SELECTED FINANCIAL DATA
(in thousands, except per share data)
- - -------------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Total revenue $1,276,884 $810,557 $493,695 $265,038 $171,416
Gross profit 613,703 391,739 227,664 125,110 86,192
Operating income 212,935 118,392 60,206 28,153 15,267
Net income 141,091 89,211 37,756 18,907 9,947
Net income per share
Primary $ 4.92 $ 3.27 $ 1.55 $ 0.79 $ 0.49
Fully diluted $ 4.67 $ 3.06 $ 1.51 $ 0.79 $ 0.49
BALANCE SHEET:
Working capital $ 470,192 $337,386 $171,918 $154,723 $ 81,521
Total assets 969,365 682,649 381,497 268,839 156,600
Long-term obligations, less current portion 52,926 95,928 78,843 79,066 13,698
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
Quarterly 1996 1st 2nd 3rd 4th
- - -----------------------------------------------------------------------------------------------------------------------------
Total revenue $263,244 $290,517 $346,639 $376,484
Gross profit 128,537 142,010 167,970 175,186
Operating income 44,970 50,378 57,755 59,832
Net income 30,467 33,479 38,649 38,496
Net income per share
Primary $ 1.07 $ 1.18 $ 1.37 $ 1.29
Fully diluted $ 1.00 $ 1.12 $ 1.28 $ 1.27
Price range per share $56.75-73.38 $45.38-68.50 $32.00-52.50 $24.50-45.50
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
Quarterly 1995 1st 2nd 3rd 4th
- - -----------------------------------------------------------------------------------------------------------------------------
Total revenue $161,513 $172,739 $219,014 $257,291
Gross profit 76,823 83,888 106,965 124,063
Operating income 22,380 26,939 35,458 33,615
Net income 15,053 18,931 24,793 30,434
Net income per share
Primary $ 0.61 $ 0.68 $ 0.89 $ 1.07
Fully diluted $ 0.58 $ 0.64 $ 0.83 $ 1.00
Price range per share $25.75-42.50 $35.00-46.75 $35.25-51.50 $42.50-68.50
- - -----------------------------------------------------------------------------------------------------------------------------
Fourth quarter fiscal 1995 net income includes the effect of a $10.4 million
gain on the sale of Brooks Automation Inc. securities.
Stock and Dividend Information: The Company's Common Stock is traded in the
over-the-counter market under the NASDAQ National Market symbol LRCX. The
price range per share is the highest and lowest bid prices as reported by the
National Association of Security Dealers, Inc.
As of June 30, 1996, the Company had 1,192 stockholders of record.
No cash dividends have been declared or are anticipated to be paid by the
Company as all available funds are intended to be employed in the development
of the business, and the Company's bank agreements restrict the payment of
dividends.
LAM RESEARCH CORP. / 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - ---------------------
RESULTS OF OPERATIONS
- - ---------------------
The information in this discussion contains forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and is subject to the safe harbor provisions created by that
statute. Such statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Forward-looking statements are indicated by an asterisk (*).
The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements, which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following table sets forth, for the fiscal years indicated, certain
income and expense items as a percentage of total revenue:
- - --------------------------------------------------------------------------------
Year ended June 30, 1996 1995 1994
- - --------------------------------------------------------------------------------
Net sales 98.2% 98.5% 98.2%
Royalty income 1.8 1.5 1.8
- - --------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
Cost of goods sold 51.9 51.7 53.8
Research and development 13.6 15.8 15.5
Selling, general and administrative 17.8 17.9 18.5
- - --------------------------------------------------------------------------------
Operating income 16.7 14.6 12.2
Other income/(expense) (0.3) 1.1 (0.6)
- - --------------------------------------------------------------------------------
Income before income taxes 16.4 15.7 11.6
Income tax expense 5.3 4.7 3.9
- - --------------------------------------------------------------------------------
Net income 11.1% 11.0% 7.7%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------
Fiscal 1996 vs. 1995
- - --------------------
Lam's revenue for fiscal year 1996 increased to $1,276.9 million, a 58%
increase from the $810.6 million of revenue in fiscal 1995. The Company's
Transformer Coupled Plasma (TCP) products experienced increased sales in all
regions and accounted for approximately one half of the overall increase in
revenue. Also contributing to the overall increase in revenue for fiscal 1996
were sales of the Company's Rainbow and Alliance products, which when
combined accounted for approximately one third of the increase in revenue.
Alliance revenue was particularly strong in the latter half of fiscal 1996,
as customers took delivery of the Alliance product in larger quantities. Most
of the remainder of the increase in revenue resulted from increased spares
and service revenue, which occurred as a result of the Company's increased
installed machine base. Lam experienced increased revenue in all geographic
regions, with foreign sales increasing to 64% of overall revenue from 54% in
fiscal 1995. The Asia Pacific region, excluding Japan, accounted for slightly
more than one half of the increase in revenue obtained from foreign sources.
Also, the United States, Japan and European regions continued to show
increases in revenue, accounting for, in approximately equal amounts, the
remainder of the increase.
During fiscal 1996, Lam benefited from the expansion of the worldwide
semiconductor market; however, this market is presently experiencing
volatility in terms of product demand and pricing. This condition has caused
some semiconductor manufacturers to exercise caution in making their capital
equipment purchase decisions and has, in certain cases, led to rescheduled or
canceled planned capital equipment purchases. As a result of the
uncertainties of this current market environment, the company anticipates
that its fiscal 1997 revenue could be less than the revenue achieved in
fiscal 1996.*
Royalty income was $22.8 million in fiscal 1996, an 85% increase over
fiscal 1995, due to the increased sales of systems incorporating Lam
technology by Tokyo Electron Limited (TEL) and Sumitomo Metal Industries,
Ltd. (Sumitomo). The current royalty agreement with TEL was due to expire in
december 1996 but has been extended at a substantially lower royalty rate. As
a result, the Company believes that sales of systems incorporating the
Company's technologies to Japanese customers and royalty income derived
therefrom will be substantially lower and continue to fluctuate on a
quarterly and annual basis.*
Gross margins were 48.1% for fiscal 1996 compared with 48.3% for fiscal
1995. The slight decrease in gross margins can be attributed to the product
mix as the Company sold a relatively higher percentage of the lower margin
TCP and Alliance machines and a relatively lower percentage of the higher
margin rainbow machines. The Company anticipates that gross margins may
continue to decline as customers increasingly accept its newer technology and
lower margin Alliance and TCP products. The Company is actively pursuing
margin improvement programs for these products. Fiscal 1997 gross margins
also may be negatively impacted due to overcapacity at the Company's
manufacturing facilities and issues related to the slower industry conditions
noted above.*
LAM RESEARCH CORP. / 15
Research and development (R&D) dollar spending increased 35.3% in fiscal
1996 over fiscal 1995 and as a percentage of revenues decreased by 2.2% to
13.6% in fiscal 1996. R&D spending increased as the Company continued to
invest in the development of advanced etch applications, chemical vapor
deposition (CVD) technologies, including Deep SubMicron (DSM) 9800 (formerly
Integrity-Registered Trademark-) and Deep SubMicron (DSM) 9900 (formerly
Epic-TM-), continued enhancements to the TCP and Alliance products, and
continued development of the Company's flat panel display technology.
