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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 SEPTEMBER 30, 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 September 30, 1998 there were 38,747,958 shares of Registrant's Common
Stock outstanding.
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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........................ 9
Results of Operations............................ 9
Liquidity and Capital Resources.................. 13
Risk Factors..................................... 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk............ 19
PART II. OTHER INFORMATION.................................................... 19
Item 1. Legal Proceedings.................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................... 20
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ITEM 1. FINANCIAL STATEMENTS
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30,
1998 June 30,
(unaudited) 1998
----------- -----------
Assets
Cash and cash equivalents $ 129,841 $ 13,509
Short-term investments 209,999 383,647
Accounts receivable, net 152,575 176,029
Inventories 214,233 220,610
Prepaid expenses and other assets 41,283 25,809
Deferred income taxes 77,485 77,485
----------- -----------
Total Current Assets 825,416 897,089
Equipment and leasehold improvements, net 137,530 144,252
Restricted cash 51,357 51,357
Other assets 55,735 58,074
----------- -----------
Total Assets $ 1,070,038 $ 1,150,772
=========== ===========
Liabilities and Stockholders' Equity
Trade accounts payable $ 54,330 $ 67,703
Accrued expenses and other
current liabilities 172,116 208,442
Current portion of long-term debt and
capital lease obligations 16,863 17,364
----------- -----------
Total Current Liabilities 243,309 293,509
Long-term debt and capital lease
obligations, less current portion 331,645 334,174
----------- -----------
Total Liabilities 574,954 627,683
Preferred stock: 5,000 shares authorized;
none outstanding
Common Stock at par value of $0.001 per share
Authorized -- 90,000 shares; issued and
outstanding 38,748 shares at September 30,
1998 and 38,267 shares at June 30, 1998 39 38
Additional paid-in capital 380,782 381,011
Accumulated other comprehensive income (loss) (710) 295
Retained earnings 114,973 141,745
----------- -----------
Total Stockholders' Equity 495,084 523,089
----------- -----------
$ 1,070,038 $ 1,150,772
=========== ===========
- --------------------
See Notes to condensed consolidated financial statements.
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LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
------------------------
September 30,
------------------------
1998 1997
--------- ---------
Net sales $ 142,137 $ 289,392
Royalty income 62 534
--------- ---------
Total revenue 142,199 289,926
Costs and expenses:
Cost of goods sold 92,043 176,940
Research and development 35,114 54,177
Selling, general and administrative 41,836 53,204
Merger costs -- 17,685
--------- ---------
Operating loss (26,794) (12,080)
Other (income) expense, net (22) 798
--------- ---------
Loss before income taxes (26,772) (12,878)
Income tax benefit -- 706
--------- ---------
Net loss $ (26,772) $ (12,172)
========= =========
Net loss per share
Basic $ (0.70) $ (0.32)
========= =========
Diluted $ (0.70) $ (0.32)
========= =========
Number of shares used in
per share calculations
Basic 38,400 37,600
========= =========
Diluted 38,400 37,600
========= =========
See Notes to condensed consolidated financial statements.
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LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
----------------------------
September 30, September 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $ (26,772) $ (12,172)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 15,013 15,148
Deferred taxes (724) --
Change in certain working capital
accounts (36,915) 16,070
----------- -----------
Net cash provided by (used in) operating
activities (49,398) 19,046
Cash flows from investing activities:
Capital expenditures, net (6,268) (13,091)
Purchase of short-term investments (874,693) (4,559,637)
Sale/maturities of short-term investments 1,048,341 4,157,485
Other 2,613 (1,232)
----------- -----------
Net cash provided by (used in)
investing activities 169,993 (416,475)
----------- -----------
Cash flows from financing activities:
Repayments of borrowings under
line of credit -- (35,000)
Common stock repurchase (3,937)
Sale of stock, net of issuance
costs 3,709 9,275
Net proceeds from issuance of
long-term debt -- 301,000
Principal payments on long-term debt
and capital lease obligations (3,030) (4,074)
Foreign currency translation adjustment (1,005) (42)
----------- -----------
Net cash provided by (used in) financing
activities (4,263) 271,159
----------- -----------
Net increase (decrease) in cash and
cash equivalents 116,332 (126,270)
Cash and cash equivalents at beginning
of period 13,509 140,872
----------- -----------
Cash and cash equivalents at end of
period $ 129,841 $ 14,602
=========== ===========
See Notes to condensed consolidated financial statements.
