| LAM RESEARCH CORP Item 1A Risk Factors In addition to the other information in this Form 10-K, the following risk factors should be carefully considered in evaluating the Company and its business because such factors may significantly impact our business, operating results, and financial condition |
| As a result of these risk factors, as well as other risks discussed in our other SEC filings, our actual results could differ materially from those projected in any forward-looking statements |
| No priority or significance is intended, or should be attached, to the order in which the risk factors appear |
| Our Quarterly Revenues and Operating Results are Unpredictable Our revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in our control |
| We manage our expense levels based in part on our expectations of future revenues |
| If revenue levels in a particular quarter do not meet our expectations, our operating results may be adversely affected |
| Because our operating expenses are based in part on anticipated future revenues, and a certain amount of those expenses are relatively fixed, a change in the timing of recognition of revenue and/or the level of gross profit from a single transaction can unfavorably affect operating results in a particular quarter |
| Factors that may cause our financial results to fluctuate unpredictably include, but are not limited to: • economic conditions in the electronics and semiconductor industry generally and the equipment industry specifically; • the extent that customers use our products and services in their business; • timing of customer acceptances of equipment; • the size and timing of orders from customers; • customer cancellations or delays in our shipments, installations, and/or acceptances; • changes in average selling prices and product mix; • our ability in a timely manner to develop, introduce and market new, enhanced and competitive products; • our competitors’ introduction of new products; • legal or technical challenges to our products and technology; • changes in import/export regulations; • transportation, communication, demand, information technology or supply disruptions based on factors outside our control such as acts of God, wars, terrorist activities and natural disasters; • legislative, tax, accounting, or regulatory changes or changes in their interpretation; • procurement shortages; • manufacturing difficulties; • the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations; • changes in our estimated effective tax rate; • new or modified accounting regulations; and • exchange rate fluctuations |
| 8 _________________________________________________________________ [41]Table of Contents Further, because a significant amount of our R&D and administrative operations and capacity is located at our Fremont, California campus, natural, physical, logistical or other events or disruptions affecting these facilities (including labor disruptions, earthquakes, and power failures) could adversely impact our financial performance |
| We Derive Our Revenues Primarily from a Relatively Small Number of High-Priced Systems System sales constitute a significant portion of our total revenue |
| Our systems can typically range in price up to approximately dlra6dtta0 million per unit, and our revenues in any given quarter are dependent upon the acceptance of a rather limited number of such systems |
| As a result, the inability to declare revenue on even a few systems can cause a significant adverse impact on our revenues for that quarter |
| Variations in the Amount of Time it Takes for Our Customers to Accept Our Systems May Cause Fluctuation in Our Operating Results We generally recognize revenue for new system sales on the date of customer acceptance or the date the contractual customer acceptance provisions lapse |
| As a result, the fiscal period in which we are able to recognize new systems revenues is typically subject to the length of time that our customers require to evaluate the performance of our equipment after shipment and installation, which could cause our quarterly operating results to fluctuate |
| The Semiconductor Equipment Industry Is Volatile and Reduced Product Demand Has a Negative Impact on Shipments Our business 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 using integrated circuits |
| The semiconductor industry is cyclical in nature and historically experiences periodic downturns |
| Business conditions historically have changed rapidly and unpredictably |
| Fluctuating levels of investment by semiconductor manufacturers could continue to materially affect our aggregate shipments, revenues and operating results |
| Where appropriate, we will attempt to respond to these fluctuations with cost management programs aimed at aligning our expenditures with anticipated revenue streams, which sometimes result in restructuring charges |
| Even during periods of reduced revenues, we must continue to invest in research and development and maintain extensive ongoing worldwide customer service and support capabilities to remain competitive, which may temporarily harm our financial results |
| We Depend on New Products and Processes for Our Success |
| Consequently, We are Subject to Risks Associated with Rapid Technological Change Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances enabling such processes |
| We believe that our future success depends in part upon our ability to develop and offer new products with improved capabilities and to continue to enhance our existing products |
| If new products have reliability or quality problems, our performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses |
| We may be unable to develop and manufacture new products successfully, or new products that we introduce may fail in the marketplace |
| Our failure to complete commercialization of these new products in a timely manner could result in unanticipated costs and inventory obsolescence, which would adversely affect our financial results |
| In order to develop new products and processes, we expect to continue to make significant investments in R&D and to pursue joint development relationships with customers, suppliers or other members of the industry |
| We must manage product transitions and joint development relationships successfully, as introduction of new products could adversely affect our sales of existing products |
| Moreover, future technologies, processes or product developments may render our current product offerings obsolete, leaving us with non-competitive products, or obsolete inventory, or both |
