What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-26 compared with 2021-04-28 · 114 added, 195 removed, 128 unchanged (71% of the section changed)

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Forward-looking statements include but are not limited to statements that relate to:

trends and opportunities in the global economic environment and the semiconductor industry;

trends and opportunities in the global economic environment;

trends and opportunities in the semiconductor industry, including in the end markets and applications for semiconductors, and in device complexity;

growth or decline in the industry and the market for, and spending on, wafer fabrication equipment;

the anticipated levels of, and rates of change in, margins, market share, served addressable market, capital expenditures, research and development expenditures, international sales, revenue (actual and/or deferred), operating expenses and earnings generally;

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volatility in our quarterly results;

the makeup of our customer base;

customer and end user requirements and our ability to satisfy those requirements;

customer capital spending and their demand for our products and services, and the reliability of indicators of change in customer spending and demand;

the effect of variability in our customers’ business plans or demand for our equipment and services;

changes in demand for our products and in our market share resulting from, among other things, any changes in our customers’ proportion of capital expenditure (with respect to certain technology inflections);

hedging transactions;

debt or financing arrangements;

customer spending and demand for our products and services, and the reliability of indicators of change in customer spending and demand;

the effect of variability in our customers’ business plans or demand for our products and services;

our competition, and our ability to defend our market share and to gain new market share;

our ability to obtain and qualify alternative sources of supply;

changes in state, federal and international tax laws, our estimated annual tax rate and the factors that affect our tax rates;

anticipated growth or decline in the industry and the total market for wafer fabrication equipment, our growth relative thereto and the resulting impact on us from such growth or decline;

the success of joint development and collaboration relationships with customers, suppliers, or others;

outsourced activities;

the role of component suppliers in our business;

our supply chain and the role of suppliers in our business, including the impacts of supply chain constraints and material costs;

our leadership and competency, and our ability to facilitate innovation;

our ability to continue to, including the underlying factors that, create sustainable differentiation;

our research and development programs;

our ability to create sustainable differentiation;

technology inflections in the industry and our ability to identify those inflections and to invest in research and development programs to meet them;

our ability to deliver multi-product solutions;

the resources invested to comply with evolving standards and the impact of such efforts;

changes in state, federal and international tax laws, our estimated annual tax rate and the factors that affect our tax rates;

legal and regulatory compliance;

the estimates we make, and the accruals we record, in order to implement our critical accounting policies (including but not limited to the adequacy of prior tax payments, future tax benefits or liabilities, and the adequacy of our accruals relating to them);

hedging transactions;

debt or financing arrangements;

our investment portfolio;

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the probability of making payments under our guarantees;

the impact of the COVID-19 pandemic, and the sufficiency of our financial resources or liquidity to support future business activities (including but not limited to operations, investments, debt service requirements, dividends, and capital expenditures).

Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value, and effect, including without limitation those discussed below under the heading “Risk Factors” within Part II Item 1A and elsewhere in this report and other documents we file from time to time with the Securities and Exchange Commission (“SEC”), such as our annual report on Form 10-K for the year ended June 28, 2020 (our “2020 Form 10-K”), our quarterly reports on Form 10-Q for the fiscal quarters ended September 27, 2020 and December 27, 2020, and our current reports on Form 8-K.

the impact of the COVID-19 pandemic;

and the sufficiency of our financial resources or liquidity to support future business activities (including but not limited to operations, investments, debt service requirements, dividends, and capital expenditures).

Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value, and effect, including without limitation those discussed below under the heading “Risk Factors” within Part II Item 1A and elsewhere in this report and other documents we file from time to time with the Securities and Exchange Commission (“SEC”), such as our annual report on Form 10-K for the year ended June 27, 2021 (our “2021 Form 10-K”), and our current reports on Form 8-K.

Such risks, uncertainties, and changes in condition, significance, value, and effect could cause our actual results to differ materially from those expressed in this report and in ways not readily foreseeable.

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We do not undertake any obligation to release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances that occur after the date of this report or to reflect the occurrence or effect of anticipated or unanticipated events.

In November 2020, the U.S.

Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No.

33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, which modernizes and simplifies certain disclosure requirements of Regulation S-K.

The final rule became effective on February 10, 2021 and must be applied in a registrant’s first fiscal year ending on or after August 9, 2021.

Under the amendments to Item 303 of Regulation S-K contained in SEC Release No.

33-10890, we have the option, in discussing any material changes in our results of operations for the most recently completed quarter, of using as the basis for comparison either the corresponding quarter for the preceding fiscal year or, in the alternative, the immediately preceding sequential quarter.