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LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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
consolidated financial statements of Lam Research Corporation (the "Company" or
"Lam") for the fiscal year ended June 30, 1998, which are included in the Annual
Report on Form 10-K, File number 0-12933.
NOTE B -- INVENTORIES
Inventories consist of the following:
Sept. 30, June 30,
(in thousands) 1998 1998
-------- --------
Raw materials $156,460 $147,794
Work-in-process 41,789 52,374
Finished goods 15,984 20,442
-------- --------
$214,233 $220,610
======== ========
NOTE C -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
Sept. 30, June 30,
(in thousands) 1998 1998
--------- ---------
Equipment $ 136,763 $ 139,358
Furniture & fixtures 62,184 60,353
Leasehold improvements 99,445 95,075
--------- ---------
298,392 294,786
Accumulated depreciation and
amortization (160,862) (150,534)
--------- ---------
$ 137,530 $ 144,252
========= =========
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NOTE D -- OTHER (INCOME) EXPENSE, NET
The significant components of other (income) expense, net are as
follows:
Three Months Ended
(in thousands) September 30,
-----------------------------
1998 1997
------- -------
Interest expense $ 4,871 $ 2,715
Interest income (5,932) (3,199)
Other 1,039 1,282
------- -------
$ (22) $ 798
======= =======
NOTE E -- NET LOSS 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 assumed 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
month periods ended September 30, 1998 and September 30, 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 September 30,
--------------------------------
(in thousands, except per share data) 1998 1997
-------- --------
Numerator:
Numerator for basic net loss per share $(26,772) $(12,172)
-------- --------
Numerator for diluted net loss per share $(26,772) $(12,172)
-------- --------
Denominator:
Basic net loss per share - average shares outstanding 38,400 37,600
-------- --------
Diluted net loss per share -
average shares outstanding and assumed
conversions 38,400 37,600
-------- --------
Basic net loss per share $ (0.70) $ (0.32)
======== ========
Diluted net loss per share $ (0.70) $ (0.32)
======== ========
NOTE F -- COMPREHENSIVE LOSS
As of July 1, 1998, the Company has adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("FAS 130"). FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however the adoption of this statement had no impact on the
Company's net loss or stockholders' equity. FAS 130 requires that unrealized
gains or losses on available-for-sale securities and foreign currency
translation adjustments are to
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be included in other comprehensive loss. Prior to adoption, unrealized gains and
losses and foreign currency translation adjustments were reported as a component
of stockholder's equity.
The components of comprehensive loss, net of tax, are as follows:
Three Months Ended
(in thousands) September 30,
- -------------- ----------------------
1998 1997
-------- --------
Net loss $(26,772) $(12,172)
Foreign currency translation adjustment (1,005) (42)
-------- --------
Comprehensive loss $(27,777) $(12,214)
======== ========
Accumulated other comprehensive income (loss) presented on the
accompanying consolidated condensed balance sheets consists of the accumulated
foreign currency translation adjustment.
NOTE G -- RESTRUCTURING
During the quarters ended March 31, 1998 and June 30, 1998, the
Company announced plans to restructure its operations to focus more on its core
etch and Chemical Mechanical Planarization ("CMP") product groups, and to exit
its Flat Panel Display ("FPD") and Chemical Vapor Deposition ("CVD") operations.
As a result of the restructurings, the Company reduced its global workforce by
approximately 28% and downsized and consolidated its manufacturing operations
and facilities. The Company recorded a total restructuring charge of $148.9
million for severance compensation and benefits, the write-off of facilities,
fixed assets and excess and obsolete inventory and other exit costs. At
September 30, 1998, $30.2 million of the charge remains accrued on the balance
sheet. During the quarter ended September 30, 1998 the Company made
approximately $17 million of cash payments, relating primarily to severance,
benefits and rent on unoccupied facilities. At September 30, 1998, the Company
has approximately $28 million of future cash payments relating to the
restructurings. There will be further charges against the restructuring reserves
established in fiscal 1998 during fiscal 1999, as the Company completes this
restructuring program.