| Continued market acceptance of these products is, therefore, critical to our future success |
| Our business, operating results, financial condition, and cash flows could therefore be adversely affected by: • a decline in demand for even a limited number of our products; • a failure to achieve continued market acceptance of our key products; • export restrictions or other regulatory or legislative actions which limit our ability to sell those products to key customer or market segments; • an improved version of products being offered by a competitor in the market we participate in; • increased pressure from competitors that offer broader product lines; • technological change that we are unable to address with our products; and • a failure to release new or enhanced versions of our products on a timely basis |
| In addition, the fact that we offer a more limited product line creates the risk that our customers may view us as less important to their business than our competitors that offer additional products as well |
| This may impact our ability to maintain or expand our business with certain customers |
| Such product concentration may also subject us to additional risks associated with technology changes |
| Since we are primarily a provider of etch equipment, our business is affected by our customers’ use of etching steps in their processes |
| Should technologies change so that the manufacture of semiconductor chips requires fewer etching steps, this might have a larger impact on our business than it would on the business of our less concentrated competitors |
| We Have a Limited Number of Key Customers Sales to a limited number of large customers constitute a significant portion of our overall revenue, new orders and profitability |
| As a result, the actions of even one customer may subject us to revenue swings that are difficult to predict |
| Similarly, significant portions of our credit risk may, at any given time, be concentrated among a limited number of customers, so that the failure of even one of these key customers to pay its obligations to us could significantly impact our financial results |
| Strategic Alliances May Have Negative Effects on our Business Increasingly, semiconductor companies are entering into strategic alliances with one another to expedite the development of processes and other manufacturing technologies |
| Often, one of the outcomes of such an alliance is the definition of a particular tool set for a certain function or a series of process steps that use a specific set of manufacturing equipment |
| While this could work to our advantage if Lam’s equipment becomes the basis for the function or process, it could work to our disadvantage if a competitor’s tools or equipment become the standard equipment for such function or process |
| In the latter case, even if Lam’s equipment was previously used by a customer, that equipment may be displaced in current and future applications by the tools standardized by the alliance |
| Similarly, our customers may team with, or follow the lead of, educational or research institutions that establish processes for accomplishing various tasks or manufacturing steps |
| If those institutions utilize a competitor’s equipment when they establish those processes, it is likely that customers will tend to use the same equipment in setting up their own manufacturing lines |
| These actions could adversely impact our market share and subsequent business |
| We Are Dependent Upon a Limited Number of Key Suppliers We obtain certain components and sub-assemblies included in our products from a single supplier or a limited group of suppliers |
| These long-term contracts can take a variety of forms |
| We may renew these contracts periodically |
| In some cases, these suppliers sold us products during at least the last four years, and we expect that we will continue to renew these contracts in the future or that we will otherwise replace them with competent alternative suppliers |
| However, several of our outsourced assembly suppliers are relatively new providers to us so that our experience with them 10 _________________________________________________________________ [43]Table of Contents and their performance is limited |
| Where practical, our intent is to establish alternative sources to mitigate the risk that the failure of any single supplier will adversely affect our business |
| Nevertheless, a prolonged inability to obtain certain components could impair our ability to ship products, lower our revenues and thus adversely affect our operating results and result in damage to our customer relationships |
| Our Outsource Providers May Fail to Perform as We Expect Outsource providers have played and will play key roles in our manufacturing operations and in many of our transactional and administrative functions, such as information technology, facilities management, and certain elements of our finance organization |
| Although we aim at selecting reputable providers and secure their performance on terms documented in written contracts, it is possible that one or more of these providers could fail to perform as we expect and such failure could have an adverse impact on our business |
| In addition, the expansive role of outsource providers has required and will continue to require us to implement changes to our existing operations and to adopt new procedures to deal with and manage the performance of these outsource providers |
| Any delay or failure in the implementation of our operational changes and new procedures could adversely affect our customer relationships and/or have a negative effect on our operating results |
| Once a Semiconductor Manufacturer Commits to Purchase a Competitor’s Semiconductor Manufacturing Equipment, the Manufacturer Typically Continues to Purchase That Competitor’s Equipment, Making It More Difficult for Us to Sell our Equipment to That Customer Semiconductor manufacturers must make a substantial investment to qualify and integrate wafer processing equipment into a semiconductor production line |
| We believe that once a semiconductor manufacturer selects a particular supplier’s processing equipment, the manufacturer generally relies upon that equipment for that specific production line application |
| Accordingly, we expect it to be more difficult to sell to a given customer if that customer initially selects a competitor’s equipment |