We have elected the latter alternative, as management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison.

Additionally, in the first filing after the change in the basis of comparison, we are required to disclose a comparison of the results for the current quarter and the corresponding quarter of the preceding fiscal year.

Accordingly, we have compared the results for the three months

ended September 26, 2021 with the results for the three months ended June 27, 2021, and September 27, 2020, where applicable, throughout this Management's Discussion and Analysis.

Documents To Review In Connection With Management’s Discussion and Analysis Of Financial Condition and Results Of Operations

For a full understanding of our financial position and results of operations for the three and nine months ended March 28, 2021, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations below, you should also read the Condensed Consolidated Financial Statements and notes presented in this Form 10-Q and the financial statements and notes in our 2020 Form 10-K.

For a full understanding of our financial position and results of operations for the three months ended September 26, 2021, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations below, you should also read the Condensed Consolidated Financial Statements and notes presented in this Form 10-Q and the financial statements and notes in our 2021 Form 10-K.

EXECUTIVE SUMMARY

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We have built a strong global presence with core competencies in areas like nanoscale applications enablement, chemistry, plasma and fluidics, advanced systems engineering and a broad range of operational disciplines.

Our products and services are designed to help our customers build smaller, faster, and better performing devices that are used in a variety of electronic products, including mobile phones, personal computers, servers, wearables, automotive vehicles, and data storage devices.

Our products and services are designed to help our customers build smaller and better performing devices that are used in a variety of electronic products, including mobile phones, personal computers, servers, wearables, automotive vehicles, and data storage devices.

Our customer base includes leading semiconductor memory, foundry, and integrated device manufacturers that make products such as non-volatile memory, dynamic random-access memory, and logic devices.

We aim to increase our strategic relevance with our customers by contributing more to their continued success.

Their continued success is part of our commitment to driving semiconductor breakthroughs that define the next generation.

Our core technical competency is integrating hardware, process, materials, software, and process control, enabling results on the wafer.

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Along with meeting technical requirements, wafer processing equipment must deliver high productivity and be cost-effective.

Demand from the Cloud, Internet of Things, and other markets is driving the need for increasingly powerful and cost-efficient semiconductors.

At the same time, there are growing technical challenges with traditional scaling.

These trends are driving significant inflections in semiconductor manufacturing, such as the increasing importance of vertical 3D scaling strategies as well as multiple patterning to enable shrinks.

Demand from cloud computing, the Internet of Things, and other markets is driving the need for increasingly powerful and cost-efficient semiconductors.

At the same time, there are growing technical challenges with traditional two-dimensional scaling.

These trends are driving significant inflections in semiconductor manufacturing, such as the increasing importance of vertical scaling strategies like three-dimensional architecture as well as multiple patterning to enable shrinks.

We believe we are in a strong position with our leadership and competency in deposition, etch, and clean to facilitate some of the most significant innovations in semiconductor device manufacturing.

We have a broad portfolio of products that provide complementary processing steps used throughout semiconductor manufacturing.

Our Customer Support Business Group focuses attention on delivering solutions that meet our customers’ technical requirements and productivity needs during the equipment lifecycle .

Our Customer Support Business Group provides products and services to maximize installed equipment performance, predictability, and operational efficiency.

Several factors create opportunity for sustainable differentiation for us:

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(ii) our ability to effectively leverage cycles of learning from our broad installed base;

(iii) our collaborative focus with ecosystem partners;

and (iv) our focus on delivering our multi-product solutions with a goal to enhance the value of Lam’s solutions to our customers.

In calendar year 2020, there was an increase in wafer fabrication equipment spending by semiconductor manufacturers, driven by the robust secular demand for semiconductors in a number of markets including high-performance computing, personal computers, and 5G networks.

During the March 2021 quarter, customer demand was strong, and we continued to increase our production output levels as we operated under COVID-19-related safety protocols.

While we are currently seeing improvements in both our own operations and those of our suppliers, we have experienced higher costs of goods sold related to freight and logistics.

(iii) our collaborative focus with semi-ecosystem partners;

and (iv) our ability to identify and invest in the breadth of our product portfolio to meet technology inflections;

and (v) our focus on delivering our multi-product solutions with a goal to enhance the value of Lam’s solutions to our customers.

In calendar year 2021, there continues to be higher investment in wafer fabrication equipment spending driven by increasing device manufacturing complexity and the robust secular demand for semiconductors in a number of markets including artificial intelligence, 5G networks, high-performance computing, an d Internet of Things.