Although the R&D expenditures increased as the Company has added engineering
and scientific headcount, R&D expenditures increased at a rate slightly
slower than revenue increased. During the quarter ended June 30, 1996, the
Company began occupancy of an additional engineering facility at the
Company's Fremont campus, which the Company is utilizing under an operating
lease. The Company operates in a constantly changing and highly competitive
market, and therefore the Company believes it is critical to continue to make
its investment in R&D programs in order to maintain its position as a
technology leader.
Selling, general and administrative (S,G&A) expenses increased by 56.5%
in fiscal 1996 over fiscal 1995 and decreased slightly as a percentage of
sales. During fiscal 1996, the Company added employees in all customer
support, sales and administration areas to accommodate the increased sales
volume. During fiscal 1996, the Company significantly expanded its foreign
facilities: the Company opened a manufacturing facility in Korea, expanded
its facilities in Japan and relocated and began the expansion of its Taiwan
facility, which will include a product demonstration laboratory and a
training facility.
As a result of the recent market conditions noted above, the Company has
implemented a number of expense and capital spending reduction programs to
manage operating costs. Furthermore, in August 1996, the Company announced a
restructuring of its operations which included an approximate 11% reduction
of its workforce. For the first quarter of fiscal 1997, the Company will
record a restructuring charge of $11.0 to $12.0 million for the costs
resulting from severance compensation and consolidation of related
facilities. The Company expects that as a result of these programs and the
restructuring of operations, operating expenses on a dollar basis will be
lower in fiscal 1997 than in 1996 but may increase as a percentage of the
lower expected revenue for the year.*
Interest expense for Lam increased by 17% over the prior fiscal year, due
to additional yen bank borrowings by the Company's Japanese subsidiary,
additional interest expense related to an interest-rate swap described in
Note D to the consolidated financial statements, and the increased
acquisition of equipment and leasehold capital leases. Other income decreased
due to a $10.4 million one time gain recorded in the fourth quarter of fiscal
1995 from the sale of all of the stock held by the Company in Brooks
Automation Inc., a vendor to the Company.
The combined effective tax rate of 32.5% for fiscal 1996 increased over
the prior year's 30%, due primarily to the expiration of federal research and
development tax credits. The Company expects its effective tax rate to
decrease in fiscal 1997 as a result of the recent reinstatement of the
expired federal research and development tax credits. The Company believes
its future income will be sufficient to realize its net deferred tax assets.*
- - --------------------
FISCAL 1995 VS. 1994
- - --------------------
Lam's net sales for fiscal year 1995 increased to $798.2 million, a 65%
increase from the prior year, as the Company continued to participate in the
worldwide expansion of the semiconductor chip market. Approximately
two-thirds of the increase was due to increased unit shipments of the
Company's Rainbow and TCP product lines, with shipments of the more advanced
TCP products rising at a slightly higher rate when compared to the prior
year. Of the remaining increase, approximately one half was due to the first
volume shipments of the Company's Alliance cluster tool, with most of that
product's revenue growth occurring in the last two quarters of the fiscal
year. Increased spares and service revenue, resulting from the Company's
growing installed base, accounted for most of the remainder of the sales
increase, with spares and service revenue representing 20% of the Company's
total revenue. Geographically, for the first time in its history, more than
one half of the Company's revenues came from foreign customers, with foreign
sales representing 54.0% of total revenue, up from 48.4% in the prior year.
During fiscal year 1995, the Company commenced direct sales of its TCP
products to customers in Japan, which accounted for almost 41.5% of the TCP
product lines' growth over the prior year. These sales are Japanese yen
denominated (the only significant sales which are not U.S.
dollar-denominated) and the Company's practice is to enter into yen forward
exchange contracts at or near the date purchase orders for TCP systems are
received from Japanese customers in order to minimize the subsequent foreign
exchange fluctuations. Korea was the Company's largest single foreign market
and accounted for 16.3% and 15.1% of net sales in fiscal 1995 and
LAM RESEARCH CORP. / 16
1994, respectively, and sales to European customers increased by over 47%
from the prior year. Royalty income increased by 40.3% from fiscal 1994 due
to increased sales of systems incorporating Lam technology by TEL and
Sumitomo.
Gross margin for fiscal 1995 was 48.3% compared to 46.2% for the prior
year. The improvement in gross margin was due in approximately equal measure
to lower unit manufacturing costs and lower installation and warranty costs.
Most of the decrease in unit manufacturing costs was due to reduced average
material costs as a result of higher volume purchasing (material costs
represent a relatively high percentage of total costs). Reductions in
installation and warranty costs were achieved as a result of active cost
reduction programs, increased training of field service and customer
personnel, as well as ongoing system design improvements.
R&D spending dollars increased by 67% in fiscal 1995 over fiscal 1994,
and as a percentage of total revenues, increased slightly to 15.8%, up from
15.5% for the prior fiscal year. During fiscal year 1995, the Company opened
a major new R&D dedicated facility at its Fremont, California campus and
continued to add scientific and engineering personnel to staff its ongoing
development projects, which included improvements to its existing etch
products, continued development of CVD products, and new product development,
including the new release of the Alliance cluster tool (introduced during
fiscal year 1995) and flat panel display.
S,G&A expenses increased by 60% in fiscal 1995 over fiscal 1994, but
continued to decrease as a percentage of total revenue to 17.9% from 18.5%
for the prior fiscal year. The Company added significant facilities and
information technology infrastructure in fiscal 1995 to accommodate the
rapidly expanding growth in its sales, field service, customer support, and
administration areas as a result of the increased sales volume. S,G&A
headcount increased by 57% in fiscal 1995 over fiscal 1994.
Interest expense increased by 30.6% over the prior fiscal year, due to
additional yen bank borrowings by its Japanese subsidiary, additional
interest expense related to an interest rate swap described in Note D to the
consolidated financial statements, and the increased acquisition of equipment
and leasehold capital leases. Interest income increased due to the investment
of the proceeds of a public offering of the Company's common stock completed
in the first quarter of fiscal 1995. Other income included a $10.4 million
gain recorded in the fourth quarter of fiscal 1995 from the sale of stock
held in Brooks Automation, a vendor to the Company. The combined effective
tax rate for fiscal 1995 of 30% decreased over the prior year's 34% due to an
increase in benefits resulting from federal and state research and other tax
credits.
- - -------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Operating activities provided approximately $26.6 million in cash flows
for fiscal 1996. Approximately $174.8 million of net cash was generated from
net income plus non-cash depreciation and amortization, which was offset by
increases in accounts receivable and inventories less increases in trade
accounts payable and accrued expenses, all such increases being due to the
Company's increased sales volume for the fiscal year. During the third
quarter of fiscal 1996, the Company renegotiated a lease agreement related to
one of its R&D buildings and an engineering building and as a result, $25.0
million of previously restricted investments (restricted cash) became
unrestricted and as a result, has been included in short-term investments at
June 30, 1996. During fiscal 1996, the Company entered into an agreement with
a bank which allows the Company to sell up to 6 billion yen of
yen-denominated accounts receivable to the bank. At June 30, 1996, the
equivalent of $82.1 million of receivables had been sold to the bank, with
$49.5 million still uncollected by the bank and subject to recourse
provisions.
