
reduced from 5% to 1%, effective January 1, 1997. Fiscal 1998 is the first full
year with royalty income calculated at the reduced royalty rate of 1%.
The Company's gross margin percentage increased to 28.3% in the third
quarter of fiscal 1998 compared with 8.8% for the year ago quarter. Gross margin
percentage was 35.8% for the first nine months
12
13
of fiscal 1998 compared with 30.5% for the year ago period. Gross margin
percentages for both the three and nine month periods ended March 31, 1998 and
March 31, 1997 were impacted by certain charges and adjustments described below.
During the three month period ended March 31, 1998, as a result of the
restructuring (see Note I) the Company established provisions of $19.6 million
for the write-off of inventory related to the thermal CVD and FPD products.
During the third quarter of fiscal 1997, and as a result of the
faster-than-anticipated customer transition from single-chamber to multi-chamber
cluster systems and costs associated with continuing revisions to the design and
features of such multi-chamber products, the Company established additional
reserves of approximately $42 million relating to excess and obsolete
manufacturing and spares inventory and inventory-related commitments. In
addition, during the third quarter of fiscal 1997, the Company re-evaluated its
warranty and installation reserves and established additional reserves of
approximately $15 million. Gross margin percentage for the three month and nine
month periods ended March 31, 1998, compared to the year ago periods, were
slightly raised by improved margins on multi-chamber cluster systems. Offsetting
the increase in gross margin percentage for the nine month period was a decrease
in royalty income.
R&D expenses for the three month period ended March 31, 1998 were
virtually flat, as compared to the year ago period. R&D expense for the nine
month period ended March 31, 1998 increased 12.9%, compared to the year ago
period. The Company believes that in order to remain competitive, it must
continue to invest substantially in R&D. The Company continues to develop its
Teres(TM) CMP polishing system, to invest in advanced etch applications and to
make enhancements to its Alliance and TCP products, including developing the
technology necessary to incorporate 300mm wafer processing capabilities into its
products. During the third quarter of fiscal 1998, the Company purchased a
non-exclusive license for Trikon's MORI source technology. The Company recorded
a charge of $12.1 million for the license and for the purchase of an R&D system
from Trikon. As discussed in Note I, the Company has announced plans to reduce
significantly R&D efforts relating to FPD and thermal CVD. The Company will
realize the full impact of the restructuring on R&D expenses in future quarters.
Selling, general and administrative ("SG&A") expenses for the three and
nine month periods ended March 31, 1998, were 6.9% lower and 2.0% higher,
respectively, than the year ago periods. However as a percentage of total
revenue, SG&A expenses were virtually flat for the nine month period ended March
31, 1998, as compared to the year ago period. The decrease in SG&A expenses for
the three months ended March 31, 1998 is in large part a result of the
restructuring (see Note I). The Company will begin to realize the full impact of
the restructuring during the fourth quarter of fiscal 1998. The Company
continues to monitor closely expenditures and capital additions relative to
revenue levels.
During the first quarter of fiscal 1998, the Company recorded costs of
$17.7 million relating to the merger with OnTrak. Such expenses relate to
investment advisory fees, legal and accounting fees, financial printing costs
and other merger-related costs.
During the third quarter of fiscal 1998, the Company restructured its
operations to focus more on its core etch and CMP product groups
13
14
and to reduce its FPD and thermal CVD operations. As a result, during the third
quarter of fiscal 1998, the Company recorded a charge of $65.3 million to cover
the effects of the reduction in global workforce, the reduction in FPD and
thermal CVD operations and the consolidation of manufacturing operations. An
additional $19.6 million relating to excess and obsolete inventory provisions
for the affected product lines was classified as a component of cost of goods
sold. During the first quarter of fiscal 1997, the Company restructured its
operations by consolidating its previous business unit structure into a more
centralized functional organization. As a result, during the first quarter of
fiscal 1997, the Company recorded a restructuring charge of $9.0 million for
costs related primarily to severance compensation and consolidation of
facilities.
