The Daily Magic Formula Stock for 06/29/2008 is Lam Research Corp. According to the Magic Formula Investing Web Site, the ebit yield is 17% and the EBIT ROIC is >100%.
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Lam Research Corporation (â€śLam Research,â€ť â€śwe,â€ť or the â€śCompanyâ€ť) was founded in 1980 and is headquartered in Fremont, California. The mailing address for our principal executive offices is 4650 Cushing Parkway, Fremont, California 94538, and our telephone number is (510) 572-0200. Additional information about Lam Research is available on our web site at http://www.lamresearch.com. Our Forms 10-K, Forms 10-Q, and Forms 8-K are available online at the Securities and Exchange Commission (SEC) web site on the Internet. The address of that site is http://www.sec.gov. We also make available free of charge the Forms 10-K, Forms 10-Q, and Forms 8-K and any amendments to those reports on our corporate web site at http://www.lamresearch.com as soon as reasonably practicable after we file them with or furnish them to the SEC.
We design, manufacture, market, and service semiconductor processing equipment used in the fabrication of integrated circuits and are recognized as a major provider of such equipment to the worldwide semiconductor industry. Semiconductor wafers are subjected to a complex series of process steps that result in the simultaneous creation of many individual integrated circuits. We leverage our expertise in these areas to develop integrated processing solutions which typically benefit our customers through reduced cost, lower defect rates, enhanced yields, or faster processing time.
Etch processes, which are repeated numerous times during the wafer fabrication cycle, are required to manufacture every type of semiconductor device produced today. Lam Research etch products selectively remove portions of various films from the wafer in the creation of semiconductors by utilizing various plasma-based technologies to create critical device features at current and future technology nodes. Plasma consists of charged and neutral species that react with exposed portions of the wafer surface to remove dielectric, metal, or polysilicon material and produce the finely delineated features and patterns of an integrated circuit.
Advanced integrated circuit manufacturing requires etch systems capable of creating structures for the 45 nanometer (nm) and below technology nodes. At this time, memory manufacturers are transitioning from aluminum to copper conductive lines, while leading logic manufacturers are progressing with the implementation of more fragile dielectric insulating materials (low-Îş and porous low-Îş). Semiconductor manufacturers continue to require more precise control over the etching process in order to accommodate decreasing linewidths and increasing wafer diameters. Lam Research etch products and services are defined around the 2300 Â® etch series.
Dielectric Etch Products
2300 Â® Exelan Â® , 2300 Â® Exelan Â® Flexâ„˘, and 2300 Â® Exelan Â® Flex45â„˘ systems . The Exelan family of dielectric etch products addresses volume manufacturing productivity requirements and enables customers to create advanced semiconductor devices. The 2300 Exelan Flex and 2300 Exelan Flex45 systems extend the capability of the 2300 Exelan family of products to address requirements for the 45 nm and below technology nodes. These systems are based on Lam Researchâ€™s patented Dual Frequency Confined TM plasma technology, which enables in situ processing, where multiple chemistries can be run sequentially in the same process chamber.
Upgrades to the 2300 Exelan product line provide enabling capability for etching smaller features and alternative dielectric materials as outlined in the semiconductor industryâ€™s manufacturing roadmap.
Conductor Etch Products
2300 Â® Versys Â® , 2300 Â® Versys Â® Kiyoâ„˘, 2300 Â® Versys Â® Kiyo45â„˘, 2300 Â® Versys Â® Metal High Performance, and 2300 Â® Versys Â® Metal45â„˘ systems . The Versys family of products for etching silicon and metal films utilizes Lam Researchâ€™s patented Transformer Coupled Plasmaâ„˘ source technology; a high-density, low-pressure plasma source that addresses leading-edge device structure requirements for etching features at the 45 nm and below technology nodes. The systems enable sequential step tuning of gas flow and wafer temperature, which allows in situ processing of multi-layer stacks. Advanced Chamber Control and Conditioning (AC3â„˘) technology reduces processing drift and maintains the same chamber conditions for subsequent wafers.
Deep Silicon Etch Products
TCP Â® 9400DSiEâ„˘ and 2300 Â® Syndionâ„˘ systems . The TCP 9400DSiE employs Lam Researchâ€™s TCP technology to facilitate deep silicon etch processes used in micro-electro mechanical systems (MEMS), power device, and passive component fabrication. The TCP-based technology provides the process flexibility needed to address a broad range of requirements for the manufacture of MEMS devices.
The 2300 Syndion, which also employs TCP technology, addresses 3-D IC through-silicon via (TSV) etch applications. TSVs provide the interconnects for die-to-die and wafer-to-wafer stacking, eliminating wire bonding to increase device packing density (smaller form factor) and improve performance (higher process speed and lower power requirements). Important for TSV applications, the Syndionâ€™s TCP-based technology enables sequential processing the same chamber while ensuring etch rate uniformity and profile symmetry to prevent tilting. The technology also supports clean mode operation and provides bias voltage control for process repeatability.
During semiconductor device manufacturing, lithography processes establish the templates for patterns to be created during subsequent etch processes.
2300 Â® Motif â„˘ system. The 2300 Motif is a post-lithography pattern enhancement system that enables the creation of features as small as 10 nm by using plasma-based technology to deposit a thin film on printed photoresist holes and spaces. The film is created by applying multiple short etch-deposition cycles until the target feature size is achieved. This capability addresses a customer technology need for a solution enabling the creation of features two to three generations ahead of lithography. The system also simplifies optical proximity correction by improving the lithography profile and provides a cost-effective approach to extending lithography tool sets in select applications.
The manufacture of semiconductor devices involves a series of processes such as etch and deposition, which leave particles and residues. The wafer must generally be cleaned following these steps to remove residues that could degrade device performance. Common wafer cleaning steps include post-etch/post-strip cleans and pre-diffusion/pre-deposit ion cleans (also referred to as â€ścritical cleansâ€ť), during which the wafer surface is prepared for subsequent diffusion/deposition steps.
For 65 nm technologies and below, defects transferred from the wafer edge bevel can significantly limit device yield. During device patterning, complex interactions of film deposition, lithography, etching, and chemical mechanical polishing (CMP) result in a wide range of unstable film stacks on the wafer edge. In subsequent process steps these film layers can produce defects that are transported to the device area of the wafer, and residues need to be removed from the wafer edge to eliminate these defect sources.
Wet Clean Products
Confined Chemical Cleaningâ„˘ (C3â„˘) single-wafer technology-based systems. At the 65 nm technology node and below, devices become more susceptible to damage from the chemical environment and mechanical forces of the cleaning process. Lam Researchâ€™s single-wafer wet cleaning system, based on the Companyâ€™s proprietary C3 technology, provides high-selectivity wafer cleaning with minimal mechanically induced damage and allows flexibility in selecting cleaning chemicals that minimize damage to device structures. Advanced drying technology integrated into the cleaning unit facilitates low-defect processing of hydrophobic materials, such as advanced low-Îş dielectrics. Short contact times, enabled by an innovative chemical delivery mechanism to enhance the transport of chemicals to and from the wafer surface, minimize potential erosion or etching of delicate features on the wafer, while allowing for highly selective and efficient residue removal.
Bevel Clean Product s
2300 Â® Coronus TM bevel clean system. The 2300 Coronus plasma-based bevel clean system is a plasma-based technology that allows control of the wafer edge at multiple steps during the device fabrication process by selectively removing films from the wafer edge using edge-confined plasma technology. Removal of these films at select points in the integration flow reduces defects and increases device yields. Precise control of the processing zone coupled with Lam Researchâ€™s Dynamic Alignment, which provides accurate wafer placement, ensures a repeatable processing area, wafer to wafer.
9400DSiE, AC3, C3, Confined Chemical Cleaning, Coronus, Flex, Flex45, Kiyo, Kiyo45, Metal45, Motif, Syndion, and Transformer Coupled Plasma are trademarks of Lam Research Corporation. 2300, Exelan, the Lam Research logo, Lam Research, TCP, and Versys are registered trademarks of Lam Research Corporation.
Research and Development
The market for semiconductor capital equipment is characterized by rapid technological change and product innovation. Our ability to obtain and maintain our competitive advantage depends in part on our continued and timely development of new products and enhancements to existing products. Accordingly, we devote a significant portion of our personnel and financial resources to R&D programs and seek to maintain close and responsive relationships with our customers and suppliers.
Our R&D expenses during fiscal years 2007, 2006, and 2005 were $285.3 million, $229.4 million, and $195.3 million, respectively. The majority of spending is targeted at etch and plasma-based technology applications with an increasing proportion focused on adjacent markets, pre- and post-etch step opportunities, consistent with our multi-product growth strategy. We believe current challenges for customers in the pre- and post-etch applications present opportunities for us. We plan to leverage our extensive production experience in etch and strip into new products and new capabilities for our customers at the 65, 45, and 32 nm nodes, including post ion implantation strip, clean, and patterning.
We expect to continue to make substantial investments in R&D to meet our customersâ€™ product needs, support our growth strategy, and enhance our competitive position.
Marketing, Sales, and Service
Our marketing, sales, and service efforts are focused on building long-term relationships with our customers and targeting product and service solutions designed to meet our customersâ€™ needs. These efforts are supported by a team of product marketing and sales professionals as well as equipment and process engineers who work closely with individual customers to develop solutions for their wafer processing needs. We maintain ongoing service relationships with our customers and have an extensive network of field service engineers in place throughout the United States, Europe, Taiwan, Korea, Japan, and Asia Pacific. We believe that comprehensive support programs and close working relationships with customers are essential to maintaining high customer satisfaction and our competitiveness in the marketplace.