Net cash used in investing activities for fiscal 1996 was $47.7 million.
Capital expenditures included acquisition of equipment used in manufacturing
and research and development and construction of demonstration labs and
leasehold improvements for the Company's expansion at the Fremont campus,
Japan facility, Taiwan facility and the new manufacturing facility in Korea
and accounted for $66.6 million of cash use. Offsetting the use of cash for
capital expenditures were proceeds from the sales of short-term investments
totaling $14.8 million (net of purchases). Cash receipts from investing
activities of $12.0 million were provided from the sale of Brooks Automation,
Inc. securities.
Net cash provided by financing activities for fiscal 1996 was $40.3
million. During the fourth quarter of fiscal 1996, the Company primarily
incurred yen-denominated borrowings of $21.9 million.
As of June 30, 1996, the Company had $130.5 million in cash, cash
equivalents and short-term investments compared with $101.0 million at June
30, 1995. The Company has a total of $210.0 million available under a
syndicated bank line of credit, which expires in December 1998 compared to
$50 million in various bank borrowing lines at June 30, 1995. At June 30,
1996,
LAM RESEARCH CORP. / 17
the Company had borrowed $25.0 million against the line of credit. Borrowings
under the line of credit are unsecured.
The Company's commitments consist primarily of debt obligations and
operating and capital lease commitments for its facilities and equipment.
Based upon current forecasts, the Company's cash, cash equivalents,
short-term investments and available lines of credit at June 30, 1996 should
be sufficient to support anticipated levels of operations and capital
expenditures through at least June 30, 1997.*
- - ------------
RISK FACTORS
- - ------------
- - ----------------------------------------------------
CURRENT SLOWDOWN AND VOLATILITY IN THE SEMICONDUCTOR
INDUSTRY
- - ----------------------------------------------------
The Company's business depends upon 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 historically experienced periodic downturns. The semiconductor industry
is presently experiencing a slowdown in terms of product demand and
volatility in terms of product pricing. This slowdown and volatility has
caused the semiconductor industry to reduce its demand for semiconductor
processing equipment. No assurance can be given that the Company's revenue
and operating results will not be adversely affected during this and possible
future downturns in the semiconductor industry. In addition, the need for
continued investments in research and development, substantial capital
equipment requirements and extensive ongoing worldwide customer service and
support capability will limit the Company's ability to reduce expenses.
Accordingly, there is no assurance that the Company will be able to remain
profitable in the future.
- - ---------------------------
HIGHLY COMPETITIVE INDUSTRY
- - ---------------------------
The semiconductor processing equipment industry is highly competitive.
The Company faces substantial competition throughout the world. The Company
believes that to remain competitive, it will require significant financial
resources in order to offer a broad range of products, to maintain customer
service and support centers worldwide, and to invest in product and process
research and development. In addition, the Company intends to continue to
invest substantial resources to increase sales of its systems to Japanese
semiconductor manufacturers, who represent a substantial portion of the
worldwide semiconductor market and whose market is difficult for non-Japanese
equipment companies to penetrate. The Company believes that 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 the Company's competitors have substantially greater financial resources
and more extensive engineering, manufacturing, marketing and customer service
and support capabilities than the Company. In addition, there are smaller
emerging semiconductor equipment companies which provide innovative
technology. The Company expects its competitors 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 the Company's competitors enter into strategic
relationships with leading semiconductor manufacturers covering etch or
deposition products similar to those sold by the Company, its ability to sell
its products to those manufacturers could be adversely affected. No assurance
can be given that the Company will continue to compete successfully in the
United States or worldwide.
- - -----------------------------------------------
DEPENDENCE ON NEW PRODUCTS AND PROCESSES; RAPID
TECHNOLOGICAL CHANGE
- - -----------------------------------------------
Semiconductor manufacturing equipment and processes are subject to rapid
technological change. The Company believes that its future success will
depend in part upon its ability to continue to enhance its existing products
and their process capabilities and to develop and manufacture new products
with improved process capabilities. As a result, the Company expects to
continue to make significant investments in research and development.* The
Company also must manage product transitions successfully, as introductions
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
its existing products and processes in a timely manner which satisfy customer
needs 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 development of advanced processes or equipment for manufacturers with
whom it has formed strategic alliances, its ability to sell its products to
those manufacturers would be adversely
LAM RESEARCH CORP. / 18
affected. In addition, in connection with the development of the Company's
new products, the Company invests 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 the Company's financial results.
- - -------------------------------------------
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
- - -------------------------------------------
The Company's revenue and operating results may fluctuate from quarter to
quarter. The Company derives its revenue primarily from the sale of a
relatively small number of high-priced systems which can range in price from
$300,000 to over $3 million. Some of these systems are ordered and shipped
during the same quarter. The Company's results of operations for a particular
quarter could be adversely affected if anticipated orders for even a small
number of systems were not received in time to enable shipment during the
quarter, if anticipated shipments were delayed or cancelled by one or more
customers or if shipments were delayed due to manufacturing difficulties. In
particular, the Company has experienced certain cases of rescheduling or
cancellation of orders. The Company's revenue and operating results may also
fluctuate due to the mix of products sold, the geographic region of
distribution or the level of royalty income from the Company's Japanese
licenses. The Company generally realizes a higher margin on sales of its
mature etch products and on revenue from service and spare parts than on
sales of new TCP and Alliance products. Newer products usually have lower
margins in the initial phase of production. Increases or decreases in royalty
income will also have a disproportionate impact on operating income and will
continue to fluctuate on a quarterly basis. The impact of these and other
factors on the Company's revenues and operating results in any future periods
is difficult for the Company to forecast.
- - ---------------------------
DEPENDENCE ON KEY SUPPLIERS
- - ---------------------------
Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers.
The Company 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.
- - -------------------------
ENVIRONMENTAL REGULATIONS
- - -------------------------
The Company is subject to a variety of governmental regulations related
to the discharge or disposal of toxic, volatile, or otherwise hazardous
chemicals used in the manufacturing process. The Company believes that it is
in compliance with these regulations and that it has obtained all necessary
environmental permits to conduct its business, which permits generally relate
to the disposal of hazardous wastes. Nevertheless, the failure to comply with
present or future regulations could result in fines being imposed on the
Company, suspension of production or cessation of operations. Such
regulations could require the Company to acquire significant equipment or to
incur substantial other expenses to comply with environmental regulations.
Any failure by the Company to control the use of, or adequately restrict the
discharge or disposal of hazardous substances could subject the Company to
future liabilities.
- - -------------------
INTERNATIONAL SALES
- - -------------------
The Company anticipates that export sales will continue to account for a
significant portion of its net sales.* Additionally, the Company continues to
expand its international operations, including expansion of its facilities in
Asia. As a result, a significant portion of the Company's sales and
operations will be subject to certain risks, including tariffs and other
barriers, difficulties in staffing and managing foreign subsidiary and branch
operations, difficulties in managing distributors, potentially adverse tax
consequences and the possibility of difficulty in accounts receivable
collection. There can be no assurance that any of these factors will not have
a material adverse effect on the Company's business, financial condition and
results of operations.