During the quarter-ended September 26, 2021, customer demand remained strong, and we continued to increase our production output levels with capacity additions and improvements in our operations.

However, we have experienced, and expect continued near-term, supply chain constraints and increased materials, freight and logistics costs.

Risks and uncertainties related to the COVID-19 pandemic remain, which may continue to negatively impact our revenue and gross margin.

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Three Months Ended

2021 December 27,

2020 March 29,

September 26,

2021 June 27,

2021 September 27,

(in thousands, except per share data and percentages)

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Diluted net income per share $ 8.27 $ 7.98 $ 5.59

In the March 2021 quarter, revenue increased 11% compared to the December 2020 quarter, with increases in both systems and customer support-related revenue, reflective of a strong wafer fabrication equipment environment.

The decrease in gross margin as a percentage of revenue in the March 2021 quarter compared to the December 2020 quarter was primarily driven by higher levels of manufacturing-related spending and higher employee-related costs, partially offset by favorable changes in customer and product mix.

The decrease in operating expenses in the March 2021 quarter compared to the December 2020 quarter was mainly driven by decreases in outside services and deferred compensation plan-related costs, partially offset by increases in employee-related costs from seasonality and increased headcount.

Our cash and cash equivalents, investments, and restricted cash and investments balances decreased to $6.0 billion at the end of the March 2021 quarter compared to $6.3 billion at the end of the December 2020 quarter.

In the September 2021 quarter, revenue increased 4% compared to the June 2021 quarter, driven primarily by an increase in systems revenue, reflective of a strong wafer fabrication equipment environment.

The decrease in gross margin as a percentage of revenue in the September 2021 quarter compared to the June 2021 quarter was primarily driven by higher levels of manufacturing-related spending as well as unfavorable changes in customer and product mix, partially offset by decreases in deferred compensation plan-related costs.

T he increase in operating expenses in the September 2021 quarter compared to the June 2021 quarter was mainly driv en by increases in spending for supplies and outside services, partially offset by decreases in deferred compensation plan-related costs.

Our cash and cash equivalents, investments, and restricted cash and investments balances decreased to $4.9 billion at the end of the September 2021 quarter compared to $6.0 billion at the end of the June 2021 quarter.

This decrease was primarily the result of $1.2 billion of share repurchases, including net share settlement on employee stock-based compensation;

$185.4 million of dividends paid to stockholders;

and $89.6 million of capital expenditures, partially offset by $1.2 billion of cash generated from operating activities.

Employee headcount as of March 28, 2021 was approximately 13,100.

and $136.4 million of capital expenditures, partially offset by $457.5 million of cash generated from operating activities.

Employee headcount as of September 26, 2021 was approximately 15,400.

RESULTS OF OPERATIONS

Three Months Ended Nine Months Ended

2021 December 27,

2020 March 29,

2020 March 28,

2021 March 29,

Three Months Ended

September 26,

2021 June 27,

2021 September 27,

Revenue (in millions) $ 4,304 $ 4,145 $ 3,177

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Europe 2 % 3 % 2 %

Revenue for the March 2021 quarter increased 11% from the December 2020 quarter, reflecting increased customer spending on capital equipment and services.

Revenue for the September 2021 quarter increased 4% from the June 2021 quarter, reflecting increased customer spending on capital equipment.

The following table presents our revenue disaggregated between system and customer support-related revenue:

Three Months Ended Nine Months Ended

2021 December 27,

2020 March 29,

2020 March 28,

2021 March 29,

Three Months Ended

September 26,

2021 June 27,

2021 September 27,

(In thousands)

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The following table presents the percentages of leading- and non-leading-edge equipment and upgrade revenue to each of the primary markets we serve:

Three Months Ended Nine Months Ended

2021 December 27,

2020 March 29,

2020 March 28,

2021 March 29,

Three Months Ended

September 26,

2021 June 27,

2021 September 27,

Memory 64 % 59 % 58 %

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Logic/integrated device manufacturing 11 % 6 % 6 %

Three Months Ended Nine Months Ended

2021 December 27,

2020 March 29,

2020 March 28,

2021 March 29,

Three Months Ended

September 26,

2021 June 27,

2021 September 27,

(in thousands, except percentages)

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Percent of revenue 45.9 % 46.2 % 47.4 %

Gross margin as a percentage of revenue was lower in the March 2021 quarter compared to the December 2020 quarter primarily as a result of higher manufacturing-related spending and higher employee-related costs, partially offset by favorable changes in customer and product mix.