We offer standard warranties for our systems that generally run for a period of 12 months from system acceptance, not to exceed 14 months from shipment of the system to the customer. The warranty provides that systems shall be free from defects in material and workmanship and conform to our published specifications. The warranty is limited to repair of the defect or replacement with new or like-new equivalent goods and is valid when the buyer provides prompt notification within the warranty period of the claimed defect or non-conformity and also makes the items available for inspection and repair. We also offer extended warranty packages to our customers to purchase as desired.
A significant portion of our sales and operations occur outside the United States and, therefore, may be subject to certain risks, including but not limited to tariffs and other barriers, difficulties in staffing and managing non-U.S. operations, adverse tax consequences, exchange rate fluctuations, changes in currency controls, compliance with U.S. and international laws and regulations, including U.S. export restrictions, and economic and political conditions.
Our customers include many of the worldâ€™s leading semiconductor manufacturers. Customers continue to establish joint ventures, alliances and licensing arrangements, which have the potential to positively or negatively impact our competitive position and market opportunity. In fiscal year 2007, revenues from Hynix Semiconductor and Samsung Electronics Company, Ltd., each accounted for approximately 14% of total revenues. In fiscal year 2006, revenues from Samsung Electronics Company, Ltd., accounted for approximately 15% of total revenues and revenues from Toshiba Corporation accounted for approximately 12% of total revenues. In fiscal year 2005, revenues from Samsung Electronics Company, Ltd., accounted for approximately 13% of total revenues.
A material reduction in orders from our customers in the semiconductor industry could adversely affect our results of operations and projected financial condition. Our business depends upon the expenditures of semiconductor manufacturers. Semiconductor manufacturersâ€™ businesses, in turn, depend on many factors, including their economic capability, the current and anticipated market demand for integrated circuits and the availability of equipment capacity to support that demand.
Our unshipped orders backlog includes orders for systems, spares, and services where written customer requests have been accepted and the delivery of products or provision of services is anticipated within the next 12 months. Our policy is to revise our backlog for order cancellations and to make adjustments to reflect, among other things, spares volume estimates and customer delivery date changes. In general, we schedule production of our systems based upon purchase orders in backlog and our customersâ€™ delivery requirements. Included in our systems backlog are orders for which written requests have been accepted, prices and product specifications have been agreed upon, and shipment of systems is expected within one year. The spares and services backlog includes customer orders for products that have not yet shipped and for services that have not yet been provided. Where specific spare parts and customer service purchase contracts do not contain discrete delivery dates, we use volume estimates at the contract price and over the contract period, not exceeding 12 months, in calculating backlog amounts.
As of June 24, 2007 and June 25, 2006, our backlog was approximately $643 million and $521 million, respectively. Generally, orders for our products and services are subject to cancellation by our customers with limited penalties. Because some orders are received for shipments in the same quarter and due to possible customer changes in delivery dates and cancellations of orders, our backlog at any particular date is not necessarily indicative of business volumes nor actual revenue levels for succeeding periods.
Our manufacturing operations consist mainly of assembling and testing components, sub-assemblies, and modules that are then integrated into finished systems prior to shipment to or at the location of our customers. Most of the assembly and testing of our products is conducted in cleanroom environments.
We have agreements with third parties to outsource certain aspects of our manufacturing, production warehousing, and logistics functions. We believe that these outsourcing contracts provide us more flexibility to scale our operations up or down in a more timely and cost effective manner, enabling us to respond to the cyclical nature of our business. We believe that we have selected reputable providers and have secured their performance on terms documented in written contracts. However, 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 and have a negative effect on our operating results and financial condition. Overall, we believe we have effective mechanisms to manage risks associated with our outsourcing relationships. Refer to Note 16 of our Consolidated Financial Statements, included in Item 8 herein, for further information concerning our outsourcing commitments.
Certain components and sub-assemblies included in our products are only obtained from a single supplier. We believe that, in many cases, alternative sources could be obtained and qualified to supply these products. Nevertheless, a prolonged inability to obtain these components could have an adverse effect on our operating results and could unfavorably impact our customer relationships.
We are subject to a variety of governmental regulations related to the management of hazardous materials. We are currently not aware of any pending notices of violation, fines, lawsuits, or investigations arising from environmental matters that would have any material effect on our business. 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. Nevertheless, the failure to comply with present or future regulations could result in fines being imposed on us, suspension of production, and cessation of our operations or reduction in our customersâ€™ 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.
As of March 10, 2008, we had approximately 3,000 regular full-time employees.
Each of our employees is required to sign an agreement to maintain the confidentiality of our proprietary information. All employees are required to sign an acknowledgement that they have read and agree to abide by a statement of standards of business conduct. In the semiconductor and semiconductor equipment industries, competition for highly skilled employees is intense. Our future success depends, to a significant extent, upon our continued ability to attract and retain qualified employees particularly in the R&D and customer support functions.
The semiconductor capital equipment industry is characterized by rapid change and is highly competitive throughout the world. To compete effectively, we invest significant financial resources to continue to strengthen and enhance our product and services portfolio and to maintain customer service and support locations globally. Semiconductor manufacturers evaluate capital equipment suppliers in many areas, including, but not limited to, process performance, productivity, customer support, defect control, and overall cost of ownership, which can be affected by many factors such as equipment design, reliability, software advancements, etc. Our ability to succeed in the marketplace will depend upon our ability to maintain existing products and introduce product enhancements and new products on a timely basis. In addition, semiconductor manufacturers must make a substantial investment to qualify and integrate new capital equipment into semiconductor production lines. As a result, once a semiconductor manufacturer has selected a particular supplierâ€™s equipment and qualified it for production, the manufacturer generally maintains that selection for that specific production application and technology node provided that there is demonstrated performance to specification by the installed base. Accordingly, we may experience difficulty in selling to a given customer if that customer has qualified a competitorâ€™s equipment. We must also continue to meet the expectations of our installed base of customers through the delivery of high-quality and cost-efficient spare parts in the presence of third-party spares provider competition. We face significant competition with all of our products and services. Certain of our existing and potential competitors have substantially greater financial resources and larger engineering, manufacturing, marketing, and customer service and support organizations than we do. We expect our competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with enhanced price/performance characteristics. If our competitors make acquisitions or enter into strategic relationships with leading semiconductor manufacturers, or other entities, covering products similar to those we sell, our ability to sell our products to those customers could be adversely affected. There can be no assurance that we will continue to compete successfully in the future. Our primary competitors in the etch market are Tokyo Electron, Ltd. and Applied Materials, Inc.
Patents and Licenses
Our policy is to seek patents on inventions relating to new or enhanced products and processes developed as part of our ongoing research, engineering, manufacturing, and support activities. We currently hold a number of United States and foreign patents covering various aspects of our products and processes. We believe that the duration of our patents generally exceeds the useful life of the technologies and processes disclosed and claimed therein. Our patents, which cover material aspects of our past and present core products, have current durations ranging from approximately 1 to 20 years. We believe that, although the patents we own and may obtain in the future will be of value, they will not alone determine our success, which depends principally upon our engineering, marketing, support, and delivery skills. However, in the absence of patent protection, we may be vulnerable to competitors who attempt to imitate our products, manufacturing techniques, and processes. In addition, other companies and inventors may receive patents that contain claims applicable or similar to our products and processes. The sale of products covered by patents of others could require licenses that may not be available on terms acceptable to us, or at all. For further discussion of legal matters, see Item 3, â€śLegal Proceedings,â€ť of this Annual Report on Form 10-K as of and for the year ended June 24, 2007 (the â€ś2007 Form 10-K).
During the quarter ended December 24, 2006, we acquired the U.S. silicon growing and silicon fabrication assets of Bullen Ultrasonics, Inc. We were the largest customer of the Bullen Ultrasonics silicon business. The silicon business has become a division of Lam Research post-acquisition.
The acquisition includes assets related to Bullen Ultrasonicsâ€™ silicon growing and silicon fabrication business, including assets of Bullen Ultrasonics and Bullen Semiconductor (Suzhou) Co., Ltd., a wholly foreign-owned enterprise established in Suzhou, Jiangsu, Peopleâ€™s Republic of China (PRC). The closing of the U.S. asset acquisition occurred on November 13, 2006. The acquisition of the Suzhou assets has not yet occurred as of the date of this filing. The assets acquired consist of fixtures, intellectual property, equipment, inventory, material and supplies, contracts relating to the conduct of the business, certain licenses and permits issued by government authorities for use in connection with the operations of Eaton, Ohio and Suzhou manufacturing facilities, real property and leaseholds connected with such facilities, data and records related to the operation of the silicon growing and silicon fabrication business and certain proprietary rights.
Pursuant to the First Amendment to the Asset Purchase Agreement dated October 5, 2006, the parties to the Asset Purchase Agreement agreed that the closing of the sale of the Suzhou assets would take place within 5 business days following receipt by the parties of all necessary approvals, consents and authorizations of governmental and provincial authorities in the PRC and satisfaction of other customary conditions and covenants. We will pay the $2.5 million purchase price for the Suzhou assets upon the receipt of the approvals and satisfaction of conditions noted above.
The acquisition supports the competitive position and capability primarily of our dielectric Etch products by providing access to and control of critical intellectual property and manufacturing technology related to the production of silicon parts in our processing chambers. We funded the purchase price of the acquisition with existing cash resources.
See the description of our acquisition of SEZ Holding AG under the heading â€śSubsequent Eventsâ€ť in Item 7, â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations,â€ť of this 2007 Form 10-K.
James W. Bagley became Chief Executive Officer and a Director of the Company with the merger of Lam Research and OnTrak Systems, Inc., in 1997. Effective September 1, 1998, he was appointed Chairman of the Board. On June 27, 2005, Mr. Bagley transitioned from Chairman of the Board and Chief Executive Officer to Executive Chairman of the Board of Lam Research. Mr. Bagley currently is a director of Teradyne, Inc. and Micron Technology, Inc. From June 1996 to August 1997, Mr. Bagley served as Chairman of the Board and Chief Executive Officer of OnTrak Systems, Inc. He was formerly Chief Operating Officer and Vice Chairman of the Board of Applied Materials, Inc., where he also served in other senior executive positions during his 15-year tenure. Mr. Bagley held various management positions at Texas Instruments, Inc., before he joined Applied Materials, Inc.