- - -----------------------------
INTELLECTUAL PROPERTY MATTERS
- - -----------------------------
From time to time, the Company is notified that it may be in violation of
certain patents. In such cases, the Company's policy is to defend against the
claims or negotiate licenses where considered appropriate. However, no
assurance can be given that it will be able to obtain necessary licenses on
commercially reasonable terms or at all. Any failure to obtain such licenses
on commercially reasonable terms, or at all, or any litigation resulting from
such claims could have a material adverse effect on the Company's business
and financial condition.
LAM RESEARCH CORP. / 19
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
- - --------------------------------------------------------------------------------
June 30, 1996 1995
- - --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 62,879 $ 43,675
Short-term investments 67,605 57,334
Accounts receivable less allowance for doubtful
accounts of $1,663 in 1996 and $1,189 in 1995 256,767 195,682
Inventories 322,366 171,401
Prepaid expenses and other assets 17,193 25,263
Deferred income taxes 50,035 32,778
- - --------------------------------------------------------------------------------
Total current assets 776,845 526,133
Equipment and leasehold improvements, net 170,839 117,571
Restricted investments -- 25,024
Other assets 21,681 13,921
- - --------------------------------------------------------------------------------
$969,365 $682,649
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $112,883 $ 82,542
Accrued expenses and other liabilities 155,874 98,633
Line of credit borrowings 25,000 --
Current portion of long-term debt and capital
lease obligations 12,896 7,572
- - --------------------------------------------------------------------------------
Total current liabilities 306,653 188,747
Long-term debt and capital lease obligations, less
current portion 52,926 95,928
Deferred income taxes -- 2,712
Commitments and contingencies
Preferred Stock; 5,000 shares authorized, none
outstanding -- --
Common stock at par value of $.001 per share
Authorized--90,000 shares; issued and
outstanding--30,266 shares at June 30, 1996
and 27,275 shares at June 30, 1995 30 27
Additional paid-in capital 298,160 224,730
Retained earnings 311,596 170,505
- - --------------------------------------------------------------------------------
Total stockholders' equity 609,786 395,262
- - --------------------------------------------------------------------------------
$969,365 $682,649
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
LAM RESEARCH CORP. / 20
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
- - ---------------------------------------------------------------------------------------------
Year ended June 30, 1996 1995 1994
- - ---------------------------------------------------------------------------------------------
Net sales $ 1,254,070 $798,209 $484,892
Royalty income 22,814 12,348 8,803
- - ---------------------------------------------------------------------------------------------
Total revenue 1,276,884 810,557 493,695
Costs and expenses:
Cost of goods sold 663,181 418,818 266,031
Research and development 173,013 127,840 76,328
Selling, general and administrative 227,755 145,507 91,130
- - --------------------------------------------------------------------------------------------
1,063,949 692,165 433,489
- - ---------------------------------------------------------------------------------------------
Operating income 212,935 118,392 60,206
- - ---------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------
Other income (expense):
Interest income 5,442 5,138 1,743
Interest expense (7,887) (6,732) (5,155)
Other, net (1,453) 10,646 363
- - ---------------------------------------------------------------------------------------------
(3,898) 9,052 (3,049)
- - ---------------------------------------------------------------------------------------------
Income before income taxes 209,037 127,444 57,157
Income tax expense 67,946 38,233 19,401
- - ---------------------------------------------------------------------------------------------
Net income $ 141,091 $ 89,211 $ 37,756
- - ---------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------
Net income per share
Primary $ 4.92 $ 3.27 $ 1.55
- - ---------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------
Fully diluted $ 4.67 $ 3.06 $ 1.51
- - ---------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------
Number of shares used in per share calculations
Primary 28,700 27,300 24,300
- - ---------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------
Fully diluted 30,940 30,300 27,000
- - ---------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
LAM RESEARCH CORP. / 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $141,091 $ 89,211 $37,756
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 33,756 23,532 18,438
Deferred income taxes (21,519) (12,529) (13,310)
Changes in certain working capital accounts:
Accounts receivable (61,085) (75,356) (50,382)
Inventories (150,965) (55,832) (51,280)
Prepaid expenses and other assets (3,968) (19,240) (2,635)
Trade accounts payable 30,341 16,415 35,289
Accrued expenses and other liabilities 58,960 52,895 32,378
- - ---------------------------------------------------------------------------------------------------------------------------------
Total adjustments (114,480) (70,115) (31,502)
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,611 19,096 6,254
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (66,588) (63,405) (18,975)
Purchase of available-for-sale securities (405,819) (348,204) (14,194)
Sale of available-for-sale securities 420,572 289,968 --
Purchase of restricted investments -- -- (9,928)
Proceeds from the sale of securities 12,038 -- --
Acquisition of Drytek, Inc. net of cash acquired -- -- ( 5,785)
Other (7,947) (3,026) (2,102)
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (47,744) (124,667) (50,984)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit 40,000 -- --
Repayment of borrowings under line of credit (15,000) -- --
Proceeds from issuance of long-term debt 21,873 9,468 5,724
Principal payments on long-term debt and capital lease obligations (13,987) (6,406) (6,843)
Proceeds from issuance of common stock 7,451 122,092 2,688
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 40,337 125,154 1,569
- - ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 19,204 19,583 (43,161)
Cash and cash equivalents at beginning of year 43,675 24,092 67,253
- - ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 62,879 $ 43,675 $24,092
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Cash payments for interest $ 8,574 $ 6,614 $ 4,575
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Cash payments for income taxes $ 74,666 $ 31,319 $20,289
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
LAM RESEARCH CORP. / 22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
Common Common Additional
Stock Stock Paid-in Retained
Shares Amount Capital Earnings Total
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 23,142 $23 $ 86,709 $ 43,538 $130,270
Sale of Common Stock, net of repurchases 350 1 2,687 -- 2,688
Income tax benefit from stock option transactions -- -- 4,939 -- 4,939
Common Stock issued to acquire Monkowski-Rhine, Inc. 36 -- 1,178 -- 1,178
Net income -- -- -- 37,756 37,756
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 23,528 24 95,513 81,294 176,831
Sale of Common Stock, net of repurchases 3,747 3 122,089 -- 122,092
Income tax benefit from stock option transactions -- -- 7,128 -- 7,128
Net income -- -- -- 89,211 89,211
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 27,275 27 224,730 170,505 395,262
Sale of Common Stock, net of repurchases 351 -- 7,451 -- 7,451
Income tax benefit from stock option transactions -- 1,719 -- 1,719
Conversion of subordinated debentures 2,640 3 64,260 -- 64,263
Net income -- -- -- 141,091 141,091
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 30,266 $30 $298,160 $311,596 $609,786
- - ----------------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
LAM RESEARCH CORP. / 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
- - ----------------------------------------------
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - ----------------------------------------------
- - -----------------------------
PRINCIPLES OF CONSOLIDATION
- - -----------------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
- - ------------------
CASH EQUIVALENTS
- - ------------------
All highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
- - -------------
INVENTORIES
- - -------------
Inventories are stated at the lower of cost (first-in, first-out
method) or market. The Company adjusts the carrying value of excess or
obsolete inventory as appropriate.