| We Are Subject to Risks Associated with Our Competitors’ Strategic Relationships and Their Introduction of New Products and We May Lack the Financial Resources or Technological Capabilities of Certain of Our Competitors Needed to Capture Increased Market Share We expect to face significant competition from multiple current and future competitors |
| We believe that other companies are developing systems and products that are competitive to ours and are planning to introduce new products, which may affect our ability to sell our existing products |
| We face a greater risk if our competitors enter into strategic relationships with leading semiconductor manufacturers covering products similar to those we sell or may develop, as this could adversely affect our ability to sell products to those manufacturers |
| We believe that to remain competitive we will require significant financial resources to offer a broad range of products, to maintain customer service and support centers worldwide, and to invest in product and process R&D Certain of our competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer service and support resources than we do and therefore have the potential to increasingly dominate the semiconductor equipment industry |
| These competitors may deeply discount or give away products similar to those that we sell, challenging or even exceeding our ability to make similar accommodations and threatening our ability to sell those products |
| For these reasons, we may fail to continue to compete successfully worldwide |
| In addition, our competitors may provide innovative technology that may have performance advantages over systems we currently, or expect to, offer |
| They may be able to develop products comparable or superior to those we offer or may adapt more quickly to new technologies or evolving customer requirements |
| In particular, while we currently are developing additional product enhancements that we believe will address future customer requirements, we may fail in a timely manner to complete the development or introduction of these additional product enhancements successfully, or these product enhancements may not achieve market acceptance or be competitive |
| Accordingly, we may be unable to continue to compete in our markets, competition may intensify, or future competition may have a material adverse effect on our revenues, operating results, financial condition, and/or cash flows |
| 11 _________________________________________________________________ [44]Table of Contents Our Future Success Depends on International Sales and the Management of Global Operations Non-US sales accounted for approximately 86prca in fiscal year 2006, 84prca in fiscal year 2005 and 82prca in fiscal year 2004 of our total revenue |
| We expect that international sales will continue to account for a significant portion of our total revenue in future years |
| We are subject to various challenges related to the management of global operations, and international sales are subject to risks including, but not limited to: • trade balance issues; • economic and political conditions; • changes in currency controls; • differences in the enforcement of intellectual property and contract rights in varying jurisdictions; • our ability to develop relationships with local suppliers; • compliance with US and international laws and regulations, including US export restrictions; • fluctuations in interest and currency exchange rates; • the need for technical support resources in different locations; and • our ability to secure and retain qualified people for the operation of our business |
| Certain international sales depend on our ability to obtain export licenses from the US Government |
| Our failure or inability to obtain such licenses would substantially limit our markets and severely restrict our revenues |
| Many of the challenges noted above are applicable in China, which is a fast developing market for the semiconductor equipment industry and therefore an area of potential significant growth for our business |
| As the business volume between China and the rest of the world grows, there is inherent risk, based on the complex relationships between China, Taiwan, Japan, and the United States, that political and diplomatic influences might lead to trade disruptions which would adversely affect our business with China and/or Taiwan and perhaps the entire Asia region |
| A significant trade disruption in these areas could have a material, adverse impact on our future revenue and profits |
| We are potentially exposed to adverse as well as beneficial movements in foreign currency exchange rates |
| The majority of our sales and expenses are denominated in US dollars except for certain of our revenues in Japan that are denominated in Japanese Yen, certain of our spares and service contracts which are denominated in other currencies, and expenses related to our non-US sales and support offices which are denominated in these countries’ local currency |
| We currently enter into foreign currency forward contracts to minimize the short-term impact of the exchange rate fluctuations on Japanese Yen-denominated assets and forecasted Japanese Yen-denominated revenue where we currently believe our primary exposure to currency rate fluctuation lies and will continue to enter into hedging transactions, for the purposes outlined, in the foreseeable future |
| However, these hedging transactions may not achieve their desired effect because differences between the actual timing of customer acceptances and our forecasts of those acceptances may leave us either over- or under-hedged on any given transaction |
| Moreover, by hedging our Yen-denominated assets with currency forward contracts, we may miss favorable currency trends, that would have been advantageous to us but for the hedges |
| Additionally, we currently do not enter into such forward contracts for currencies other than the Yen, and we therefore are subject to both favorable and unfavorable exchange rate fluctuations to the extent that we transact business (including intercompany transactions) in other currencies |
| Our Financial Results May Be Adversely Impacted By Higher Than Expected Tax Rates Or Exposure To Additional Income Tax Liabilities As a global company, our effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region |
| We are subject to income taxes in both the United States and various foreign jurisdictions, and significant judgment is required to determine worldwide tax liabilities |