Restructuring activity:
Facilities
Severance and Excess and Other
and Fixed Obsolete Exit
(in thousands) Benefits Assets Inventory Costs Total
-------- -------- -------- -------- --------
Restructuring provision $ 40,317 $ 64,339 $ 31,933 $ 12,269 $148,858
Spending and charges 9,766 48,859 31,933 9,857 100,415
-------- -------- -------- -------- --------
Balance at June 30, 1998 $ 30,551 $ 15,480 $ -- $ 2,412 $ 48,443
Spending and charges 17,312 911 -- -- 18,223
-------- -------- -------- -------- --------
Balance at September 30, 1998 $ 13,239 $ 14,569 $ -- $ 2,412 $ 30,220
======== ======== ======== ======== ========
NOTE H -- DEBT
During the quarter ended September 30, 1998, the Company renegotiated
a replacement facility for a yen 1.7 billion yen-
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denominated loan. Principal payments on the new facility are due annually on
September 30 through September 30, 2001. The new facility was renegotiated at
terms which were more favorable than the previous yen-denominated loan.
NOTE I -- 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 27A
of the Securities Act of 1933 and Section 21E of the Exchange Act, 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, product development, demand, acceptance
and market share, competitiveness, royalty income, gross margins, levels of
research and development and operating expenses, management's plans and
objectives for current and future operations of the Company, the effects of the
Company's on-going reorganization and consolidation of operations and
facilities, the ability of the Company to complete contemplated reorganizations
or consolidations on time or within anticipated costs, and the sufficiency of
financial resources to support future operations and capital expenditures. Such
statements are based on current expectations and are subject to risks,
uncertainties, and changes in condition, significance, value and effect,
including those discussed below under the heading Risk Factors, and other
documents the Company files from time to time with the Securities and Exchange
Commission, specifically the Company's last filed Annual Report on the Form
10-K. Such risks, uncertainties and changes in condition, significance, value
and effect could cause actual results to differ materially from those expressed
herein and in ways not readily foreseeable. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof and of information currently and reasonably known. The Company
undertakes no obligation to release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
which occur after the date hereof or to reflect the occurrence or effect of
anticipated or unanticipated events. This discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and Notes
presented thereto on pages 3 to 9 of this Form 10-Q for a full understanding of
the Company's financial position and results of operations for the quarter ended
September 30, 1998.
Results of Operations
Net sales for the first quarter of fiscal 1999 decreased 51% compared
to the first quarter of fiscal 1998. The Company experienced decreased revenues
for all of its product lines. Total foreign sales represented 42% of total
revenue during the first quarter of fiscal 1999 compared to 51% of total revenue
for the year-ago period. Revenue from the Asia Pacific and Japan regions
decreased to 15% and 6%, respectively, of total revenue during the first quarter
of fiscal 1999 from 31% and 9%, respectively of total revenue during the first
quarter of fiscal 1998. Revenue from the North America and Europe regions
increased to 58% and 21%, respectively, of total revenue during the first
quarter
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of fiscal 1999 from 49% and 11%, respectively, of total revenue during the first
quarter of fiscal 1998. The semiconductor industry is currently experiencing a
severe worldwide slowdown in equipment demand which was and continues to be
brought on by depressed DRAM pricing, production overcapacity as well as
uncertainty in the worldwide financial markets. The Company anticipates that net
sales will decrease, compared to the quarter ended September 30, 1998, for the
remainder of calendar 1998.
In response to the continued decline in net sales, and as part of a
restructuring plan, the Company commenced a reduction of its work force in
November 1998. In addition, Management anticipates that as part of the
restructuring plan it will consolidate facilities. The Company has not yet
finalized its restructuring plan and therefore, it cannot quantify the
associated costs at this time. The Company will record a restructuring charge
during the fiscal quarter ending December 1998.
Royalty income decreased 88% from the year-ago period. The Company
expects that royalty income will remain relatively flat for the remainder of the
fiscal year. The reduction in royalty income is a result of the slowdown in
equipment sales in the Japan region.
Gross margin percentage declined to 35.3% in the first quarter of
fiscal 1999 compared with 39.0% for the year-ago period. The lower overall gross
margin percentage is primarily a result of excess manufacturing capacity which
is a result of the Company's lower volume of sales.