- - -------------------------------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
- - -------------------------------------
Equipment and leasehold improvements are stated at cost. Equipment is
depreciated by the straight-line method over the estimated useful lives of
the assets, generally three to five years. Leasehold improvements are
amortized by the straight-line method over the shorter of the life of the
related asset or the term of the lease. Amortization of equipment under
capital leases is included with depreciation. In 1995, the Financial
Accounting Standards Board released Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" (FAS 121). FAS 121 requires
recognition of impairment of long-lived assets in the event the net book
value of such assets exceeds the future undiscounted cash flows attributable
to such assets. FAS 121 is effective for fiscal years beginning after
December 15, 1995. Adoption of FAS 121 is not expected to have a material
impact on the Company's financial position or results of operation.
- - ----------------------
REVENUE RECOGNITION
- - ----------------------
Sales of the Company's products are generally recorded upon shipment.
Estimated costs to be incurred by the Company related to product installation
and warranty fulfillment are accrued at the date of shipment.
- - ---------------------
FOREIGN CURRENCY
- - ---------------------
The Company has foreign sales, service and manufacturing operations.
With respect to all foreign subsidiaries excluding Japan, the functional
currency is the U.S. dollar and transaction and translation gains and losses
are included in net income and have not been material in any year presented.
The functional currency of the Company's Japanese subsidiary is the Japanese
yen. Translation gains and losses related to the Japan subsidiary are
included as component of stockholders' equity, but have not been material
through June 30, 1996.
- - ------------------
INCOME PER SHARE
- - ------------------
Income per share computations are based upon the weighted average
number of shares of Common Stock and common stock equivalents outstanding
during the year. The common stock equivalents include shares issuable upon
the assumed exercise of stock options using the treasury stock method. The
convertible subordinated debentures are not deemed to be common stock
equivalents and, accordingly, are excluded from the calculation of primary
income per share. Fully diluted income per share includes the effect of the
convertible subordinated debentures, and net income is adjusted to reflect
the exclusion of net interest expense and net amortization expense of debt
issuance costs related to the debentures, assuming their conversion at the
beginning of the period. Primary income per share, for fiscal 1996,
calculated to reflect the conversion of the convertible subordinated
debentures as if they were converted on July 1, 1995 is $4.67.
- - ---------------------
EMPLOYEE STOCK PLANS
- - ---------------------
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting Principles
Board's Opinion No. 25 "Accounting For Stock Issued to Employees" (APB 25).
In October 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standard No. 123, "Accounting For Stock-Based
Compensation"( FAS 123). FAS 123 provides an alternative to APB 25 and is
effective for fiscal years beginning after December 15, 1995. The Company
expects to continue to account for its employee stock plans in accordance
with the provisions of APB 25. Accord
LAM RESEARCH CORP. / 24
ingly, FAS 123 is not expected to have a material impact on the Company's
Financial position or results of operation. Effective with the issuance of
the Company's fiscal year 1997 financial statements, the Company will
disclose proforma net income and net income per share amounts as if FAS 123
were applied.
- - -------------------
USE OF ESTIMATES
- - -------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that could affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
- - ------------------------------------
B COMPANY AND INDUSTRY INFORMATION
- - -------------------------------------
Lam Research Corporation is a leading supplier of technically complex
thin film processing equipment used in the primary stages of semiconductor
manufacturing. The Company's product offerings include single wafer plasma
etch systems with a wide range of applications and chemical vapor deposition
(CVD) systems. The Company sells its products primarily to large companies
involved in the production of semiconductors in the United States, Europe,
Japan and Asia Pacific. Credit evaluations are performed on all customers,
and the Company usually does not require collateral on sales.
The semiconductor industry has historically been cyclical and has
experienced periodic downturns, which have had a material adverse effect on
the semiconductor industry's demand for semiconductor processing equipment,
including equipment manufactured and marketed by the Company. Certain of the
components and subassemblies included in the Company's products are obtained
from a single supplier or a limited group of suppliers. The Company believes
that alternative sources could be obtained and qualified to supply these
products. Nevertheless, a prolonged inability to obtain certain components
could have a severe near term effect on the Company's operating results and
could result in damage to customer relationships.
The Company entered into agreements totaling approximately 6 billion
yen and 5 billion yen in fiscal 1996 and 1995, respectively, to sell specific
Japanese yen-denominated receivables subject to recourse. At June 30, 1996
and 1995, $82,104,000 and $37,612,000, of these receivables respectively, had
been sold to the bank, of which $49,467,000, at June 30, 1996, remained
uncollected by the bank and subject to recourse provisions.
During fiscal 1996, no individual customer accounted for greater than
10% of sales. One customer accounted for 11% and 14% of sales for fiscal 1995
and 1994, respectively. Another customer accounted for 10% of sales for
fiscal 1994.
The Company operates in four geographic regions, the United States,
Europe, Japan and Asia Pacific. The following is a summary of local
operations by geographic region at June 30:
- - ----------------------------------------------------------------
(in thousands) 1996 1995 1994
- - ----------------------------------------------------------------
Revenue:
United States $1,295,003 $820,418 $491,909
Europe 65,266 38,604 23,776
Japan 150,707 52,923 5,705
Asia Pacific 65,331 38,162 13,522
Elimination (299,423) (139,550) (41,217)
- - ----------------------------------------------------------------
Total $1,276,884 $810,557 $493,695
- - ----------------------------------------------------------------
- - ----------------------------------------------------------------
Operating income/(loss):
United States $ 171,632 $111,284 $ 57,694
Europe 23,717 9,874 7,902
Japan 4,127 520 793
Asia Pacific 16,700 13,199 2,885
Elimination (3,241) (16,485) (9,068)
- - ---------------------------------------------------------------
Total $ 212,935 $118,392 $ 60,206
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
Identifiable assets:
United States $1,097,246 $772,696 $411,838
Europe 48,458 28,936 26,067
Japan 99,592 64,135 10,993
Asia Pacific 90,561 32,832 15,346
Elimination (366,492) (215,950) (82,747)
- - ---------------------------------------------------------------
Total $ 969,365 $682,649 $381,497
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
LAM RESEARCH CORP. / 25
Sales between geographic areas are accounted for at prices that provide
a profit and are in accordance with the rules and regulations of the
respective governing authorities. Total export revenue consisting of sales
from the Company's U.S. operating subsidiary to non-affiliated customers by
geographic region for the years ended June 30 are as follows:
- - --------------------------------------------------------
(in thousands) 1996 1995 1994
- - --------------------------------------------------------
Asia Pacific $334,149 $173,549 $102,763
Europe 172,586 105,349 73,563
Japan 22,936 29,477 19,612
- - --------------------------------------------------------
$529,671 $308,375 $195,938
- - --------------------------------------------------------
- - ------------------------
C FINANCIAL INSTRUMENTS
- - ------------------------
In November 1995, the Financial Accounting Standards Board staff issued
a Special Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities". In accordance with
provisions in that Special Report, the Company elected, in December 1995, to
reclassify all of its held-to-maturity securities to available-for-sale. At
the time of transfer, the amortized cost of those securities was $24,099,000
million, which approximated their fair value.