Other income increased $0.5 million during the first nine months of
fiscal 1998, compared to the first nine months of fiscal 1997. During the first
quarter of fiscal 1998, the Company issued $310.0 million of Notes bearing
interest at 5% which are due to mature on September 1, 2002. Interest income,
net of interest expense, has increased significantly during fiscal 1998, as the
Company's rate of return on the invested cash proceeds of the debenture offering
has exceeded the interest rate it pays on the Notes. However, in the nine month
period ended March 31, 1998 the Company recognized higher foreign currency
translation losses, primarily due to exchange rate fluctuations in Korea,
although there was a slight recovery of the losses in the third quarter of
fiscal 1998.
The Company recorded a tax benefit of 30% of its pre-tax loss related
primarily to the benefit from its operating loss carryback for the fiscal 1998
nine month period.
As the year 2000 approaches, an issue impacting all companies has
emerged regarding how existing application software programs and operating
systems can accommodate the year 2000 date transition. The Company has assembled
a task force to review internal software and systems to ensure that they do not
malfunction as a result of the year 2000 date transition. The Company
anticipates having to replace some software and systems and to upgrade others.
The task force is also reviewing the operating systems the Company sells with
its machines to ensure that they are year 2000 compliant. The Company has not
fully evaluated the potential future financial impact of the year 2000
compliance.
Liquidity and Capital Resources
Net cash used by operating activities was $24.1 million for the nine
months ended March 31, 1998. Non-cash depreciation and amortization charges of
$48.4 million and charges of $12.1 million relating to the purchase of
in-process R&D were more than offset by the net loss and the decrease in working
capital recorded for the nine month period ended March 31, 1998.
Cash used in investing activities was $184.8 million derived primarily
by net purchases of short-term investments of $101.3 million and transfers of
$52.0 million of cash to restricted cash as a collateral requirement under the
amended and restated Synthetic Lease Agreement, as discussed in Note K. Capital
expenditures for the nine month period ended March 31, 1998 were $30.4 million.
The Company has also made cash payments of $9.0 million relating to the acquired
in-process R&D.
14
15
Cash provided by financing activities was $262.2 million for the nine
month period ended March 31, 1998. During the first quarter of fiscal 1998, the
Company received approximately $301.0 million of net cash from the issuance of
the Notes. The Company incurred $9.0 million of debt issuance costs which will
be amortized over the life of the Notes. The Company repaid $35.0 million of
borrowings under its syndicated line of credit. Also offsetting the cash
provided from the issuance of debt was $22.4 million of principal payments on
long-term debt and capital lease obligations.
As of March 31, 1998, the Company had $350.3 million in cash, cash
equivalents and short-term investments, compared with $195.7 million at June 30,
1997. At March 31, 1998 the Company had a total of $210.0 million available
under a syndicated bank line of credit. The line of credit has since been
renegotiated on more favorable terms and reduced to $100.0 million and is due to
expire in April 2001. Borrowings under the line of credit bear interest at the
participating banks' prime rate or 0.45% to 0.75% over London Interbank Offered
Rate. Borrowings under the line of credit are subject to the Company's
compliance with financial covenants. At March 31 1998, the Company received
waivers for its historical financial covenants under the then-existing credit
facility and has since amended the applicable covenant requirements of its new
line of credit.
The Company's cash, cash equivalents, short-term investments and
available lines of credit at the end of the third quarter of fiscal 1998 are
considered adequate to support current levels of operations for at least the
next twelve months.
RISK FACTORS
Fluctuations in Quarterly Revenues and Operating Results
The Company's quarterly revenues have fluctuated in the past and may
fluctuate in the future. The Company's revenues are dependent on many factors,
including, but not limited to, the economic conditions in the semiconductor
industry, customer capacity requirements, the size and timing of the receipt of
orders from customers, customer cancellations or delays of shipments, the
Company's ability to develop, introduce and market new and enhanced products on
a timely basis, the introduction of new products by its competitors, challenges
to the Company's products and technology, changes in average selling prices and
product mix, and exchange rate fluctuations, among others. The Company's expense
levels will be based, in part, on expectations of future revenues. If revenue
levels in a particular quarter do not meet expectations, operating results could
be affected.