Stephen G. Newberry joined the Company in August 1997 as Executive Vice President and Chief Operating Officer. He was appointed President and Chief Operating Officer of Lam Research in July 1998 and President and Chief Executive Officer in June 2005. Mr. Newberry currently serves as a director of Lam Research Corporation and of SEMI, the industryâ€™s trade association. Prior to joining Lam Research, Mr. Newberry served as Group Vice President of Global Operations and Planning at Applied Materials, Inc. During his 17 years at Applied Materials, he held various positions in manufacturing, product development, sales and marketing, and customer service. Mr. Newberry is a graduate of the U.S. Naval Academy (BS Ocean Engineering) and the Harvard Graduate School of Business (Program for Management Development) and served five years in naval aviation prior to joining Applied Materials.
Martin B. Anstice joined Lam Research in April 2001 as Senior Director, Operations Controller, was promoted to the position of Managing Director and Corporate Controller in May 2002, and was promoted to Group Vice President, Chief Financial Officer, and Chief Accounting Officer in June 2004 and named Senior Vice President, Chief Financial Officer and Chief Accounting Officer in March 2007. Mr. Anstice began his career at Raychem Corporation where, during his 13-year tenure, he held numerous finance roles of increasing responsibility in Europe and North America. Subsequent to Tyco Internationalâ€™s acquisition of Raychem in 1999, he assumed responsibilities supporting mergers and acquisition activities of Tyco Electronics. Mr. Anstice is an associate member of the Chartered Institute of Management Accountants in the United Kingdom.
Ernest E. Maddock, Senior Vice President of Global Operations since March 2007 and previously Group Vice President of Global Operations since October 2003, currently oversees Global Operations which consists of: Information Technology, Global Supply Chain, Production Operations, Corporate Quality, Global Security, Global Real Estate & Facilities. Additionally, Mr. Maddock heads Bullen Semiconductor, a division of Lam Research. Mr. Maddock joined the Company in November 1997. Mr. Maddockâ€™s previously held positions with the Company include Vice President of the Customer Support Business Group. Prior to his employment with Lam Research, he was Managing Director, Global Logistics and Repair Services Operations, and Chief Financial Officer, Software Products Division, of NCR Corporation. He has also held a variety of executive roles in finance and operations in several industries ranging from commercial real estate to telecommunications.
Abdi Hariri was named Group Vice President of the Customer Support Business Group in March 2007. Prior to his current position, Mr. Hariri had been Vice President and General Manager of the Customer Support Business Group since August 2004. Mr. Hariri previously served as the General Manager of Lam Research Co. Ltd. (Japan) for approximately 18 months and has served in a number of different assignments with the Field Sales and Product Groups. His experience prior to his appointment in Japan included over 13 years at the Company with various responsibilities, including global business development and engineering. Prior to his employment at Lam Research, Mr. Hariri served as a Process Engineer at Siliconix, Inc. He holds a Masters Degree in Chemical Engineering from Stanford University.
Richard A. Gottscho, Group Vice President and General Manager, Etch Products since March 2007, joined the Company in January 1996 and has served at various Director and Vice President levels in support of etch products, CVD products, and corporate research. Prior to joining Lam Research, Dr. Gottscho was a member of Bell Laboratories for 15 years where he started his career working in plasma processing. During his tenure at Bell, he headed research departments in electronics materials, electronics packaging, and flat panel displays. Dr. Gottscho is the author of numerous papers, patents, and lectures in plasma processing and process control. He is a recipient of the American Vacuum Societyâ€™s Peter Mark Memorial Award and is a fellow of the American Physical and American Vacuum Societies, has served on numerous editorial boards of refereed technical publications, program committees for major conferences in plasma science and engineering, and was vice-chair of a National Research Council study on plasma science in the 1980s. Dr. Gottscho earned Ph.D. and B.S. degrees in physical chemistry from the Massachusetts Institute of Technology and the Pennsylvania State University, respectively.
Thomas J. Bondur, Vice President, Global Field Operations since March 2007, joined Lam in August 2001 and has served in various roles in business development and field operations in Europe and the United States. Prior to joining Lam Research, Mr. Bondur spent eight years in the semiconductor industry with Applied Materials in various roles in Santa Clara and France including Sales, Business Management and Process Engineering. Mr. Bondur holds a degree in Business from the State University of New York.
MANAGEMENT DISCUSSION FROM LATEST 10K
The semiconductor industry is cyclical in nature and has historically experienced periodic downturns and upturns. Todayâ€™s leading indicators of changes in customer investment patterns may not be any more reliable than in prior years. Demand for our equipment can vary significantly from period to period as a result of various factors, including, but not limited to, economic conditions (generally and in the semiconductor industry), supply, demand, and prices for semiconductors, customer capacity requirements, and our ability to develop and market competitive products. For these and other reasons, our results of operations for fiscal years 2007, 2006, and 2005 may not necessarily be indicative of future operating results.
Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides a description of our results of operations and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in this 2007 Form 10-K. MD&A consists of the following sections:
Restatement of Previously Issued Financial Statements explains the results of the voluntary stock option review and related restatement of our financial statements.
Executive Summary provides a summary of the key highlights of our results of operations
Results of Operations provides an analysis of operating results
Critical Accounting Policies and Estimates discusses accounting policies that reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements
Liquidity and Capital Resources provides an analysis of cash flows, contractual obligations and financial position
Subsequent Events discusses events impacting our operations that have occurred after June 24, 2007
Restatement of Previously Issued Financial Statements
In this 2007 Form 10-K, the Company is restating its consolidated balance sheet as of June 25, 2006 and the related consolidated statements of operations, stockholdersâ€™ equity, and cash flows for the years ended June 25, 2006 and June 26, 2005 as a result of determinations from a voluntary independent stock option review conducted by the Independent Committee. The Company also recorded adjustments affecting previously-reported financial statements for fiscal years 1997 through 2004, the effects of which are summarized in cumulative adjustments to additional paid-in capital, deferred stock-based compensation, and retained earnings as of June 27, 2004. This restatement is also described in the Explanatory Note to this 2007 10-K, immediately preceding Part I Item I and in Note 3, â€śRestatement of Consolidated Financial Statementsâ€ť, to Consolidated Financial Statements. This 2007 Form 10-K also reflects the restatement of â€śSelected Financial Dataâ€ť in Item 6 for the years ended June 25, 2006, June 26, 2005, June 27, 2004 and June 29, 2003. In addition, the Company is restating the unaudited quarterly condensed financial statements for interim periods of fiscal year 2006, and unaudited condensed balance sheets as of March 25, 2007, December 24, 2006 and September 24, 2006. There was no effect of the restatement on the consolidated statements of operations for the first three quarters of fiscal year 2007.
Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K filed or furnished by Lam Research prior to January 24, 2008, and the related opinions of its Independent Registered Public Accounting Firm and all earnings press releases and similar communications issued by the Company prior to January 24, 2008 are superseded in their entirety by this 2007 Form 10-K and other reports on Form 10-Q and Form 8-K filed by the Company with the Securities and Exchange Commission on or after January 24, 2008.
Independent Committee Review
On July 18, 2007, the Company announced that its Board of Directors had initiated a voluntary independent review regarding the timing of and accounting for the Companyâ€™s past stock option grants and other related issues. The voluntary internal review arose after the Companyâ€™s Independent Registered Public Accounting Firm performed auditing procedures relating to the Companyâ€™s historical stock option grant programs and procedures as part of the firmâ€™s fiscal year-end 2007 audit. The Board of Directors appointed a special committee consisting of two independent board members (the â€śIndependent Committeeâ€ť) to conduct a comprehensive review of the Companyâ€™s historical stock option practices. The Independent Committee promptly engaged independent outside legal counsel and forensic accountants to assist with the review. On December 21, 2007, the Company announced that the Independent Committee had reached a preliminary conclusion that the actual measurement dates for financial accounting purposes of certain stock option grants issued in the past differed from the recorded grant dates of such awards. Upon the recommendation of management and the Independent Committee, the Audit Committee of the Board of Directors concluded that the financial statements for fiscal years 1997 through 2005, and the interim periods contained therein should no longer be relied upon. The Independent Committeeâ€™s review was completed in February 2008.
Scope of the Independent Committee Review
The review covered stock option grants awarded in fiscal years 1997 through 2005 (the â€śReview Periodâ€ť). The scope of the review included evaluating 100% of â€śCompany-wideâ€ť grants, director grants, Section 16 officer grants, and new hire grants, as well as a sampling of grants deemed â€śother grantsâ€ť, representing approximately 94% of all stock option grants during the Review Period. This Review Period comprised approximately 16,000 separate stock option grants on approximately 500 separately recorded grant dates. These grants involved approximately 58 million underlying shares of Common Stock and included grants to domestic and international employees. Share amount have been adjusted as applicable to reflect the March 2000 3-for-1 stock split. The Independent Committeeâ€™s review also included procedures to identify potential modifications of stock option grants, and grants awarded to consultants, and testing of cash exercises. The Company had not awarded any Company-wide stock option grants since October 2002 and stopped issuing stock option grants during fiscal year 2005 and only issued restricted stock units (â€śRSUsâ€ť) thereafter. The Independent Committee did not include fiscal years 2006 and 2007 in the scope of its review based on several factors including but not limited to the fact that the Company only issued RSUs after fiscal year 2005 and the Companyâ€™s equity granting processes and controls had been documented and tested as part of its assessment of the operating effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes Oxley Act of 2002. Additionally, no information arose during the stock option review that would indicate a need to expand the scope of the review to include other periods.