Investments at June 30, 1996 are comprised of the following:
- - ----------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- - ----------------------------------------------------------------------------
Available-for-sale:
Institutional Money
Market Funds $ 5,546 $-- $-- $ 5,546
- - ---------------------------------------------------------------------------
Amounts included in cash
and cash equivalents 5,546 -- -- 5,546
Floating Rate
Municipal Bonds 44,600 -- -- 44,600
U.S. Treasury Notes 23,005 -- -- 23,005
- - ---------------------------------------------------------------------------
Amounts included in
short-term investments 67,605 -- -- 67,605
- - ---------------------------------------------------------------------------
Total Available-for-sale $73,151 $-- $-- $73,151
- - ---------------------------------------------------------------------------
Investments at June 30, 1995 are comprised of the following:
- - ----------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- - ----------------------------------------------------------------------------
Available-for-sale:
Commercial Paper $12,983 $-- $ -- $12,983
Institutional Money
Market Funds 15,050 -- -- 15,050
U.S. Treasury Notes 1,973 -- -- 1,973
- - ---------------------------------------------------------------------------
Amounts included in cash
and cash equivalents 30,006 -- -- 30,006
Floating Rate
Municipal Bonds 50,334 -- -- 50,334
Money Market
Preferred Stock 7,000 -- -- 7,000
- - --------------------------------------------------------------------------
Amounts included in
short-term investments 57,334 -- -- 57,334
- - --------------------------------------------------------------------------
Total Available-for-sale $87,340 $-- $ -- $87,340
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury Notes $25,024 $-- $(509) $24,515
- - --------------------------------------------------------------------------
Amounts included in
restricted cash $25,024 $-- $(509) $24,515
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
The amortized cost and estimated fair value of investments in debt
securities at June 30 by contractual maturities are as follows:
- - ---------------------------------------------------------------------------
1996 1995
------------------------------------------------
Estimated Estimated
Fair Fair
(in thousands) Cost Value Cost Value
- - ---------------------------------------------------------------------------
Due in less than
one year $50,146 $50,146 $ 87,340 $ 87,340
Due after one year
through five years 23,005 23,005 25,024 24,515
- - ---------------------------------------------------------------------------
Total investments in
debt securities $73,151 $73,151 $112,364 $111,855
- - ---------------------------------------------------------------------------
- - ---------------------------------------------------------------------------
During fiscal 1996, the Company terminated a lease agreement related to
one of its R&D buildings and an engineering building and, as a result, all
previously restricted cash, $25,024,000, at June 30, 1995 became unrestricted.
LAM RESEARCH CORP. / 26
The carrying and fair values of the Company's other financial
instruments at June 30, are as follows:
- - ---------------------------------------------------------------------------
1996 1995
---------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in thousands) Value Value Value Value
- - --------------------------------------------------------------------------
Cash & cash
equivalents $62,879 $62,879 $43,675 $ 43,675
Convertible subordinated
debentures $ -- $ -- $66,000 $169,868
Other long-term debt $65,822 $65,591 $37,500 $ 37,200
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
The fair values of the Company's short-term investments, restricted
investments, and convertible subordinated debentures are based on quoted
market prices at June 30, 1996 and 1995. The fair value of the Company's
other long-term debt is estimated based on the current rates offered to the
Company for similar debt instruments of the same remaining maturities.
During the fourth quarter of fiscal 1995, the Company sold all of its
shareholdings of Brooks Automation, Inc., (Brooks) for a net gain of
$10,399,000, which was included as other income. At June 30, 1995, the
receivable related to the sale of these securities was recorded in other
current assets. The shares the Company sold were included as part of the
Brooks public offering of common stock on June 27, 1995. At that time, Roger
Emerick, the Company's Chief Executive Officer, served on the board of
directors of Brooks.
- - -----------------------------------
D DERIVATIVE FINANCIAL INSTRUMENTS
- - ------------------------------------
The Company enters into foreign-currency forward contracts to minimize
the impact of exchange rate fluctuations on the value of yen-denominated
assets and liabilities. A substantial portion of the forward contracts
entered into have a maturity of 90 days or less. The realized and unrealized
gains and losses on these contracts are deferred and offset against realized
and unrealized gains and losses from the settlement of the related yen
receivables. The realized losses on yen-forward contracts during fiscal 1996
were offset by the gains on underlying receivables.
At June 30, 1996, the Company had forward contracts to sell yen worth
$43,632,000. Of the total outstanding contracts, $38,794,000 was hedging yen
receivables and $4,838,000 was hedging firm commitments from customers in
Japan. The unrealized gain on these contracts at June 30, 1996 was $948,000.
At June 30, 1995, the Company had forward contracts to sell $30,701,000
Japanese yen. The unrealized gain on these contracts at June 30, 1995 was
$464,000. The realized losses on yen-forward contracts during fiscal 1995
were offset by underlying realized gains on the receivables.
In May 1993, the Company had entered into a three year interest-rate
swap agreement with a third party which was scheduled to mature in May 1996.
Under the agreement, the third party assumed 4.5% of the 6% fixed interest
rate payments related to the Company's $66,000,000 convertible subordinated
debentures, while the Company assumed variable interest rate
[equal to the six-month London Interbank Offered Rate (LIBOR)] payments of
the third party on a like principal amount. The net amount of interest
payments assumed by the third party and interest payments made by the Company
is included in interest expense. The fair value of the liability related to
the Company's interest rate swap was $1,216,000 at June 30, 1995. In May
1996, the Company's convertible subordinated debentures were converted into
common stock, and in conjunction with the conversion of the convertible
subordinated debentures, the Company terminated the interest-rate swap
agreement and paid a nominal termination fee.
- - ----------------
E INVENTORIES
- - ----------------
Inventories consist of the following at June 30:
- - ----------------------------------------------------
(in thousands) 1996 1995
- - ---------------------------------------------------
Raw materials $167,513 $ 80,910
Work-in-process 122,828 73,183
Finished goods 32,025 17,308
- - --------------------------------------------------
$322,366 $171,401
- - --------------------------------------------------
LAM RESEARCH CORP. / 27
- - ----------------------------------------
F EQUIPMENT AND LEASEHOLD IMPROVEMENTS
- - ----------------------------------------
Equipment and leasehold improvements consist of the following at June 30:
- - ---------------------------------------------------------
(in thousands) 1996 1995
- - ---------------------------------------------------------
Equipment $120,770 $ 80,910
Furniture and fixtures 45,740 25,372
Leasehold improvements 88,131 64,707
- - ---------------------------------------------------------
254,641 170,989
Less allowance for depreciation
and amortization (83,802) (53,418)
- - --------------------------------------------------------
$170,839 $117,571
- - --------------------------------------------------------
- - --------------------------------------------------------
- - ------------------------------------------
G ACCRUED EXPENSES AND OTHER LIABILITIES
- - ------------------------------------------
The significant components of accrued expenses and other liabilities
consist of the following at June 30:
- - --------------------------------------------------------
(in thousands) 1996 1995
- - --------------------------------------------------------
Warranty, installation, and
product improvement reserves $ 62,180 $40,986
Accrued compensation 27,752 22,260
Income and other taxes payable 45,471 22,546
Other 20,471 12,841
- - --------------------------------------------------------
$155,874 $98,633
- - --------------------------------------------------------
- - --------------------------------------------------------
- - ----------------------------------------------
H LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL
LEASE OBLIGATIONS
- - ----------------------------------------------
Long-term debt and capital lease obligations at June 30 consist of the
following:
- - --------------------------------------------------------------------------------
(in thousands) 1996 1995
- - -------------------------------------------------------------------------------
Japanese yen-denominated bank loans with
fixed interest rates from 3.0% to 4.9%,
principal payable in quarterly and semi-annual
installments from July 1996 to April 2003 $32,724 $16,572
Notes payable to leasing companies with
interest rates from 4.9% to 11.2%, payable
in monthly installments through January 1998 1,121 2,391
Capitalized lease obligations with varying
interest rates from 6.3% to 10.5% 30,043 15,508
6% convertible subordinated debentures
due 2003 -- 66,000
Other 1,934 3,029
- - -------------------------------------------------------------------------------
65,822 103,500
Less current portion (12,896) (7,572)
- - -------------------------------------------------------------------------------
$52,926 $95,928
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
During May 1996, the Company's convertible subordinated debentures were
converted into 2,640,000 shares of the Company's common stock (see Note D).