| Our effective tax rate could be adversely affected by changes in the split of earnings between countries with differing statutory tax rates, in the valuation of deferred tax assets, in tax laws or by 12 _________________________________________________________________ [45]Table of Contents material audit assessments, which could affect our profitability |
| In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States |
| In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability |
| Changes in Accounting Standards for Equity-Based Compensation May Adversely Affect our Operating Results, Our Stock Price, and Our Competitiveness in the Employee Marketplace The adoption of SFAS Nodtta 123(R) required us to expense all equity-based compensation provided to employees and directors beginning with our quarter ending September 25, 2005 |
| The environment for skilled employees that are knowledgeable about our products and services is a competitive one, and we believe that equity-based compensation is an important part of the overall compensation that we offer to attract and retain such employees |
| SFAS Nodtta 123(R) has decreased and will continue to decrease our earnings based on its measure of the value of equity-based compensation |
| There is some risk that the design of our compensation plans is ineffective at balancing our profitability and employee retention objectives |
| A Failure to Comply with Environmental Regulations May Adversely Affect Our Operating Results We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals |
| We believe that we are in general compliance with these regulations and that we have obtained (or will obtain or are otherwise addressing) all necessary environmental permits to conduct our business |
| These 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 us, suspension of production, cessation of our operations or reduction in our customers’ acceptance of our products |
| These regulations could require us to alter our current operations, to acquire significant equipment or to incur substantial other expenses to comply with environmental regulations |
| Our failure to control the use, sale, transport or disposal of hazardous substances could subject us to future liabilities |
| If We Are Unable to Adjust the Scale of Our Business in Response to Rapid Changes in Demand in the Semiconductor Equipment Industry, Our Operating Results and Our Ability to Compete Successfully May Be Impaired The business cycle in the semiconductor equipment industry has historically been characterized by frequent periods of rapid change in demand that challenge our management to adjust spending and resources allocated to operating activities |
| During periods of rapid growth or decline in demand for our products and services, we face significant challenges in maintaining adequate financial and business controls, management processes, information systems and procedures and in training, managing, and appropriately sizing our supply chain, our work force and other components of our business on a timely basis |
| Our success will depend, to a significant extent, on the ability of our executive officers and other members of our senior management to identify and respond to these challenges effectively |
| If we do not adequately meet these challenges, our gross margins and earnings may be impaired during periods of demand decline, and we may lack the infrastructure and resources to scale up our business to meet customer expectations and compete successfully during periods of demand growth |
| If We Choose to Acquire or Dispose of Product Lines and Technologies, We May Encounter Unforeseen Costs and Difficulties That Could Impair Our Financial Performance An important element of our management strategy is to review acquisition prospects that would complement our existing products, augment our market coverage and distribution ability, or enhance our technological capabilities |
| As a result, we may make acquisitions of complementary companies, products or technologies, or we may reduce or dispose of certain product lines or technologies, which no longer fit our long-term strategies |
| Managing an acquired business, disposing of product technologies or reducing personnel entails numerous operational and financial risks, including difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, diversion of management’s attention away from other business concerns, amortization of acquired intangible assets and potential loss of key employees or customers of acquired or disposed operations among others |
| There can be no assurance that we will be able to achieve and manage successfully any such integration of potential acquisitions, disposition of product lines or technologies, or reduction in personnel or that our management, personnel, or systems will be adequate to support continued operations |
| Any such inabilities or inadequacies could have a material adverse effect on our business, operating results, financial condition, and cash flows |
| 13 _________________________________________________________________ [46]Table of Contents In addition, any acquisitions could result in changes such as potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the amortization of related intangible assets, and goodwill impairment charges, any of which could materially adversely affect our business, financial condition, and results of operations and/or the price of our Common Stock |
| The Market for Our Common Stock is Volatile, Which May Affect Our Ability to Raise Capital or Make Acquisitions The market price for our Common Stock is volatile and has fluctuated significantly over the past years |
| The trading price of our Common Stock could continue to be highly volatile and fluctuate widely in response to factors, including but not limited to the following: • general market, semiconductor, or semiconductor equipment industry conditions; • global economic fluctuations; • variations in our quarterly operating results; • variations in our revenues or earnings from levels experienced by other companies in our industry or forecasts by securities analysts; • announcements of restructurings, technological innovations, reductions in force, departure of key employees, consolidations of operations, or introduction of new products; • government regulations; • developments in, or claims relating to, patent or other proprietary rights; • success or failure of our new and existing products; • liquidity of Lam; • disruptions with key customers or suppliers; or • political, economic, or environmental events occurring globally or in any of our key sales regions |