Research and development ("R&D") expenses for the quarter ended
September 30, 1998 were 35.2% lower than the year-ago period. As a percentage of
total revenue R&D expenses increased to 24.7% of total revenue for the quarter
ended September 30, 1998 compared to 18.7% of total revenue for the quarter
ended September 30, 1997. The decrease in R&D expenses is a result of the
Company's efforts to exit from its FPD and CVD operations and to focus more on
its core etch and CMP product groups.
Selling, general and administrative ("SG&A") expenses decreased 21.4%
during the first quarter of fiscal 1999 compared to the year-ago period. The
decrease in SG&A expenses is a result of the Company's restructurings in fiscal
1998. The Company continues to monitor closely its expenditures and capital
spending relative to revenue levels.
During the first quarter of fiscal 1998, the Company recorded costs
of $17.7 million related to the merger with OnTrak Systems, Inc. ("OnTrak").
Such expenses relate to investment advisory fees, legal and accounting fees,
financial printing costs and other merger-related costs.
Other income increased $0.8 million during the first quarter of
fiscal 1999 compared to the first quarter of fiscal 1998. During the first
quarter of fiscal 1998, the Company issued $310.0 million of convertible
subordinated notes ("the Notes") bearing interest at 5% which are due to mature
on September 1, 2002. During the first quarter of fiscal 1999, the Company's
rate of return on its investments exceeded the interest rate it pays on the
Notes.
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Due to the Company's significant tax loss and credit carryovers, Lam
did not record any tax benefit during the first quarter of fiscal 1999.
During the quarters ended March 31, 1998 and June 30, 1998, the
Company announced plans to restructure its operations to focus more on its core
etch and CMP product groups, and to exit its FPD and Chemical Vapor Deposition
("CVD") operations. As a result of the restructurings, Lam reduced its global
workforce by approximately 28% and downsized and consolidated its manufacturing
operations and facilities. The Company recorded a total restructuring charge of
$148.9 million for severance compensation and benefits, the write-off of
facilities, fixed assets and excess and obsolete inventory and other exit costs.
At September 30, 1998, $30.2 million of the charge remains accrued on the
balance sheet. During the quarter ended September 30, 1998, the Company made
approximately $17 million of cash payments, relating primarily to severance,
benefits and rent on unoccupied facilities. At September 30, 1998 the Company
has approximately $28 million of future cash payments relating to the
restructurings. There will be further charges against the restructuring reserves
established in fiscal 1998 during fiscal 1999, as the Company completes its
restructuring program.
The Company has established a team to address issues raised by the
introduction of the Single European Currency ("Euro") for initial implementation
as of January 1, 1999, and through the transition period to January 1, 2002. Lam
expects to be able to meet related legal requirements by January 1, 1999, and
through the transition period. Lam does not expect the cost of any system
modifications to be material and does not currently expect that introduction and
use of the Euro will materially affect its foreign exchange and hedging
activities or will result in any material increase in transaction costs. The
Company will continue to evaluate the impact over time of the introduction of
the Euro; however, based on currently available information management does not
believe that the introduction of the Euro will have a material adverse impact on
the Company's financial condition or the overall trends in results of its
operations.
The Company relies heavily on its existing application software and
operating systems. The Year 2000 compliance issue (in which systems do not
properly recognize date sensitive information when the year changes to 2000)
creates risks for the Company: if internal data management, accounting and/or
manufacturing or operational software and systems do not adequately or
accurately process or manage day or date information beyond the year 1999, there
could be an adverse impact on the Company's operations. To address the issue,
the Company has assembled a task force to review and assess internal software,
data management, accounting and manufacturing and operational systems to ensure
that they do not malfunction as a result of the Year 2000 date transition. The
review and corrective measures are proceeding in parallel. These review and
corrective measures are intended to encompass all significant categories of
systems used by the Company, including data management, accounting,
manufacturing, sales, human resources and operational software and systems. The
Company is also working with its significant suppliers of products and systems
to assure that the products and systems supplied to the Company, and the
products the Company supplies to its customers, are Year 2000 compliant. With
respect to compliance of the products the Company supplies to its customers, the
Company intends to adhere to Year 2000
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test case scenarios established by SEMATECH, an industry group comprised of US
semiconductor manufacturers. The Company's compliance efforts are substantially
complete, and the Company currently expects that its review, corrective measures
and contingency planning (where necessary) will be complete by the end of fiscal
1999, with the goal of resolving all material internal programs and systems
prior to the Year 2000 date transition.