During the second quarter of fiscal 1996, the Company entered into a
syndicated bank line of credit totaling $210,000,000, on which borrowings
bear interest at the bank's prime rate or 0.7% to 0.9% over LIBOR. This
syndicated bank line of credit expires in December 1998. At June 30, 1996,
the Company had outstanding borrowings of $25,000,000 against the syndicated
bank line of credit. At June 30, 1995, the Company had lines of credit
available with four banks which together totaled $50,000,000. No borrowings
were outstanding at June 30, 1995. The Company's line of credit restrict the
Company from paying dividends.
The notes payable to leasing companies are collateralized by equipment
additions with a cost equal to the original principal amount of the notes.
At June 30, 1996, future maturities of long-term debt and minimum
payments for capital lease obligations are as follows:
- - -------------------------------------------------------------------
Capital
Year ending June 30 Long term Lease
(in thousands) Debt Obligations Total
- - -------------------------------------------------------------------
1997 $ 3,444 $11,495 $14,939
1998 4,286 10,583 14,869
1999 8,006 8,405 16,411
2000 7,784 3,618 11,402
2001 5,916 5,916
Thereafter 6,343 6,343
Less amounts representing
interest -- (4,058) (4,058)
- - -------------------------------------------------------------------
$35,779 $30,043 $65,822
- - -------------------------------------------------------------------
- - -------------------------------------------------------------------
Long-term debt and capital lease obligations are collateralized by
equipment included in equipment and leasehold improvements with a cost and
accumulated depreciation and amortization of $45,484,000 and $(15,309,000),
respectively, at June 30, 1996 and $27,009,000 and $(16,136,000),
respectively, at June 30, 1995.
- - -----------------------------------------------
I INCENTIVE STOCK OPTION PLANS, PERFORMANCE-
BASED STOCK PLAN AND STOCK PURCHASE PLAN
- - ------------------------------------------------
The Company has adopted incentive stock option plans that provide for
the granting to qualified employees of incentive
LAM RESEARCH CORP. / 28
stock options to purchase shares of Common Stock. In addition, the plans
permit the granting of nonstatutory stock options to paid consultants and
employees and provides for the automatic grant of nonstatutory stock options
to outside directors. The option price is determined by the Board of
Directors, but in no event will it be less than the fair market value on the
date of grant (no less than 85% of the fair market value at the date of grant
in case of nonstatutory options). Options granted under the plans vest over a
period determined by the Board of Directors. Under the automatic grant
program, each outside director receives an option exercisable for 6,000
shares of Common Stock during January of each year with the exercise price
equal to the fair market value on date of grant.
A summary of incentive stock option plan transactions follows:
- - ----------------------------------------------------------------------------
Authorized Outstanding Option Price
- - ----------------------------------------------------------------------------
June 30, 1993 226,119 1,510,512 $ 0.34-20.21
Additional amount
authorized 900,000 -- --
Granted (743,225) 743,225 26.29-35.88
Exercised -- (281,528) 0.34-20.00
Cancelled 100,589 (100,589) 0.34-35.88
Expired (9,767) -- --
- - ---------------------------------------------------------------------------
June 30, 1994 473,716 1,871,620 2.04-35.88
Additional amount
authorized 1,075,000 -- --
Granted (820,600) 820,600 28.00-63.88
Exercised -- (563,965) 2.04-35.88
Cancelled 49,654 (49,654) 1.70-50.63
Expired (5,481) -- --
- - --------------------------------------------------------------------------
June 30, 1995 772,289 2,078,601 2.04- 63.88
Additional amount
authorized 1,000,000 -- --
Granted (1,995,948) 1,995,948 25.94- 68.00
Exercised (156,552) 2.04- 45.13
Cancelled 1,121,602 (1,121,602) 2.04- 68.00
Expired (8,174) -- --
- - --------------------------------------------------------------------------
June 30, 1996 889,769 2,796,395 $ 2.26-62.88
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
At June 30, 1996, 3,686,164 shares of Common Stock were reserved for
future issuance under the stock option plans and options to purchase
1,165,055 shares were exercisable at a range of $2.26-$62.88.
During fiscal 1996, the Company adopted a Performance-Based Restricted
Stock Plan designed to reward executives based upon the achievement of
certain predetermined goals. The grant is based on the fair market value of
the Company's common stock at the end of the quarter, provided the
predetermined goals are met. The Company authorized 150,000 shares to be
reserved for issuance under the Performance-Based Stock Plan. At June 30,
1996 132,802 shares remain available under this plan.
Common Stock is sold to employees under the 1984 Employee Stock
Purchase Plan. During fiscal 1996, the Company authorized an additional
150,000 shares to be reserved for issuance under the 1984 Employee Stock
Purchase Plan. The purchase price per share is the lower of 85% of the fair
market value of the Common Stock on the first or last day of a six-month
offering period. A total of 965,427 shares of the Company's Common Stock were
issued under the Plan through June 30, 1996 at prices ranging from $2.65 to
$43.03 per share. At June 30, 1996, 372,073 shares remain available for sale
under this plan.
- - -----------------------------------------
J PROFIT SHARING PLAN AND BENEFIT PLAN
- - -----------------------------------------
During fiscal 1995, the Company revised the profit sharing plan for its
domestic employees. Distributions to employees by the Company are made
quarterly based upon a percentage of base salary provided that a threshold
level of the Company's financial performance is met. Upon achievement of the
threshold, the profit sharing is awarded based upon performance against
certain corporate financial and operating goals. Prior to fiscal 1995,
distributions to the domestic employees under the profit sharing plan were
made semi-annually based on 5% of pretax income provided certain minimum net
income goals were met. Profit sharing plan expense for fiscal 1996, 1995 and
1994 was $14,438,000, $9,506,000, and $3,008,000.
The Company maintains a 401(k) retirement savings plan for its
full-time domestic employees. Beginning October 1, 1995, each participant in
the plan may elect to contribute 2% to 15% of his or her annual salary to the
plan, subject to statutory limitations. Prior to October 1, 1995 each
participant could elect to contribute 2% to 20% of his or her annual salary
to the plan, subject to statutory limitations. Beginning January 1, 1994, the
LAM RESEARCH CORP. / 29
Company began to match employee contributions to the plan at the rate of 50%
of the first 6% of salary contributed. The Company match expense for fiscal
1996, 1995 and 1994 was $3,754,000, $2,342,000, and $770,000, respectively.