The Company derives its revenue primarily from the sale of a relatively
small number of high-priced systems. The Company's systems can range in price
from approximately $150,000 to over $3 million per unit. The sale of fewer
systems than anticipated in any quarter may have a substantial negative impact
on the operating results for the quarter. The Company's results of operations
for a particular quarter could be adversely affected if anticipated orders are
not received in time to enable shipment during such quarter, if anticipated
shipments are delayed or canceled by one or more customers, or if shipments are
delayed due to procurement shortages or manufacturing difficulties. Further, as
a result of the continuing consolidation of manufacturing operations and
capacity at the Company's Fremont, California facility, natural, physical or
other events, including labor disruptions, affecting the facility could
adversely impact the Company's operations and revenue.
15
16
The Company generally realizes a higher margin on sales of its mature
products, such as Rainbow etch systems and Synergy(TM) CMP cleaning systems,
than on sales of Alliance, plasma CVD, and newly released TCP products. Newer
products usually have lower margins in the initial phase of production.
International Sales
International sales accounted for 57%, 63%, 53%, 55% and 62%
respectively, of the Company's net revenues in the fiscal years 1997, 1996 and
1995 and the first nine months of fiscal 1998 and 1997. Historically, sales to
the Asian regions have accounted for a substantial portion of international
sales. Recent banking and currency problems in the Asian regions, however, have
had and will continue to have an adverse impact on the Company's revenue and
operations, including specifically revenues and operations for the fourth
quarter of fiscal 1998.
Sales of products by the Company currently are denominated in United
States dollars. In Korea, devaluation of the Won and difficulties by customers
in obtaining credit have curtailed semiconductor equipment investment and have
recently led to cancellation or delay of orders for the Company's products and
are likely to continue to do so.
In Japan, the Company's sales are denominated in Japanese yen. A
weakening of the value of the Japanese yen as compared to the U.S. dollar could
negatively impact operating margins. Currently, the Company enters into foreign
currency forward contracts to minimize the impact of exchange rate fluctuations
on the yen-denominated assets and liabilities, and the Company will enter into
such hedging transactions in the future.
The impact of these and other factors on the Company's revenues and
operating results in any future period is difficult for the Company to forecast.
There can be no assurance that these and other factors will not materially
adversely affect the Company's future business and financial results.
Introduction of New Product
The CMP polishing system was launched by the Company in February 1998
and is expected to face significant competition from multiple current and future
competitors. Companies currently offering polishing systems include Applied
Materials, Inc., Cybeq Systems, Ebara Corporation, Integrated Process Equipment
Corp. ("IPEC"), SpeedFam Corp., Strasbaugh and Sumitomo Metals Limited. Lam
believes that other companies are developing polishing systems and are planning
to introduce new products to this market before or during the same time frame as
the Company's introduction of its CMP polishing system.
Potential Volatility Common Stock Price
The market price for Lam Common Stock has been volatile. The market
price of Lam Common Stock could be subject to significant
16
17
fluctuations in response to variations in quarterly operating results,
shortfalls in revenues or earnings from levels expected by securities analysts
and other factors such as announcements of restructurings, technological
innovations, reductions in force, consolidations of operations or new products
by the Company or by the Company's competitors, government regulations,
developments in patent or other proprietary rights. In addition, the stock
market has in recent years experienced significant price fluctuations. These
fluctuations often have been unrelated to the operating performance of the
specific companies whose stocks are traded. Recent fluctuations have been tied
to the Asian financial crisis and the price of semiconductors. Broad market
fluctuations, as well as economic conditions generally in the semiconductor
industry, may adversely affect the market price of Lam Common Stock.