In connection with its review and corrective measures, both to ensure
that its internal products and systems, and the operating systems accompanying
the products sold to its customers, are Year 2000 compliant, the Company expects
both to replace some software and systems and to upgrade others where
appropriate. As a contingency with respect to products the Company currently
offers to its customers, the Company may replace all non-compliant operating
systems with systems demonstrated to be Year 2000 compliant. With respect to
products and systems supplied to the Company for use internally, the Company may
upgrade all non-compliant products and systems and, where necessary or where no
reasonable upgrade is available, replace such non-compliant products and systems
with products and systems demonstrated to be Year 2000 compliant.
The Company is in the process of identifying for its customers the
corrective measures necessary to ensure that its installed products are Year
2000 compliant, including compliance of third-party products (such as software)
incorporated into the Company's installed products. In this regard, the Company
is incurring, and will continue to incur throughout fiscal 1999, various costs
to provide customer support regarding Year 2000 issues, and certain of such
costs are expected to be borne not by the Company but, instead, to be passed on
to the customers. The full cost of these activities, including corrective
measures, is not fully known. However, the Company believes that the potential
future financial impact of assuring such Year 2000 compliance is not expected to
be material. The Company's failure to ensure, at all or in a timely or
reasonable manner, that its products are Year 2000 compliant may cause
disruption in the customer's ability to derive expected productivity from those
products or to integrate the products fully and functionally into certain
automated manufacturing environments. With respect to products and systems the
Company purchases for use internally, failure to ensure Year 2000 compliance may
cause disruption in the Company's automated accounting, financial planning, data
management and manufacturing operations which could have a material effect on
the Company's short-term ability to manage its day-to-day operations in an
efficient, cost-effective and reliable manner.
The Company believes that its Year 2000 compliance project will be
completed on a timely basis, and in advance of the Year 2000 date transition and
will not have a material adverse effect on the Company's financial condition or
overall trends in the results of operations. However, there can be no assurance
that unexpected delays or problems, including the failure to ensure Year 2000
compliance by systems or products supplied to the Company by a third party, will
not have an adverse effect on the Company, its financial performance, or the
competitiveness or customer acceptance of its products. Further, the Company's
current understanding of expected costs is subject to change as the project
progresses, and does not include potential costs related to actual customer
claims, or the cost of internal software and hardware replaced in the normal
course of business (whose installation
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otherwise in the normal course of business may be accelerated to provide
solutions to Year 2000 compliance issues).
Liquidity and Capital Resources
As of September 30, 1998, the Company had $391.2 million in cash,
cash equivalents, short-term investments and restricted cash, compared with
$448.5 million at June 30, 1998. The Company has a total of $100.0 million
available under a syndicated bank line of credit which is due to expire in April
2001. Borrowings under the line of credit bear interest at the bank's prime rate
or 0.55% to 0.95% over London Interbank Offered Rate.
Net cash used in operating activities was $49.4 million for the three
months ended September 30, 1998. The Company used $36.9 million of working
capital. Cash payouts relating to the fiscal 1998 restructurings were
approximately $17 million. Decreases in accounts payable, accrued liabilities
and increases in prepaid expenses were offset by decreases in accounts
receivables and inventory resulting in a use of cash of $19.9 million. Cash
provided by investing activities was $170.0 million, which was primarily from
the net sales of short-term investments. Capital expenditures, net of
retirements, for the three month period ended September 30, 1998 were $6.3
million. The Company used $4.3 million in financing activities primarily from
the principal payments of long-term debt and capital lease obligations of $3.0
million. During the quarter ended September 30, 1998, the Company used $3.9
million for the repurchase of common stock which was offset by the sale of
common stock.
The Company's cash, cash equivalents, short-term investments and
available lines of credit at the end of the first quarter of fiscal 1999 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 generally, and equipment industry specifically, 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, enhanced and competitive products, at all and 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 adversely 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 $2.5 million per unit. The sale of
fewer systems than anticipated in any
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quarter may have a substantial negative impact on the Company's 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
affecting the facility, including labor disruptions, could adversely impact the
Company's operations and revenue.