The Independent Committeeâ€™s review included the collection and processing of over 3.5 million electronic documents, which included hard drives and network share drives of numerous individuals, the Companyâ€™s network servers, and backup tapes. The Independent Committeeâ€™s advisors also collected and reviewed hard copy documents from numerous sources and conducted 61 interviews of 47 individuals, predominantly current or former directors, officers and employees of the Company.
Stock Option Review Results
Consistent with applicable accounting literature and guidance from the SEC staff, the Company organized the grants during the review period into categories based on the grant type and the process by which the grant was finalized. The Company analyzed the evidence from the Independent Committeeâ€™s review related to each category including, but not limited to, physical documents, electronic documents, and underlying electronic data about documents. Based on the relevant facts and circumstances, the Company applied the applicable accounting standards to determine, for grants within each category, the proper measurement date. If the measurement date was not the originally recorded grant date, accounting adjustments were made as required, in some cases resulting in stock-based compensation expense and related tax effects. The significant majority of the measurement date changes result from stock options granted prior to fiscal year 2003. As a result of the findings of the review, the Company has recognized incremental stock-based compensation and associated payroll tax expense of $96.4 million on a pre-tax basis ($65.8 million after taxes) in the aggregate during fiscal years 1997 through 2006 which includes incremental stock-based compensation expense of $1.2 million recognized in accordance with SFAS No. 123R during fiscal year 2006.
The Independent Committee also concluded that there was no intentional misconduct on the part of Company management or the Companyâ€™s independent directors. During its review of the Companyâ€™s historical stock option practices, the Independent Committee did not find evidence of any other financial reporting or accounting issues unrelated to stock-based compensation.
Company-wide grants were awarded on ten dates during the Review Period, and are associated with approximately half of the shares underlying option grants encompassed in the review. These ten dates include grants issued on six dates for broad-based and primarily discretionary grants (â€śfocal grantsâ€ť), two grant dates that were formula-based grants (â€śsupplemental grantsâ€ť) and two grant dates designed to address certain previously granted stock options for which the exercise price was higher than the then-current fair value of the Companyâ€™s Common Stock (â€ścancel and replace grantsâ€ť). As a result of its review, the Company determined that the actual measurement dates for certain stock option grants differed from the recorded grant dates. The Company determined that the actual measurement date, meaning when the required actions necessary to grant the option were completed, including the determination of the number of shares underlying the options to be granted to each employee and the exercise price, was the correct measurement date to determine what, if any stock-based compensation was appropriate. Any intrinsic value of the options on the measurement date, measured as the difference between the stated exercise price and the market price, has been recorded as compensation expense during the periods when employees were providing services in exchange for the options.
With respect to the focal grants, the Company concluded that a process to determine the total number of shares underlying the options, grant date and exercise price generally commenced prior to the recorded grant date, but that in certain cases the specific allocation of those shares among the various option recipients was not finalized until after the original recorded grant date. To address these circumstances, the Company has revised the measurement date for accounting purposes for these option grants to a date after the original grant date, when the allocation of the shares was first known to be finalized. The Company has recognized stock-based compensation expense, net of forfeitures, of $61.2 million on a pre-tax basis as a result of these revised measurement dates.
With respect to the supplemental grants, the Company determined that the general formula for determining the number of shares underlying the option grant to which each recipient would be entitled was not sufficiently finalized for accounting purposes at the original recorded grant date. To address these circumstances, the Company has revised the measurement date for accounting purposes for these grants to the date when this formula was first known to be finalized. The Company has recognized stock-based compensation expense, net of forfeitures, of $5.6 million on a pre-tax basis as a result of these revised measurement dates.
The cancel and replace grants involved recipients electing to exchange certain stock options, for which the exercise price was higher than the then-current fair value of the Companyâ€™s Common Stock, in return for a new grant of options. The Company determined that in both instances, the election deadline was after the recorded grant date. The measurement date should have been the later of the recorded grant date or the date of election because the elections were revocable up to the last day of the offer period. To address these circumstances, the Company has revised the measurement date for accounting purposes for these grants to the last possible date of election. The Company has recognized stock-based compensation expense, net of forfeitures, of $0.2 million on a pre-tax basis as a result of these revised measurement dates.
Grants to Directors and Section 16 Officers
Director grants were awarded on ten dates during the stock option review period. Grants to directors were typically governed by the requirements of the underlying stock option plan documents, as grant dates and amounts were typically fixed by the respective stock option plan. There were instances when the grant dates were not consistent with dates fixed by the respective stock option plan. In all instances the grant date was within 1 to 3 days of the dates provided by the plan. To address these circumstances, the Company has revised the measurement date for accounting purposes for these grants to the date as required by the stock option plan. The Company has recognized stock-based compensation expense, net of forfeitures, of $2.8 million on a pre-tax basis as a result of the revised measurement dates.
Section 16 officer grants were awarded on 23 grant dates during the stock option review period. The Company determined that the actual measurement date, meaning when the required actions necessary to grant the option were completed, including the determination of the number of shares underlying the options to be granted to each employee and the exercise price, was the correct measurement date to determine the market price of the option shares. Any intrinsic value of the options on the measurement date, measured as the difference between the stated exercise price and the market price, has been recorded as compensation expense during the periods when employees were providing services in exchange for the options. In instances where the original recorded grant date was not consistent with the correct measurement date, the Company has revised the measurement date for accounting purposes for these grants to a date after the original grant date, when the number of shares underlying the options to be granted to each employee and the exercise price were first known to be finalized. The Company has recognized stock-based compensation expense, net of forfeitures, of $1.0 million on a pre-tax basis as a result of the revised measurement dates. Additionally, it was determined that for one grant the recorded grant price was based on an average of closing prices of the Companyâ€™s stock immediately prior to the grant date. The option plan under which this option was granted allowed for similar pricing. To address this circumstance the Company has recognized stock-based compensation expense of $2.1 million on a pre-tax basis for this grant, which was equal to the difference between the closing price of the stock on the date of grant and the originally recorded grant exercise price.
Grants to Consultant
The Company concluded that six granting actions to a non-employee consultant were incorrectly accounted for as employee as opposed to non-employee stock awards. To address this circumstance, the Company has recognized a stock-based compensation expense of $3.2 million on a pre-tax basis under â€śfair valueâ€ť accounting in accordance with the requirements of EITF Issue No. 96-18, â€śAccounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Servicesâ€ť.
Grants to New Hires
New hire grants were generally approved prior to the employeeâ€™s hire date and granted as of the last day of the month of hire prior to calendar year 1999 and on the first day of the individualâ€™s employment with the Company beginning in calendar year 1999. In instances where approval was not evidenced on or before the original recorded grant date, the Company has revised the measurement date for accounting purposes for these grants to a date after the original grant date, when the required approval was first evidenced, but not before the employeeâ€™s hire date. The Company has recognized stock-based compensation expense, net of forfeitures, of $1.7 million on a pre-tax basis as a result of these revised measurement dates.
For the remaining population reviewed of stock options granted during the stock option review period, the Company has concluded that certain actual measurement dates differed from the recorded grant dates primarily due to a lack of contemporaneous documentation evidencing approval as of the original recorded grant date. In these circumstances, the Company has revised the measurement date for accounting purposes for these grants to a date after the original grant date, when the shares underlying the options to be granted to each employee and the exercise price were first known to be finalized. The primary issue with these grants was that there was insufficient evidence to conclude that the specific allocation of those shares among the various grant recipients was finalized at the original recorded grant date. To address these circumstances, the Company has revised the measurement date for accounting purposes for these grants to a date after the original grant date, when the allocation of the shares underlying the options and exercise price was first known to be finalized. The Company has recognized stock-based compensation expense, net of forfeitures, of $8.2 million on a pre-tax basis as a result of these revised measurement dates.
Deemed Modifications to Stock Option Grants Connected with Terminations or Leaves of Absences
Compensation expense was also recognized as a result of deemed modifications to certain employee stock option grant awards in connection with certain employeesâ€™ terminations or leaves of absence. Typically such modifications related to extensions of the time employees could exercise options following their termination of employment or that enabled the employee to vest in additional shares in relation to a leave of absence or subsequent to their termination, thus triggering a new measurement date under the accounting literature applicable at that time. The Company has recognized stock-based compensation expense, net of forfeitures, of $9.2 million on a pre-tax basis as a result of these new measurement dates.
Use of Judgment
The Company evaluated all available evidence for each individual grant within the scope of the independent review and the revised measurement dates represent the earliest date when the terms of the options granted to individual recipients were known with finality. The proposed measurement date for certain grants could not be determined with certainty based on available evidence. In light of the judgment used in establishing the measurement dates, alternate approaches to those used by the Company could have resulted in different stock-based compensation expense than that recorded by the Company in the restatements. While the Company has considered these alternative approaches, it believes its approach is the most appropriate under the circumstances.
The Company prepared a sensitivity analysis to determine the hypothetical minimum and maximum compensation expense charge that it might have recorded for these grants if it had used different judgments to determine the revised measurement dates. The Company applied its sensitivity methodology on a grant date by grant date basis to examine the largest hypothetical variations in stock-based compensation expense within a reasonable range of possible measurement dates for each grant event.
After developing the range for each grant event included in the Companyâ€™s sensitivity analysis, the Company selected the highest and lowest closing sale price of its Common Stock within the date range to determine the range of potential compensation expense adjustments for the grants. The Company then compared these aggregated amounts to the stock-based compensation expense that it recorded for the stock option grants analyzed. If the Company had used the highest closing sale price of its Common Stock within the date range for these grant events, its stock-based compensation expense adjustment relating to these grants would have increased, net of forfeitures, by approximately $30 million on a pre-tax basis. Conversely, had the Company used the lowest closing sale price of its Common Stock within the date range for the grants analyzed, its stock-based compensation expense adjustment relating to these grants would have decreased, net of forfeitures, by approximately $26 million on a pre-tax basis. Substantially all of the hypothetical increases or decreases of stock-based compensation expense resulting from the Companyâ€™s sensitivity analysis relates to periods prior to fiscal 2005.