| In addition, the stock market experiences significant price and volume fluctuations |
| Historically, we have witnessed significant volatility in the price of our Common Stock due in part to the actual or anticipated movement in interest rates and the price of and markets for semiconductors |
| These broad market and industry factors have and may again adversely affect the price of our Common Stock, regardless of our actual operating performance |
| In the past, following volatile periods in the price of stock, many companies became the object of securities class action litigation |
| If we are sued in a securities class action, we could incur substantial costs, and it could divert management’s attention and resources and have an unfavorable impact on the price for our Common Stock |
| We Rely Upon Certain Critical Information Systems for the Operation of our Business We maintain and rely upon certain critical Information Systems for the effective operation of our business |
| These Information Systems include telecommunications, the internet, our corporate intranet, various computer hardware and software applications, network communications, and e-mail |
| These Information Systems may be owned by us or by our outsource providers or even third parties such as vendors and contractors and may be maintained by us or by such providers and third parties |
| These Information Systems are subject to attacks, failures, and access denials from a number of potential sources including viruses, destructive or inadequate code, power failures, and physical damage to computers, hard drives, communication lines, and networking equipment |
| To the extent that these Information Systems are under our control, we have implemented security procedures, such as virus protection software and emergency recovery processes, to address the outlined risks; however, security procedures for Information Systems cannot be guaranteed to be failsafe and our inability to use or access these Information Systems at critical points in time could unfavorably impact the timely and efficient operation of our business |
| 14 _________________________________________________________________ [47]Table of Contents Intellectual Property and Other Claims Against Us Can Be Costly and Could Result in the Loss of Significant Rights Which Are Necessary to Our Continued Business and Profitability Third parties may assert infringement, unfair competition or other claims against us |
| From time to time, other parties send us notices alleging that our products infringe their patent or other intellectual property rights |
| In addition, our Bylaws and indemnity obligations provide that we will indemnify officers and directors against losses that they may incur in legal proceedings resulting from their service to Lam |
| In such cases, it is our policy either to defend the claims or to negotiate licenses or other settlements on commercially reasonable terms |
| However, we may be unable in the future to negotiate necessary licenses or reach agreement on other settlements on commercially reasonable terms, or at all, and any litigation resulting from these claims by other parties may materially adversely affect our business and financial results |
| Moreover, although we seek to obtain insurance to protect us from claims and cover losses to our property, there is no guarantee that such insurance will fully indemnify us for any losses that we may incur |
| We May Fail to Protect Our Proprietary Technology Rights, Which Would Affect Our Business Our success depends in part on our proprietary technology |
| While we attempt to protect our proprietary technology through patents, copyrights and trade secret protection, we believe that our success also depends on increasing our technological expertise, continuing our development of new systems, increasing market penetration and growth of our installed base, and providing comprehensive support and service to our customers |
| However, we may be unable to protect our technology in all instances, or our competitors may develop similar or more competitive technology independently |
| We currently hold a number of United States and foreign patents and pending patent applications |
| However, other parties may challenge or attempt to invalidate or circumvent any patents the United States or foreign governments issue to us or these governments may fail to issue patents for pending applications |
| In addition, the rights granted or anticipated under any of these patents or pending patent applications may be narrower than we expect or, in fact provide no competitive advantages |
| We Are Subject to the Internal Control Evaluation and Attestation Requirements of Section 404 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual report our assessment of the effectiveness of our internal control over financial reporting and our audited financial statements as of the end of each fiscal year |
| Furthermore, our independent registered public accounting firm (Firm) is required to attest to whether our assessment of the effectiveness of our internal control over financial reporting is fairly stated in all material respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting as of the end of each fiscal year |
| We have successfully completed our assessment and obtained our Firm’s attestation as to the effectiveness of our internal control over financial reporting as of June 25, 2006 |
| In future years, if we fail to timely complete this assessment, or if our Firm cannot timely attest to our assessment, we could be subject to regulatory sanctions and a loss of public confidence in our internal control |
| In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations |
| Our Independent Registered Public Accounting Firm Must Confirm Its Independence in Order for Us to Meet Our Regulatory Reporting Obligations on a Timely Basis Our independent registered public accounting firm communicates with us at least annually regarding any relationships between the Firm and Lam that, in the Firm’s professional judgment, might have a bearing on the Firm’s independence with respect to us |
| If, for whatever reason, our independent registered public accounting firm finds that it cannot confirm that it is independent of Lam based on existing securities laws and registered public accounting firm independence standards, we could experience delays or other failures to meet our regulatory reporting obligations |