Volatility in the Semiconductor Equipment Industry
The business of the Company depends on the capital equipment
expenditures of semiconductor manufacturers, which in turn depend on the current
and anticipated market demand for integrated circuits and products utilizing
integrated circuits. The semiconductor industry has been cyclical in nature and
has historically experienced periodic downturns. During the past nine months the
semiconductor industry has been experiencing a severe slowdown of product demand
and extreme volatility in product pricing. This slowdown and volatility has
caused the semiconductor industry to reduce or delay significantly purchases of
semiconductor manufacturing equipment and construction of new fabrication
facilities. This slowdown and volatility is expected to continue throughout
fiscal 1999. As previously announced, these conditions have adversely affected
and will continue to affect materially the Company's aggregate bookings,
revenues and operating results. Even during periods of reduced revenues, in
order to remain competitive the Company will continue to invest in R&D and to
maintain extensive ongoing worldwide customer service and support capabilities,
which could adversely affect its financial results.
Dependence on New Products and Processes; Rapid Technological Change
Rapid technological changes in semiconductor manufacturing processes
subject the semiconductor equipment industry to increased pressure to maintain
technological parity with deep submicron process technology. The Company
believes that its future success will depend in part upon its ability to
develop, manufacture and introduce successfully new products and product lines
with improved capabilities and to continue to enhance existing products. Due to
the risks inherent in transitioning to new products, the Company will be
required to forecast accurately demand for new products while managing the
transition from older products. If new products have reliability or quality
problems, reduced orders, higher manufacturing costs, delays in acceptance of
and payment for new products and additional service and warranty expenses may
result. In the past, the Company has experienced some delays, as well as
reliability and quality problems, in connection with product introductions.
There can be no assurance that the Company will successfully develop and
manufacture new products, or that new products introduced by it will be accepted
in the marketplace. If Lam does not successfully introduce new products, the
Company's results from operations will be materially adversely affected.
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The Company expects to continue to make significant investments in
R&D and to explore joint development relationships with other members of the
industry. The Company must manage product transitions or joint development
relationships successfully, as introduction of new products could adversely
affect sales of existing products. There can be no assurance that future
technologies, processes or product developments will not render the Company's
current product offerings obsolete or that the Company will be able to develop
and introduce new products or enhancements to existing products which satisfy
customer needs in a timely manner or achieve market acceptance. The failure to
do so could adversely affect the Company's business. Furthermore, if the Company
is not successful in the marketing and selling of advanced processes or
equipment to customers with whom it has formed strategic alliances, selling of
its existing products to those customers could be adversely affected. In
addition, in connection with the development of the Company's new products, the
Company will invest in high levels of preproduction inventory, and the failure
to complete development and commercialization of these new products in a timely
manner could result in inventory obsolescence, which could have an adverse
effect on its financial results.
Introduction of New Product
Lam currently anticipates shipping its Teres CMP system in fiscal
1999, which is expected to face significant competition from multiple current
and future competitors. Among the companies currently offering polishing systems
are Applied Materials, Inc., Cybeq Systems, Ebara Corporation, IPEC, SpeedFam
Corp., Strasbaugh and Sumitomo. 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 anticipated introduction
of its Teres CMP polishing system.
Product Concentration; Lack of Product Revenue Diversification
A substantial percentage of the Company's revenues to date have been
derived from a limited number of products, and such products are expected to
continue to account for a substantial percentage of the Company's revenues in
the near term. Continued market acceptance of its primary products is therefore
critical to the future success of the Company. Any decline in demand for or
failure to achieve continued market acceptance of such products or any new
version of these products, if any, as a result of competition, technological
change, failure of the Company to release new versions of these products on
time, or otherwise, could have a material adverse effect on the business,
operating results, financial condition and cash flows of the Company.
Dependence Upon Key Suppliers and Key Distributors
Certain of the components and subassemblies included in the products
of the Company are obtained from a single supplier or a limited group of
suppliers. The Company's key suppliers include Bullen Ultrasonics, Inc., which
supplies electrodes, Edwards High Vacuum Inc., Lam's supplier of chillers, and
Advanced Energy Industries, Lam's RF generator supplier. The Company purchases
in excess of $500,000 of supplies on a monthly basis from these
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suppliers. Each of these suppliers has a one year blanket purchase contract
under which Lam may issue purchase orders. These contracts may be renewed
periodically. Each of these suppliers has sold products to Lam during at least
the last four years, and there is no reason to expect that these contracts will
not continue to be renewed in the future or otherwise replaced with competent
alternative source suppliers. Management believes that alternative sources could
be obtained and qualified to supply these products. Nevertheless, a prolonged
inability to obtain certain components could have an adverse effect on the
Company's operating results and could result in damage to customer
relationships.