Findings and Recommendations of the Independent Committee
As a result of its review, the Independent Committee identified certain deficiencies relating to the Companyâ€™s historical practices and accounting with respect to stock options, including the following areas:
â€˘ Historical Board and Compensation Committee procedures regarding the issuance and approval of stock option grants;
â€˘ Historical coordination among departments relating to the administration of the stock option grant process;
â€˘ Historical compliance with and application of accounting standards with respect to stock option grants;
â€˘ Compliance with certain of the Companyâ€™s stock option plans; and
â€˘ Historical record-keeping with respect to stock option grants.
As a result of the deficiencies identified, the Independent Committee developed recommendations targeted at strengthening the Companyâ€™s processes with respect to equity compensation and relating accounting. These recommendations were presented to the Board of Directors on February 1, 2008 and include the areas of: approval authority for equity compensation awards; oversight and administration of the awards process; coordination among relevant departments; training with respect to equity compensation; and record-keeping. The Company is currently reviewing all of the Independent Committeeâ€™s recommendations as well as a potential timetable for implementation, but the Company believes that the substance of many of the recommendations of the Independent Committee have already been incorporated into the Companyâ€™s current equity compensation processes. This belief is consistent with the determination by the Independent Committee and the Company that the granting of RSUs after fiscal year 2005 was not within the scope of the Independent Committee review in part due to the documentation and testing required by Section 404 of the Sarbanes-Oxley Act of 2002.
Results of Operations
Unshipped orders in backlog as of June 24, 2007 were approximately $642.6 million. The basis for recording new orders is defined in our backlog policy. Our unshipped orders backlog includes orders for systems, spares, and services where written customer requests have been accepted and the delivery of products or provision of services is anticipated within the next 12 months. Our policy is to revise our backlog for order cancellations and to make adjustments to reflect, among other things, spares volume estimates and customer delivery date changes. Please refer to â€śBacklogâ€ť in Part I Item 1, â€śBusinessâ€ť of this 2007 Form 10-K for additional information on our backlog policy.
The increase in revenues during fiscal years 2007 and 2006 reflected an improved market environment which was evidenced by expanded levels of capital investments by semiconductor manufacturers and our market share expansion. We believe we gained market share in both the dielectric and conductor product segments of the etch market over this period, with strong revenue performance in Taiwan, China, North America, and Korea during fiscal year 2007 and in Japan and Korea during fiscal year 2006. The increase in revenues was correlated to the amount of shipments and our installation and acceptance timelines. The overall Asia region continued to account for a significant portion of our revenues as a substantial amount of the worldwide capacity additions for semiconductor manufacturing continues to occur in that region. Our deferred revenue balance increased to $295.5 million as of June 24, 2007 compared to $229.7 million as of June 25, 2006, as shipments outpaced revenues during fiscal year 2007. The anticipated future revenue value of orders shipped from backlog to Japanese customers that are not recorded as deferred revenue was approximately $51 million as of June 24, 2007; these shipments are classified as inventory at cost until title transfers.
Gross margin as a percent of revenue during fiscal year 2007 remained greater than 50% for the third consecutive year and increased sequentially to 50.8% for fiscal year 2007. The increase in gross margin as a percent of revenue for fiscal year 2007 compared with fiscal year 2006 was primarily driven by improved utilization of factory and field resources on higher business volumes partially offset by product and customer mix and implementation of a targeted consumable spare parts price-reduction strategy focused on preserving and building market share and strengthening customer trust in our efforts to support their cost-reduction roadmaps.
The decrease in gross margin as a percent of revenue during fiscal year 2006 compared with fiscal year 2005 was affected by the inclusion of equity-based compensation as a result of the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), â€śShare-Based Paymentâ€ť (SFAS No. 123R) of $5 million, or 0.3%. The impact of unfavorable product mix was generally offset by improved installation and warranty performance, and improved factory utilization which was facilitated by higher volumes.
We continue to invest significantly in research and development focused on leading-edge plasma etch and our portfolio of new products. The growth in absolute spending levels during fiscal year 2007 compared to fiscal year 2006 included expected increases of approximately $22 million in engineering material supplies and outside services targeting etch, new and product growth objectives, $18 million in salary and benefits costs for planned increases in headcount and employee base compensation supporting that same strategy, $6 million in incentive-based compensation driven by higher profit levels and $6 million in equity-based compensation. Approximately 33% of fiscal year 2007 systems revenues were derived from products introduced over the previous two years.
The growth in absolute spending levels during fiscal year 2006 compared to fiscal year 2005 was primarily due to approximately $19 million in increased supplies and outside services, $8 million in increased equity-based compensation expense, and $4 million in increased salary and benefit costs due to planned increases of employee base compensation and increased headcount.
The increase in SG&A expenses during fiscal year 2007 compared with the prior year was driven by increases of $20 million in incentive-based compensation triggered by higher profits and stock price, approximately $15 million in salary and benefit costs for planned increases in headcount and employee base compensation, and $5 million in equity-based compensation.
The increase in SG&A expenses during fiscal year 2006 compared with the prior year was driven by increases in salary and benefits costs of approximately $4 million due to planned increases of employee base compensation and increased headcount. Increases in incentive-based cash compensation of approximately $7 million were principally due to our long-term executive compensation program implemented during fiscal year 2006 and equity-based compensation was approximately $8 million. Fiscal year 2005 SG&A expenses were lower primarily due to the March 2005 receipt of an $8 million tax refund from the California State Board of Equalization for previously paid sales and use tax.
The increase in interest income during fiscal year 2007 compared with the prior year is primarily due to increases in our average balances of cash and cash equivalents, short-term investments, and restricted cash and investments throughout fiscal year 2007 and to a lesser extent, increases in interest rate yields. Although the average total cash and cash equivalents and short-term investments balances increased throughout the year, the balances at the end of fiscal year 2007 decreased by approximately $490 million compared to the prior year, primarily due to share repurchase activity of approximately $1.1 billion throughout fiscal year 2007, of which approximately $768 million occurred during the June 2007 quarter.
The increase in interest expense during fiscal year 2007 was due to the $350 million of long-term debt entered into by our wholly-owned subsidiary on June 16, 2006 to facilitate the repatriation of foreign earnings under the American Jobs Creation Act of 2004 (AJCA). The balance of our long-term debt was $250 million as of June 24, 2007.
In June 2007 we recognized a gain of $3.0 million related to the sale of a private equity investment.
The favorable legal judgment of $15.8 million during fiscal year 2007 was obtained in a lawsuit filed by the Company alleging breach of purchase order contracts by one of its customers. The Supreme Court of California denied review of lower and appellate court judgments in favor of Lam Research during the quarter ended September 24, 2006.
The sequential increase in interest income during fiscal year 2006 compared to fiscal year 2005 was due to the combined effect of increased cash and cash equivalents, short-term securities, and restricted cash and investments balances as well as increases in interest rate yields. The Companyâ€™s total balances of cash, cash equivalents, short-term securities, and restricted cash and investments, increased approximately $626 million from fiscal year 2005. This increase included the Companyâ€™s wholly-owned subsidiaryâ€™s drawdown against a $350 million Credit Agreement to support the Companyâ€™s foreign earnings repatriation of $500 million under the AJCA. The remaining increase of $276 million was primarily driven by $367 million from cash flows from operating activities.
Income Tax Expense
Our annual income tax expense was $161.9 million, $104.6 million and $99.0 million, in fiscal years 2007, 2006, and 2005, respectively. Our effective tax rate for fiscal years 2007, 2006, and 2005 was 19.1%, 23.8% and 25.0%, respectively. The decrease in our effective tax rate in fiscal year 2007 was due to the change in the geographical mix of income in jurisdictions with a lower tax rate as well as certain discrete events resulting in a net tax benefit of $21.5 million, or 2.5% benefit on the effective tax rate. These discrete events included favorable adjustments for previously estimated tax liabilities upon the filing of the Companyâ€™s U.S. and certain foreign income tax returns, the reversal of tax reserves with respect to certain transfer pricing items now settled and an increased benefit related to the extension of the federal research credit as it pertains to the Companyâ€™s fiscal year 2006. These favorable adjustments were partially offset by an increase in tax expense related to the application of foreign tax rulings.
The fiscal year 2006 effective tax rate was 23.8%, compared to the fiscal year 2005 effective tax rate of 25.0%, and reflects the increase in income in jurisdictions with a lower tax rate, the realization of state R&D tax credits not previously benefited, favorable tax rulings on prior year tax returns filed and the reversal of tax reserves with respect to the agreement of a bilateral advanced pricing arrangement. These favorable adjustments for the year were partially offset by a discrete event for the repatriation during fiscal year 2006 of a $500 million extraordinary dividend under the American Jobs Creation Act of 2004, combined with the impact of the accounting for equity-based awards in accordance with SFAS No. 123R and the deductibility of those awards in some jurisdictions, and the expiration of the research tax credit on December 31, 2005.
Deferred Income Taxes
Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our gross deferred tax assets, primarily comprised of reserves and accruals that are not currently deductible and tax credit carryforwards, were $123.3 million and $133.3 million at the end of fiscal years 2007 and 2006, respectively. These gross deferred tax assets were offset by deferred tax liabilities of $34.2 million and $27.1 million at the end of fiscal years 2007 and 2006, respectively.