- - ------------------
K COMMITMENTS
- - -------------------
The Company leases its administrative, research and development, and
manufacturing facilities, regional sales/service offices and certain
equipment under noncancelable operating leases, which expire at various dates
through 2006. All of the Company's facility leases for buildings located at
its Fremont, California headquarters and certain operating leases provide the
Company an option to extend the lease for additional periods. Certain of the
Company's other facility leases provide for periodic rent increases based on
the general rate of inflation.
Future minimum lease payments for the years ended June 30 and in the
aggregate under operating leases consist of the following:
- - -----------------------------------------------------
(in thousands)
- - -----------------------------------------------------
1997 $ 46,028
1998 44,176
1999 36,796
2000 29,057
2001 22,108
Thereafter 127,682
- - ----------------------------------------------------
$305,847
- - ----------------------------------------------------
- - ----------------------------------------------------
During fiscal 1996, the Company entered into a ten year operating lease
agreement for two buildings, an R&D building and an additional engineering
building, which requires the Company to set aside $47,317,000 as lease
collateral five years after lease inception.
Total rental expense for all leases amounted to approximately
$35,303,000, $9,528,000, and $6,173,000, for the years ended June 30, 1996,
1995 and 1994, respectively.
- - --------------------------------
L LICENSING/ROYALTY AGREEMENTS
- - --------------------------------
The Company also receives royalty income from Tokyo Electron, Ltd.
(TEL) under a licensing agreement signed in fiscal 1987 and extended in
fiscal 1992 and 1996. For the years ended June 30, 1996, 1995 and 1994, the
Company earned approximately $20,700,000, $10,500,000, and $7,000,000,
respectively, of royalty income from TEL. The current royalty agreement,
which was due to expire December 31, 1996, has been extended with a new
agreement effective January 1, 1997 which provides for royalties to be paid
by TEL at a much lower rate than the current agreement.
The Company also receives royalty income from Sumitomo Metal, Ltd.
(Sumitomo). Royalty income earned from Sumitomo for fiscal 1996, 1995 and
1994 amounted to approximately $2,100,000, $1,700,000, and $1,800,000,
respectively.
During fiscal 1995, the Company earned $100,000 of royalty income from
other sources.
- - -----------------
M INCOME TAXES
- - -----------------
Income tax expense consists of the following:
- - ---------------------------------------------------------------
(in thousands) 1996 1995 1994
- - ---------------------------------------------------------------
Federal:
Current $61,950 $36,093 $23,544
Deferred (18,397) (10,247) (13,310)
- - ----------------------------------------------------------------
43,553 25,846 10,234
State:
Current 6,746 6,131 3,572
Deferred (1,572) (2,282) --
- - ---------------------------------------------------------------
5,174 3,849 3,572
Foreign:
Current 20,769 8,538 5,595
Deferred (1,550) -- --
- - ---------------------------------------------------------------
19,219 8,538 5,595
$67,946 $38,233 $19,401
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
Actual current tax liabilities are lower than reflected above for
fiscal years 1996, 1995 and 1994 by $1,719,000, $7,128,000, and $4,939,000,
respectively, for the stock option deduction benefits recorded as a credit to
stockholders' equity.
LAM RESEARCH CORP. / 30
Under FAS No. 109, deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's net deferred tax assets
as of June 30, are as follows:
- - ---------------------------------------------------------------
(in thousands) 1996 1995
- - ---------------------------------------------------------------
Deferred tax assets:
Inventory valuation differences $21,696 $15,969
Accounting reserves and accruals
deductible in different periods 24,745 16,809
Net undistributed profits of
foreign subsidiaries 6,753 --
Other 446 --
- - ---------------------------------------------------------------
Total deferred tax assets 53,640 32,778
- - ---------------------------------------------------------------
Deferred tax liabilities:
Other (2,055) (2,712)
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
Total deferred tax liabilities (2,055) (2,712)
- - ---------------------------------------------------------------
Net deferred tax assets $51,585 $30,066
- - ---------------------------------------------------------------
- - -------------------------------------------------------------
A reconciliation of income tax expense provided at the federal
statutory rate (35% in 1996, 1995 and 1994) to income tax expense follows:
- - -------------------------------------------------------------------
(in thousands) 1996 1995 1994
- - -------------------------------------------------------------------
Income tax expense computed
at federal statutory rate $73,163 $44,605 $20,005
Tax credits -- (2,800) (701)
State income taxes, net of
federal tax benefits 3,363 2,502 2,322
Foreign sales corporation
tax benefits (9,074) (5,250) (2,038)
Other 494 (824) (187)
- - -------------------------------------------------------------------
$67,946 $38,233 $19,401
- - -------------------------------------------------------------------
- - -------------------------------------------------------------------
Income before income taxes from foreign operations for fiscal years
1996, 1995 and 1994 was $42,216,000, $17,830,000, and $12,859,000,
respectively. In addition, the Company received royalty and other income from
foreign sources of $22,814,000, $12,227,000 and $8,803,000, in fiscal years
1996, 1995 and 1994, respectively, which is subject to foreign tax withholding.
- - ---------------------
N LITIGATION
- - --------------------
In October 1993, Varian Associates, Inc. (Varian) brought suit against
the Company in the United States District Court, Northern District of
California, seeking monetary damages and injunctive relief based on the
Company's alleged infringement of certain patents held by Varian. The lawsuit
is in the late stages of discovery and has recently been reassigned to a new
judge. The Company has asserted defenses of invalidity and unenforceability
of the patents that are the subject of the lawsuit, as well as
noninfringement of such patents by the Company's products. While litigation
is subject to inherent uncertainties and no assurance can be given that the
Company will prevail in such litigation or will obtain a license under such
patents on commercially reasonable terms or at all if such patents are held
valid and infringed by the Company's products, the Company believes that the
Varian lawsuit will not have a material adverse effect on the Company's
consolidated financial statements.
In addition, the Company is from time to time notified by various
parties that it may be in violation of certain patents. In such cases, it is
the Company's intention to seek negotiated licenses where it is considered
appropriate. The outcome of these matters will not, in management's opinion,
have a material impact on the Company's consolidated financial position,
operating results or cash flow statements.
- - --------------------------------
O SUBSEQUENT EVENT (UNAUDITED)
- - --------------------------------
In August 1996, the Company announced a restructuring of its
operations, consolidating its previous business unit structure into
centralized functional organizations. As a result of the restructuring, and
in response to industry conditions, the Company reduced its workforce by
approximately 11%. For the first quarter of fiscal 1997, the Company will
record a restructuring charge of $11.0 to $12.0 million for costs resulting
primarily from severance compensation and consolidation of related facilities.
LAM RESEARCH CORP. / 31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- - ------------------------------------------------------------------------------
Board of Directors
Lam Research Corporation
Fremont, California
We have audited the accompanying consolidated balance sheets of Lam
Research Corporation as of June 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Lam
Research Corporation at June 30, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
July 29, 1996
San Jose, California
Design: Heiney & Craig, Inc., San Francisco
LAM RESEARCH CORP. / 32