Highly Competitive Industry
The semiconductor equipment manufacturing industry is highly
competitive. The Company expects to continue to face substantial competition
throughout the world. A substantial investment is required by semiconductor
manufacturers to install and integrate capital equipment into a semiconductor
production line. The Company believes that as a result, once a semiconductor
manufacturer has selected a particular supplier's capital equipment, the
manufacturer generally relies upon that equipment for the specific production
line application and frequently will attempt to consolidate its other capital
equipment requirements with the same supplier. Accordingly, Lam would expect to
experience difficulty in selling to a given customer if that customer had
initially selected or selects a competitor's capital equipment. The Company
believes that to remain competitive, significant financial resources are
required in order to offer a broad range of products, to maintain customer
service and support centers worldwide, and to invest in product and process R&D.
The semiconductor equipment industry is becoming increasingly
dominated by large manufacturers who have the resources to support customers on
a worldwide basis, and certain of Lam's competitors have substantially greater
financial resources and more extensive engineering, manufacturing, marketing and
customer service and support. In addition, there are smaller, emerging
semiconductor equipment companies that provide innovative technology that may
have performance advantages over systems offered by the Company.
Competitors are expected to continue to improve the design and
performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics. If
competitors enter into strategic relationships with leading semiconductor
manufacturers covering products similar to those sold or being developed by the
Company, its ability to sell products to those manufacturers could be adversely
affected. No assurance can be given that Lam will continue to compete
successfully in the United States or worldwide.
Present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly to
new technologies or evolving customer requirements. In particular, while Lam
currently is developing additional product enhancements that it believes
addresses customer requirements, there can be no assurance that the development
or introduction of these additional product enhancements will be successfully
completed, at all or on a timely basis, or that these product enhancements will
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achieve market acceptance or be competitive. Accordingly, there can be no
assurance that the Company will be able to continue to compete effectively in
its markets, that competition will not intensify or that future competition will
not have a material adverse effect on the business, operating results, financial
condition and cash flows of the Company.
International Sales
International sales accounted for 42% and 51%, respectively, of net
revenues for the first quarter of fiscal 1999 and 1998, and 55%, 57% and 63%,
respectively, of net revenues for fiscal years 1998, 1997 and 1996.
Historically, sales to the Asia regions have accounted for a substantial portion
of international sales. Recent banking and currency problems in the Asia regions
have had and will continue to have a significant adverse impact on the Company's
revenue and operations, including specifically revenues and operations for
fiscal 1999.
Sales of products 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 led to
cancellation or delay of orders by the Company's customers, and are likely to
continue to do so in fiscal 1999.
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 yen-denominated assets and liabilities and will continue to enter into such
hedging transactions in the future.
In Europe, sales following January 1, 1999 will be subject to certain
provisions governing the transition of commercial transactions to the Euro. Lam
expects to be able to meet related legal requirements by January 1, 1999, and
through the transition period. The Company does not currently expect that
introduction and use of the Euro will materially affect its foreign exchange and
hedging activities or will result in any material increase in transaction costs.
Lam will continue to evaluate the impact over time of the introduction of the
Euro. Based on currently available information management does not believe that
the introduction of the Euro will have a material adverse impact on Lam's
financial condition or the overall trends in results of operations.
The impact of these and other factors on the Company's revenues and
operating results in any future period is difficult to forecast. There can be no
assurance that these and other factors relating to international sales and
operations by the Company will not materially adversely affect future business
and financial results, or in ways not readily foreseeable.
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Potential Volatility of Common Stock Price
The market price for Lam Common Stock has been volatile and it could
continue to be subject to significant fluctuations in response to market or
industry conditions generally, or specific 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, departure of key employees,
consolidations of operations or introduction of new products by the Company or
by the Company's competitors, government regulations, developments in patent or
other proprietary rights, disruptions with key customers or the occurrence of
political, economic or environmental events globally or in key sales regions. 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 affecting Lam Common Stock have been tied in part to the Asian and
Russian financial crisis and the price of and market for 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, Lam 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 Lam 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.