Deferred tax assets decreased in fiscal year 2007 primarily due to the utilization of tax credits, adjustments for previously estimated tax liabilities upon the filing of income tax returns in various jurisdictions, the impact of certain elections related to foreign tax rulings, the conclusion of negotiations on certain transfer pricing items, and the incremental tax benefit related to stock-based compensation deductions.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more likely than not that such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the deferred tax assets would be realized, then the previously provided valuation allowance would be reversed. We evaluate the realizability of the deferred tax assets quarterly and will continue to assess the need for additional valuation allowances, if any.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain judgments, 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. We based our estimates and assumptions on historical experience and on various other assumptions believed to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates.
The significant accounting policies used in the preparation of our financial statements are described in Note 2 of our Consolidated Financial Statements. Some of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain.
We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition: We recognize all revenue when persuasive evidence of an arrangement exists, delivery has occurred and title has passed or services have been rendered, the selling price is fixed or determinable, collection of the receivable is reasonably assured, and we have completed our system installation obligations, received customer acceptance or are otherwise released from our installation or customer acceptance obligations. In the event that terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. In circumstances where the practices of a customer do not provide for a written acceptance or the terms of sale do not include a lapsing acceptance provision, we recognize revenue where it can be reliably demonstrated that the delivered system meets all of the agreed-to customer specifications. In situations with multiple deliverables, revenue is recognized upon the delivery of the separate elements to the customer and when we receive customer acceptance or are otherwise released from our customer acceptance obligations. Revenue from multiple-element arrangements is allocated among the separate elements based on their relative fair values, provided the elements have value on a stand-alone basis, there is objective and reliable evidence of fair value, the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items. Revenue related to sales of spare parts and system upgrade kits is generally recognized upon shipment. Revenue related to services is generally recognized upon completion of the services requested by a customer order. Revenue for extended maintenance service contracts with a fixed payment amount is recognized on a straight-line basis over the term of the contract.
Inventory Valuation : Inventories are stated at the lower of cost or market using standard costs which approximate actual costs on a first-in, first-out basis. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies, and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of title transfer to the customer. Generally, title transfer is documented in the terms of sale. When the terms of sale do not specify, we assume title transfers when we complete physical transfer of the products to the freight carrier unless other customer practices prevail. Transfer of title for shipments to Japanese customers generally occurs at time of customer acceptance.
Standard costs are reassessed at least annually and reflect achievable acquisition costs, generally the most recent vendor contract prices for purchased parts, currently obtainable assembly and test labor utilization levels, methods of manufacturing, and overhead for internally manufactured products. Manufacturing labor and overhead costs are attributed to individual product standard costs at a level planned to absorb spending at average utilization volumes. All intercompany profits related to the sales and purchases of inventory between our legal entities are eliminated from our consolidated financial statements.
Management evaluates the need to record adjustments for impairment of inventory at least quarterly. Our policy is to assess the valuation of all inventories including manufacturing raw materials, work-in-process, finished goods, and spare parts in each reporting period. Generally, obsolete inventory or inventory in excess of managementâ€™s estimated usage requirements over the next 12 to 36 months is written down to its estimated market value if less than cost. Inherent in the estimates of market value are managementâ€™s forecasts related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, general semiconductor market conditions, possible alternative uses, and ultimate realization of excess inventory. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made.
Warranty : Typically, the sale of semiconductor capital equipment includes providing parts and service warranty to customers as part of the overall price of the system. We offer standard warranties for our systems that run generally for a period of 12 months from system acceptance, not to exceed 14 months from shipment of the system to the customer. When appropriate, we record a provision for estimated warranty expenses to cost of sales for each system upon revenue recognition. The amount recorded is based on an analysis of historical activity which uses factors such as type of system, customer, geographic region, and any known factors such as tool reliability trends. All actual parts and labor costs incurred in subsequent periods are charged to those established reserves through the application of detailed project record keeping.
Actual warranty expenses are incurred on a system-by-system basis, and may differ from our original estimates. While we periodically monitor the performance and cost of warranty activities, if actual costs incurred are different than our estimates, we may recognize adjustments to provisions in the period in which those differences arise or are identified. We do not maintain general or unspecified reserves; all warranty reserves are related to specific systems.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONS
Shipments for the March 2008 quarter exceeded our expectations and grew 11%, including approximately $30 million from our Spin Clean Division, compared with the December 2007 quarter. During the March 2008 quarter, 300 millimeter applications represented approximately 93% of total etch system shipments and 92% of total etch system shipments were for applications at less than or equal to the 90 nanometer technology node. We classify total etch systems shipments market segmentation for the March 2008 quarter as memory at approximately 76%, logic/other at 8% and foundry at 16%.
We expect shipments for the June 2008 quarter to range between $490 million to $530 million; this reflects our outlook, particularly impacted by the equipment utilization decisions of our customers and any supply/demand imbalance in memory, particularly DRAM. This expectation is a forward-looking statement and actual results could differ materially as a result of certain factors as referred to on page 22 of this Quarterly Report on Form 10-Q.
Revenue for the March 2008 quarter slightly exceeded the midpoint of our guidance range and was facilitated in part by strong same quarter shipments to revenue turns of etch systems. Revenue for the March 2008 quarter increased slightly sequentially and decreased 6% year over year and included $1.7 million from our Spin Clean Division. Revenue for the nine months ended March 30, 2008 increased slightly year over year. Our revenues are affected by the amounts of previously reported shipments and our acceptance timelines The overall Asia region continues to account for a significant portion of our revenues as a substantial amount of the worldwide capacity additions for semiconductor manufacturing continues to occur in this region. Our deferred revenue balance increased to $270.1 million as of March 30, 2008 compared to $229.6 million at December 23, 2007, including $29.4 million from our Spin Clean Division. The anticipated future revenue value of orders shipped from backlog to Japanese customers that are not recorded as deferred revenue was approximately $43 million as of March 30, 2008 and approximately $41 million as of December 23, 2007; these shipments are classified as inventory at cost until title transfers.
Gross margin as a percentage of revenue for the March 2008 quarter was 46.8% and was within our guidance and decreased sequentially due to challenging customer and product mix. The decrease in gross margin percentage during the three and nine months ended March 30, 2008 compared with the same periods in the prior year was primarily due to decreased factory utilization in line with reduced shipment volumes, customer and product mix challenges, and $6.4 million of expense associated with the assumption of employee liabilities under Section 409A as a result of the determinations from our voluntary independent stock option review which represented 1% of March 2008 quarter revenues.
We expect gross margin as a percent of revenue will range between 42% to 44% in the June 2008 quarter reflecting continued customer and product mix challenges, the integration of our Spin Clean Division including further transition to an acceptance-based revenue recognition model as well as higher equity-based compensation expense associated with our annual employee equity grant executed during the quarter ending June 29, 2008. This expectation is a forward-looking statement and actual results could differ materially as a result of certain factors as referred to on page 22 of this Quarterly Report on Form 10-Q.
Although there are near term pressures on our business from declining customer investment levels, given the targeted longer term benefit of our product development activities, we continue to invest significantly in research and development focused on leading-edge plasma etch and new products, including single-wafer clean despite the lower anticipated short term available market. R&D expense for the March 2008 quarter was consistent with the December 2007 quarter and included approximately $3 million associated with our Spin Clean Division. The March 2008 quarter compared with the December 2007 quarter reflects an increase of approximately $4 million in salaries and benefits costs associated with seasonally high payroll tax as well as increased headcount attributed to our acquisition of the Spin Clean Division which accounted for approximately $1 million of the overall increase in salaries and benefits costs noted above, offset by a reduction of approximately $4 million in engineering material supplies. The growth in R&D expenses during the three months ended March 30, 2008 compared with the same period in the prior year reflects our planned investment level and includes an increase of approximately $5 million in salary and benefit costs for planned increases in headcount, including our Spin Clean Division, and employee base compensation. The increase in R&D expenses during the nine months ended March 30, 2008 compared with the same period in the prior year reflects our planned investment level and includes an increase of approximately $13 million in salaries and benefits costs associated with increased headcount, including our Spin Clean Division, and employee base compensation, $10 million in engineering material supplies and outside services which are targeted at our continuing support of our existing and new product growth opportunities and nearly $3 million in equity-based compensation.
SG&A expenses increased during the March 2008 quarter compared to the December 2007 quarter and included approximately $3 million from our Spin Clean Division. The overall sequential increase consisted of approximately $5 million in salary and benefits mainly due to seasonally high payroll taxes and increased headcount primarily attributable to employees from our acquisition of our Spin Clean Division, which accounted for approximately $2 million of the salary and benefits increase. The increase in SG&A expenses during the three months ended March 30, 2008 compared to the same period in the prior year included an increase of $7 million in salary and benefits costs for planned increases of headcount, including our Spin Clean Division, and employee base compensation and $6 million in legal and accounting costs incurred as a result of the voluntary stock option review, partially offset by a decrease of $3 million in incentive-based compensation on lower profit levels. The growth in SG&A expenses during the nine months ended March 30, 2008 compared to the same period in the prior year includes an increase in salary and benefit costs of $14 million for planned increases in headcount and employee base compensation, an increase of $16 million in legal and accounting costs incurred as a result of the voluntary stock option review, and an increase in equity-based compensation of approximately $2 million.
As a result of the determinations from a voluntary independent stock option review, we considered the application of Section 409A of the IRC and similar provisions of state law to certain stock option grants where, under APB No. 25, intrinsic value existed at the time of grant. In the event such stock option grants are not considered as issued at fair market value at the original grant date under the IRC, these options are subject to Section 409A and similar provisions of state law. Due to this, taxes and penalties are levied not on the intrinsic value increase, but on the entire stock option gain for exercised options. On March 30, 2008, the Board of Directors of the Company authorized the Company to assume the liability of certain employees, including the Companyâ€™s Chief Executive Officer and certain executive officers, with options subject to Section 409A. The 409A liability totaled $50.2 million; $43.8 million was recorded in operating expenses and $6.4 million in cost of goods sold in our condensed consolidated statements of operations for the three and nine months ended March 30, 2008. The determinations from the voluntary independent stock option review are more fully described in Note 3, â€śRestatement of Consolidated Financial Statementsâ€ť to Consolidated Financial Statements and â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť in Item 7 of our 2007 Form 10-K.