Intellectual Property Matters
From time to time, the Company has received notices from third parties
alleging infringement of such parties' patent or other intellectual property
rights by the Company's products. In such cases, it is the policy of the Company
to defend the claims or negotiate licenses on commercially reasonable terms,
where considered appropriate. However, no assurance can be given that the
Company will be able in the future to negotiate necessary licenses on
commercially reasonable terms, or at all, or that any litigation resulting from
such claims would not have a material adverse effect on the Company's business
and financial results.
The Company's success depends in part on its proprietary technology.
While the Company attempts to protect its proprietary technology through
patents, copyrights and trade secret protection, it believes that the success of
the Company will depend on more technological expertise, continuing the
development of new systems, market penetration and growth of its installed base
and the ability to provide comprehensive support and service to customers. There
can be no assurance that the Company will be able to protect its technology or
that competitors will not be able to develop similar or more competitive
technology independently. The Company currently has a number of United States
and foreign patents and patent applications pending. There can be no assurance
that any patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.
Year 2000 Computer Compliance
The Company relies heavily on the Company's existing application
software programs and operating systems. In order to assess product changes
relating to the year 2000 compliance issues (in which systems do not properly
recognize date sensitive information when the year changes to 2000), the Company
has formed a task force to review software and systems. The Company expects both
to replace some software and systems and to upgrade others where appropriate. In
addition, the task force is reviewing the operating systems the Company sells
with its products to confirm they are year 2000
17
18
compliant. While the Company has incurred and will continue to incur internal
staff costs as well as consulting and other expenses as a result of year 2000
issues, it has not fully evaluated the potential financial impacts of the year
2000 compliance project. The Company believes that its year 2000 compliance
project will be completed on a timely basis. However, there can be no assurance
that unexpected delays or problems will not have an adverse effect on the
Company, its financial performance, or the competitiveness of its products.
Restructuring of Operations
As stated in Note I, the Company announced a restructuring of its
operations in February 1998. Implementation of this restructuring involves
several risks, including the risk that by simplifying and modifying its product
line the Company will increase its dependence on fewer products and potentially
reduce overall sales.
Although the Company believes that the actions it is taking in
connection with the restructuring, including the reduction in workforce, the
consolidation of manufacturing operations and reduction of FPD and thermal CVD
operations, should help align the Company with its business outlook, there can
be no assurance that such actions will enable the Company to achieve its
objectives of reducing costs and maintaining sustainable profitability. In
addition, there can be no assurance that the size of the restructuring charge
will not exceed the Company's estimates. The Company's future consolidated
operating results and financial condition could be adversely affected should it
encounter difficulty in effectively managing the restructuring.
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
was recently reassigned to a new judge in December 1997 and 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 position, operating results or cash flows.
In addition, the Company is from time to time notified by various
parties that it may be in violation of certain patents or other asserted
intellectual property. In such cases, it is the Company's intention to defend
such claims or to seek negotiated licenses where
18
19
it is considered appropriate. Although impossible to predict, it is currently
Management's opinion that the outcome of these matters will not have a material
impact on the Company's consolidated financial position, operating results or
cash flows.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.50 License Agreement between Lam Research Corporation and Trikon
Technologies, Inc., dated March 18, 1998.
10.51 Loan Agreement between Lam Research Corporation and The
Industrial Bank of Japan, Limited, dated March 30, 1998.
27.0 Financial Data Schedule
27.1 Restated Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
27.4 Restated Financial Data Schedule
(b) No reports on Form 8-K were filed by the Registrant during the quarter
ended March 31, 1998.
19
20
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: May 12, 1998
LAM RESEARCH CORPORATION
By:/s/ Mercedes Johnson
-----------------------------------------
Mercedes Johnson, Vice
President, Finance & Chief
Financial Officer
20
21
EXHIBIT INDEX
Exhibits:
10.50 License Agreement between Lam Research Corporation and Trikon
Technologies, Inc., dated March 18, 1998.
10.51 Loan Agreement between Lam Research Corporation and The
Industrial Bank of Japan, Limited, dated March 30, 1998.
27.0 Financial Data Schedule
27.1 Restated Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
27.4 Restated Financial Data Schedule
21