In October 1993, Varian brought suit against Lam in the United States
District Court for the Northern District of California, seeking monetary damages
and injunctive relief based on the Company's alleged infringement of certain
patents held by Varian. The Company has asserted defenses of invalidity and
unenforceability of the patents that are the subject of the lawsuit, as well as
non-infringement of such patents by the Company's products. No trial date is
currently scheduled. While litigation is subject to inherent uncertainties and
no assurance can be given that Lam 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 operating results or the Company's financial position.
The Company's success depends in part on its proprietary technology.
While Lam attempts to protect its proprietary technology through patents,
copyrights and trade secret protection, it believes that its success 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. Lam
currently holds a number of United States and foreign patents and patent
applications pending. There can be no
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assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, that pending applications will be issued or that
the rights granted or anticipated thereunder will provide competitive
advantages.
Year 2000 Compliance
See discussion in Management Discussion and Analysis of Financial
Condition and Results of Operation on page 11 to 13.
Restructurings and Consolidation of Operations
The Company substantially restructured and consolidated its
operations during the quarters ended March 31, 1998 and June 30, 1998.
Implementation of these restructurings and consolidations involves several
risks, including that of simplifying and modifying its product line offerings
(which will increase its dependence on fewer products and potentially reduce
overall sales).
Although the Company believes that the actions it is taking and
contemplates taking in connection with the restructurings and consolidations,
including the reduction in workforce, the consolidation of manufacturing
operations and the exiting from FPD and CVD operations, should help more closely
align Lam with its business outlook, there can be no assurance that such actions
will enable the Company to achieve its objectives of reducing costs, or can be
accomplished at specific or optimum values or on time or as intended. In
addition, there can be no assurance that the size of the restructuring charge
will not exceed current estimates. The Company's future consolidated operating
results and financial condition could be adversely affected should it encounter
difficulty in effectively managing the restructurings and consolidations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
For financial market risks related to changes in interest rates and
foreign currency exchange rates, refer to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In October 1993, Varian brought suit against the Company in the
United States District Court for the Northern District of California, seeking
monetary damages and injunctive relief based on the Company's alleged
infringement of certain patents held by Varian. The Company has asserted
defenses of invalidity and unenforceability of the patents that are the subject
of the lawsuit, as well as non-infringement of such patents by the Company's
products. No trial date is currently scheduled. While litigation is subject to
inherent uncertainties and no assurance can be given that Lam 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
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Company believes that the Varian lawsuit will not have a material adverse effect
on the Company's operating results or the Company's financial position.
In addition, the Company is from time to time notified by various
parties that its products 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 flow statements.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.58 Loan Agreement between Lam Research Co., LTD and ABN
AMRO Bank N.V., dated September 30, 1998.
Exhibit 10.59 Guaranty to Loan Agreement between Lam Research Co.,
LTD and ABN AMRO Bank N.V., dated September 30, 1998.
Exhibit 10.60 Second Addendum to Employment Agreement between Lam
Research Corporation and Roger D. Emerick, effective
September 1, 1998.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 10, 1998 making an Item 5
disclosure to disclose the Company's announcement of a restructuring.
The Company filed a Form 8-K on August 14, 1998 making an Item 5
disclosure to disclose its year end press release.
The Company filed a Form 8-K on September 16, 1998 making an Item 5
disclosure to disclose that the Company had announced a stock
repurchase.
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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: November 12, 1998
LAM RESEARCH CORPORATION
By:/s/ Mercedes Johnson
---------------------------------
Mercedes Johnson, Vice President,
Finance & Chief Financial Officer
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EXHIBIT INDEX
Exhibit 10.58 Loan Agreement between Lam Research Co., LTD and ABN
AMRO Bank N.V., dated September 30, 1998.
Exhibit 10.59 Guaranty to Loan Agreement between Lam Research Co.,
LTD and ABN AMRO Bank N.V., dated September 30, 1998.
Exhibit 10.60 Second Addendum to Employment Agreement between Lam
Research Corporation and Roger D. Emerick, effective
September 1, 1998.
Exhibit 27 Financial Data Schedule