In Process Research and Development
We incurred a charge of $2.1 million related to the write-off of in process research and development following our acquisition of our Spin Clean Division which is reported in operating expenses during the three months ended March 30, 2008. There remains no additional in process research and development on our balance sheet.
Interest income decreased $2.2 million during the quarter ended March 30, 2008 as compared with the quarter ended December 23, 2007 and was primarily attributable to decreases in interest rate yields over the period. The decrease in interest income for the three and nine months ending March 30, 2008, as compared with the same periods in the prior year, is primarily due to decreases in our average balances of cash and cash equivalents, short-term investments, and restricted cash and investments and, to a lesser extent, decreases in interest rate yields over the period. The decrease in average balances was due to share repurchase activity of approximately $768 million during the June 2007 quarter and the acquisition of our Spin Clean Division in March 2008.
The decrease in interest expense during the three and nine months ended March 30, 2008 as compared with the same periods in the prior year was due to a $100 million repayment on our long-term debt during the December and March quarters of fiscal year 2007 and a decline in interest rates. The balance of our long-term debt was $284.1 million as of March 30, 2008, including $34.1 million of long-term debt assumed as a result of the Spin Clean Division acquisition.
Included in foreign exchange gains during the three and nine months ended March 30, 2008 are gains associated with the acquisition of the Spin Clean Division of $49.3 million relating primarily to the settlement of a hedge of the Swiss franc. For the nine months ended March 30, 2008, this gain is partially offset by an unrealized loss recognized during the quarter ended December 23, 2007, representing the change in fair value of $7.2 million on the hedge of the Swiss franc related to the acquisition of the Spin Clean Division. These net foreign exchange gains were offset by foreign exchange losses of approximately $8.6 million during the three months ending March 30, 2008 and $13.6 million during the nine months ending March 30, 2008. These foreign exchange losses were primarily due to our foreign currency denominated liabilities with non-U.S. dollar functional subsidiaries where the U.S. dollar weakened against certain currencies, primarily the Euro and Taiwan dollar resulting in the foreign exchange loss. A description of our exposure to foreign currency exchange rates can be found in the Risk Factors section of this Quarterly Report on Form 10-Q under the heading â€śOur Future Success Depends on International Sales and Management of Global Operations.â€ť
The legal judgment of $15.8 million during the nine months ended March 25, 2007 was obtained in a lawsuit filed by us alleging breach of purchase order contracts by one of our customers. The Supreme Court of California denied review of lower and appellate court judgments in favor of Lam Research during the quarter ended September 24, 2006.
Thank you, operator. Good afternoon, and welcome to Lam Research Corporation's quarterly conference call. Here today are Steve Newberry, President and Chief Executive Officer, and Martin Anstice, Chief Financial Officer. Today we will discuss the financial results for the quarter ended March 30, 2008, and share our business outlook for the June 2008 quarter. A press release detailing our financial results for the March 2008 quarter was distributed by BusinessWire at approximately 2:00 O' clock this afternoon and is available on our Web site at www.LamResearch.com.
Today's call contains forward-looking statements, including those related to revenue, shipment, margin and yearly forecasts, customer demand and industry conditions, as well as statements that express the company's expectations, beliefs, plans, and forecasts. There are important factors that could cause our actual results to differ materially from those discussed in these forward-looking statements. Additional information concerning factors that could cause results to differ can be found on our annual report form 10-K for the year ended June 24, 2007 and as filed with the SEC. This call is scheduled to last until 3:00 p.m. and we ask that you please limit questions to one per firm.
With that, I'll turn the call over to Martin for a review of the March quarter results.
Thank you, Carol. This afternoon, we have a lot to discuss as we are giving more comprehensive financial disclosure of the company. It's been a difficult time for all of us working with only limited, preliminary statements. I would like to thank you all for your patience.
As we review the financial statements today, we have a significant number of unusual items including the completion of the voluntary stock options review and the SEZ group acquisition. We have presented what we consider the key headlines in our earnings release; I will supplement that with additional comment shortly.
Before we begin, I wanted to communicate our intensions related to financial statement disclosure for the SEZ business. We are planning to aggregate the SEZ group now known as the Spin Clean Division into the existing Lam financial and accordingly we will not be routinely separating out their numbers.
Our presentation of the March 2008 quarter includes full consolidation of the SEZ group, although they reflect that they were slightly less than 2% minority interest. Because we provided guidance for the March quarter without this Spin Clean Division and the actual results we reported today have consolidated is performance since March 11, 2008 and include certain one-time and non-ongoing items, we will be more extensive in our commentary today.
Highlights of reported ongoing earnings for the March 2008 quarter include, revenues slightly above our mid-range guidance at $614 million or $612 million excluding Spin Clean Division.
Consolidated ongoing gross margin of 47.8% of revenues marginally stronger than expected but down sequentially due to challenging customer and product mix or 47.9% excluding the Spin Clean Division.
Consolidated ongoing operating income performance of 23.6% of revenues or 24.5% excluding the Spin Clean Division. Gross cash and short term investments including restricted cash in excess of $1 billion. Shipments momentum in the upcoming quarter was positive representing approximately 6% growth sequentially, a little stronger than our earlier expectations.
Consistent with prior quarters our applications and segment shipments disclosure is limited to the Etch business, accordingly 300 millimeter applications represented approximately 93% of the total shipment, and applications at less than or equal to the 90 nanometer technology node represented 92%.
Memory segment customers in the quarter represented about 76% of total, with the NAND components accounting for approximately 51% of total memory. Logic/other was 8% and foundry was 16% of the total.
As just noted, revenue was slightly stronger than the mid-points of our guidance range, facilitated in part by strong same quarter shipments to revenue churns in Etch system of more than 50%. Our customers are working with us to qualify and utilize our equipment as fast as ever.
For more complete details on the geographic breakdown of shipments and revenues, please see today's press release and website for a reconciliation of shipments, revenues, deferred revenues and cash. Generally consistent with our guidance our March quarter gross margin of 47.8%, decreased 2.6% sequentially as a result of unfavorable customer mix.
As discussed in January the concentration around the large memory customers was significant.
Product mix also placed pressure on our gross margins, notably in the Etch business. This was the first quarter that our 4X Series products represented the majority of our system revenue.
These products are the foundation of our recent market share expansion. They provide the basis for our expectations going forward and so we are really pleased with the revenue momentum.
As we have articulated in the most recent couple of quarters, we have continued to invest in building customer trust by supporting where appropriate, the current economic needs of our customers. Our reported profitability level reflects those pricing decisions and also the relative immaturity of the same products as far as we've implemented the targeted cost reduction.
Ongoing operating expenses for the company were $148.9 million in the March quarter, which includes $5.6 million incurred by the Spin Clean Division. In view of that the pre-acquisition operating expense levels is exactly as we projected.
As you will remember, one of the primary drivers for a sequential operating expense increase in the March quarter is the seasonal impact of high payroll packages. It is also the quarter where LAM processes its annual merit pay increases.
Normally, we would have approved the annual all employee equity grant in the quarter. Also, the date of the stock options review; that was postponed and is now planned for the June 2008 quarter.
Ongoing operating income was a healthy 23.6% of revenues or 24.5% on a pre-acquisition basis. Again in line with the guidance we provided in January.
Before moving to the balance sheet, our non-ongoing P&L items are as follows; as reported in our recently filled financial statements, the company accrued 50.2 million of future cash confrontation charges associated with anticipated employee Internal Revenue Code 409A tax liabilities on certain gains from so called misdated stock options. This expense is the result of determination by the company in completing its independent stock option review.
As shown on the pages of the P&L, $6.4 million of these compensation charges is classified in cost of goods sold, the remainder in operating expense. We incurred an additional $6 million in expense associated with the stock option review in the March quarter bringing the total cost in professional fees and other costs to $16 million. The costs are reported as general and administrative. Currently we only anticipate nominal costs going forward.
We incurred a one-time $2.1 million charge related to the write-off of in-process R&D following our acquisition of the SEZ group. This reflects the present value estimates of prior R&D investments made with no standalone expectation of future revenue and is reported in operating expenses.
Included in other income we realized a non-operating gain of $49 million, related to our currency hedging and Swiss franc strengthening associated with the purchase price of the SEZ group.
Finally the income tax effect related to the aggregates non-ongoing items is a benefit of $2.9 million. The financial consolidation of the SEZ group into LAM Research in essence involves two significant process steps.
First, the conversion from international accounting standards to US GAAP, including alignment with Liamâ€™s corporate accounting policy and secondly, the completion of the purchase price accounting to determine the fair value of existing tangible and intangible assets, the new fair value assigned to separately identifiable intangible assets as a result of our acquisition, and finally the consequential goodwill.
Both of these processes and their effects are ongoing. The transition from international standard for US GAAP per se was largely insignificant.
Although only a short time has passed since the acquisition; our integration activities are becoming more meaningful. Since the deal closed we've implemented actions promoting a single phase for the customer by integrating a third organization into our existing global account structure.
In addition, we have developed a roadmap for business process streamlining, including in the area of customer terms and conditions. In that regards specifically, it became clear in recent weeks that it is appropriate to standardize the Spin Clean Division business under our preexisting revenue on acceptance model, because you had GAAP purchase price accounting rules precluding us from creating and opening balance sheet position for revenues, previously reported on the shipment base revenue model of the SEZ group this decision to adopt an acceptance model has the effect of deferring revenues and cost of sales for an estimated one to three months period from the date of shipments to the process acceptance timeline.
