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Lam Research’s End of Quarter ASR Raises Capital Allocation Concerns
Semiconductor equipment maker rushed to buy back $450 million in shares despite knowing it would miss the quarter.
April 27, 2022
With two weeks to go in the first quarter, Lam Research (LRCX), a semiconductor equipment maker, looks as if it may have made a last ditch effort to meet consensus EPS estimates. If not, investors are right to question management's judgment in the matter. One week after missing top line and EPS forecasts, a 10-Q footnote reveals Lam executed an accelerated share repurchase (ASR) with just 14-days left in the quarter.
Without the ASR— which immediately reduced the share count by 758,000— Lam’s $0.11 cent EPS miss would have been worse. If we add back the shares repurchased as part of the ASR, Lam would have reported adjusted EPS of $7.36, missing consensus estimates by $0.15.
The ASR cost Lam the equivalent of 43% of the quarter’s net income. Investors are right to be disappointed if management spent $450 million—75% of the $600 million was completed before the quarter ended— in an effort to make an EPS target. Management knew or should have known the top line miss and disappointing guidance to be issued would almost certainly result in pressure on the share price.
Yet Lam’s management executed the ASR in the waning days of the quarter anyway.
It’s unlikely, in our view, the aim of the ASR was to make the EPS miss smaller than it otherwise would have been. However, the alternative— committing the equivalent of nearly half the quarter’s net income to an ASR just ahead of issuing disappointing guidance— is likely more concerning to investors.
The behavior seems uncharacteristic of this management team. DuDil has contacted Lam Research and requested more detail regarding management’s thinking regarding the timing of the ASR. We’ll update clients as new information becomes available.
There’s more to come though.
The February ASR was executed via two financial institutions. One of them settled its portion of the ASR in April— delivering an additional 216k shares after the first quarter ended— meaning analysts can already begin adjusting their second quarter share count estimate. Lam says final settlement of the ASR will occur no later than June 16, 2022.
Related: AMAT, ASML, KLAC, MKSI, PLAB
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