During this initial period of deferring more than as recognized, we continue to record all operating expense as a period expense consistent with US GAAP. As a result of this accounting policy change and the very limited 19-day windows since we closed the acquisition the Spin Clean Division shows an operating loss that in our view significantly exaggerate negatively the economic reality of the Spin Clean Division in the quarter.
We would expect this condition to repeat in the June quarter and largely be normalized by the September quarter as customer acceptances are anticipated to catch up, so to speak with the level of shipments.
Finally, the allocations of purchase price and equity consideration transaction costs and assumed liability are preliminary. But the March quarter ending balance sheet allocation includes $65 million of intangible assets and $204 million of goodwill.
Our total consolidated growth cash balance including restricted cash is slightly more than $1 billion at the end of March. This represents an approximate $100 million increase in our gross cash balance after the net tax used to purchase the SEZ group and as planned we reposition our $250 offshore debt to the US.
The consolidated deferred revenue balance was $270 million including $29 million for the Spin Clean Division at the end of March. In addition there was approximately $43 million of anticipated future revenue value of our previously made shipments to Japanese customers.
In the quarter there was no stock repurchase activity by the company and as a reminder we currently have no Board authorized repurchase program insight.
Consolidated capital expenditures were $19 million, depreciation and amortization was $13 million. As a result of the voluntary stock option review, LAM suspended its employee equity plans and so we received no cash from the exercise of those plans during the March quarter.
Headcounts were more or less constant and slightly more than 3000 employees at the end of March for LAM. The company added approximately 900 employees with the acquisition of the SEZ group.
Now, I'd like to provide a few words on the tax rate. Our US GAAP income tax rate for the March 2008 quarter was 23.8%, in large part this reduction from the level of 28.1% in the two quarters ended December 2007, is attributed to the tax reduction for the previously announced 409, A related employee compensation liability.
As Steve will capture in our guidance for the June quarter, the company assumes a 28% tax rate for the 2008 fiscal year, which requires us to assume a 34% rate for the June 2008 quarter. Most of the rates volatility quarter-to-quarter is a function of the timing of the non-ongoing items. Most of the fiscal year rate differentials to our previously announced target of 25% long-term effective tax rate is a consequence of this fiscal year being the most disadvantage tax holiday year in our last five. Further, the absence of the RD tax credit beyond December 2007 is a loss of one percentage points in the fiscal year.
In fiscal year 2009, and therefore the second half of calendar 2008, we would anticipate the rates fall on or below the 25% level again, due to the redemption of improved tax holiday benefits, which apply through fiscal 2013. Excluding the Spin Clean Division, operating assets performance remain strong. Accounts receivables collection performance had a DSO of 71 days. Inventory performance was 5.4 turns.
As a status comment on the SEZ group acquisition, we have at this point reached the 98% ownership threshold to qualify us for the more simplified administrative process to acquire the remaining shares of SEZ that we do not currently own. We are targeting to realize our goal of 100% ownership within the calendar year.
Finally, to recap the important headlines. We are pleased that through a period of significant adjustments in the industry we delivered ongoing operating performance that match or slightly exceeded our previously announced guidance in the March 2008 quarter.
We consolidated 19 days of SEZ Group performance into the financials and during large parts through our decision providing acceptance-based revenue recognition model, result was slightly diluted to earnings.
As previously highlighted, we have significant non-ongoing items this quarter including our voluntary stock options review $56 million pre-tax, and a gain related currency of $49 million as part of the SEZ acquisition. Our tax rate is generally in line with our expectations, although more volatile than normal mainly due to the non-ongoing items or discreet events.
And finally, our cash momentum is strong. We closed the quarter with $1 billion in gross cash balances. Now to Steve's comments.
Thank you Martin and good afternoon everyone. LAM produced a successful quarter in a challenging environment with our March shipments revenues, gross margins and operating income all meeting or exceeding our previously stated expectations.
In addition to these solid financial results, we completed our acquisition of the SEZ Group, a very important milestone in our strategy to expand in the market adjacent to etch.
The independent committee of the Broad of Directors completed its review of our historical stock auction practices for accounting purposes in the quarter, and now our 10-K and 10-Qs for past period are now current. We look forward to resuming our normal levels of disclosure transparency.
Since our last conference call when we shared our outlook, the macro environment has deteriorated significantly. We enjoyed a strong shipment environment in the March quarter, but increasing uncertainty in the consumer electronics environment had negative implications for previously planned capacity additions by semi manufactures over the next few quarters.
Our previous commentary around wafer fib equipment spending hasnâ€™t focused on the supply, demand, and balances in memory and the results of negative impacts to memory manufactures profitability.
Increasingly, the economy must be factored into our view as well, and as a result of increased uncertainty around the demand side of the equation, we now believe that memory units, supply and demand and balances may take longer to resolve than we previously thought.
We think the impact of these conditions will be felt through the next two quarters with supply and demand for memory likely reaching equilibrium sometime in the fourth quarter of 2008. The level and timing of any resumption in increased capacity additions for memory is a function of improved profitability, cash flows, and the impact of the contraction in the credit markets that could affect access to capital.
Foundries for the most part continue to run at a very high utilization rates delaying as long as possible what looked to be required investments going forward for additional capacity. While foundries strive to improve profitability by keeping utilization rates high, foundry investment in leading edge technology continues, but at a slower adoption rate than previously expected. Foundries are shipping wafers at the 65 nanometer node, but the adoption rates are slower than the rates achieved for the 90 nanometer node. Additional factors impacting investments in added capacity are the short delivery and installation lead times available for equipment and the current strategy by foundries to add small amounts of incremental capacity, while waiting for demand signals from their customers.
As a result of the collective factors of memory unit supply and demand and balances, and customer profitability issues, and the macro economic issues potentially impacting consumer spending. Our overall view of the semiconductor equipment industry is that CapEx for 2008 will now be down around 20% to 25% relative to the spending in 2007.
4X specifically, we believe the reduction in equipment spending maybe down 20% to the 27% on a shipment stand basis relative to 2007. Our analysis suggests that even a down 25% scenario requires a strong acceleration of shipments in the last three to four months of the year.
With the current view of customer spending for equipment, I'd like to discuss how LAM is managing through this challenging near term environment. Our longer term thesis for underlying IC unit demand growth and the related capital spending requirements remains unchanged. And our strategy to target that opportunity through continued market share growth in etch and expansion into adjacent markets remains the key focus in the company.
And, we have stated on several occasions in the past few months, we are committed to investing in the long-term profitable growth of the company throughout the cycle and we plan to maintain spending to meet our long-term strategic goals while still generating acceptable operating income performance.
Despite the near-term decline in wafer fib equipment spending, we continue to perform well in etch, winning and defending applications at the leading etch. We are encouraged by customer decisions and we believe to validate our expectations to gain an additional couple points of market share in the transition from 6X to 5X to 4X technology nodes.
Our analysis suggest that most of the 4X tool selections decisions have been made for NAND Flash and we expect that NAND production wise going forward will be for the 4X node throughout 2008 and the first half of 2009. DRAM is introduction on 7X and 6X technology and decisions for tool selections at 5X are ongoing throughout the year. Microprocessor is complete for 4X decisions and advanced logic foundry decisions for 4X are ongoing throughout the year. We further advanced our adjacent market strategy.
We completed the acquisition of the SEZ group on March 11 of this year. This acquisition is the key achievement for our company and we have turned immediately to the task of assuring a successful integration.
First and foremost since the deal date, our addition discovery and strong collaboration have reinforced our belief in the value of our strategy in acquisition decision. A combination of the companies creates a broad set of highly competitive capabilities of the opportunity to leverage the leading installed base of single wafer clean and the established customer relationships of both companies into an accelerated penetration of the rapidly emerging transition in single-wafer clean, particularly in the front end of the line.
Integration activities are well underway and are progressing to plan. We are accelerating the collaboration activities between the companies particularly in the areas of technology exchange and we have reorganized the field organization around our existing global customer accounts to achieve a strong single phase to the customer capability.
Comprehensive discussions with the top semi-companies are occurring and I'm expecting accelerating, joint development projects and activity for both the new Spin Clean Divisions, Ad Vinci Prime and Isanti product line as well as Lames C3 linear cleaner.
In adjacent to our strategic commentary today, with the acquisition closed and integration well underway, we're aggressively focused on applying LAms strong operating discipline to the SEZ business. Opportunities for cost and operating asset improvements have been identified, as well as other synergies. We will provide addition commentary on this topic over the next several quarters.
We remain committed to both spin and linear clean technologies and our near-term technology focus is to leverage the advanced process technology and integration knowledge existing LAMs etch and clean business with the engineering and productivity expertise existing in a Spin Clean Division to strengthen our overall differentiation across the product portfolio. We expect this to result in a powerful capability, which when able strong share gains in the total wafer clean market going forward.
Turning to our guidance for the June quarter, this guidance reflects full integration of the new Spin Clean Division into the LAM research corporate P&L on a revenue on acceptance basis. We expect shipments to decrease to 490 million from 530 million down approximately 20 to 25% form the prior quarter. Revenues are expected to be in the range of $535 million to $565 million, down 7.5% to 12.5% from the prior quarter.
Gross margins are forecast at 43% plus or minus one percentage point. Operating margin guidance is in the range of 12.5% plus or minus one percentage point. GAAP EPS is expected to be in the range of $0.32 to $0.42 per share for the quarter.
Wrapping up, the current customer spending environment creates challenges for us in the near term. However, our commitment to a long-term strategy for growing LAM at a significantly higher rate and the wafer fab equipment industry is still supported by a favorable IC units demand outlook over the next several years.
Our strong balance sheet and profitability allows us to continue our investment in positioning products in multiple wafer fab equipment segments for the next generation of yield enabling solutions providing a strong spring board for the company's next leg of growth.