The decrease in gross margin as a percentage of revenue in the March 2021 quarter compared to the same period in the prior year was primarily driven by increased manufacturing-related spending as a result of COVID-19 disruptions, deferred compensation plan-related costs and employee-related expenses, partially offset by favorable changes in customer and product mix.

The increase in gross margin as a percentage of revenue in the nine months ended March 28, 2021 compared to the same period in the prior year was primarily driven by favorable changes in customer and product mix, partially offset by increases in manufacturing-related spending as a result of COVID-19 disruptions, deferred compensation plan-related costs and employee-related expenses.

Gross margin as a percentage of revenue was lower in the September 2021 quarter compared to the June 2021 quarter primarily as a result of higher levels of manufacturing-related spending as well as unfavorable changes in customer and product mix, partially offset by decreases in deferred compensation plan-related costs.

The decrease in gross margin as a percentage of revenue in the September 2021 quarter compared to the same period in the prior year was primarily driven by increased manufacturing-related spending as a result of COVID-19 disrup tions and by unfavorable changes in customer and product mix.

Research and Development

Three Months Ended Nine Months Ended

2021 December 27,

2020 March 29,

2020 March 28,

2021 March 29,

Three Months Ended

September 26,

2021 June 27,

2021 September 27,

(in thousands, except percentages)

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Percent of revenue 8.9 % 9.2 % 11.2 %

We continued to make significant R&D investments in the March 2021 quarter focused on leading-edge deposition, etch, clean and other semiconductor manufacturing processes.

The increase in R&D expense in the March 2021 quarter compared to the December 2020 quarter was primarily driven by an increase of $22 million in employee-related expenses from increased headcount and seasonality, partially offset by decreases of $11 million in outside services and $7 million in deferred compensation plan-related costs.

The increase in R&D expense in the March 2021 quarter compared to the same period in the prior year was primarily driven by increases of $39 million in employee-related expenses as a result of increased headcount, $19 million in deferred compensation plan-related costs and $9 million in outside services.

The increase in R&D expense in the nine months ended March 28, 2021 compared to the same period in the prior year was primarily driven by increases of $105 million in employee-related expenses as a result of increased headcount, $39 million in outside services, $30 million in deferred compensation plan-related costs, and $27 million in spending for supplies.

We co ntinued to make significant R&D investments in the September 2021 quarter focused on leading-edge deposition, etch, clean and other semiconductor manufacturing processes.

The increase in R&D expense in the September 2021 quarter compared to the June 2021 quarter was primarily driven by an increase in spending for supplies, mostly offset by decreases in employee-related expenses and deferred compensation plan-related costs.

The increase in R&D expense in the September 2021 quarter compared to the same period in the prior year was primarily driven by an increase of $28 million in employee-related expenses as a result of increased headcount, slightly offset by decreases in deferred compensation plan-related costs.

Selling, General, and Administrative

Three Months Ended Nine Months Ended

2021 December 27,

2020 March 29,

2020 March 28,

2021 March 29,

Three Months Ended

September 26,

2021 June 27,

2021 September 27,

(in thousands, except percentages)

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Percent of revenue 5.2 % 5.2 % 6.0 %

SG&A expense during the March 2021 quarter decreased in comparison to the December 2020 quarter, primarily due to decreases of $5 million in deferred compensation plan-related costs and $4 million in outside services.

SG&A expense during the March 2021 quarter increased compared to the same period in the prior year, primarily driven by increases of $29 million in employee-related expenses from increased headcount and $13 million in deferred compensation plan-related costs.

The increase in SG&A expense in the nine months ended March 28, 2021 compared to the same period in the prior year was primarily due to increases of $72 million in employee-related expenses from increased headcount, $24 million in outside services, and $20 million in deferred compensation plan-related costs.

SG&A expense during the September 2021 quarter increased in comparison to the June 2021 quarter, primarily driven by an increase in spending for outside services, partially offset by a decrease in deferred compensation plan-related costs.

SG&A expense during the September 2021 quarter increased compared to the same period in the prior year, primarily driven by an increase of $13 million in employee-related expenses from increased headcount and $19 million in spending for outside services.

Other Expense, Net

Other expense, net consisted of the following:

Three Months Ended Nine Months Ended

2021 December 27,

2020 March 29,

2020 March 28,

2021 March 29,

Three Months Ended

September 26,

2021 June 27,

2021 September 27,

(in thousands)

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Interest expense (45,056) (51,695) (52,115)

Gains (losses) on deferred compensation plan-related assets, net 7,520 24,207 (33,828) 44,654 (20,135)

Foreign exchange gains (losses), net 541 (3,763) 480 (4,597) (2,336)

Gains on deferred compensation plan-related assets, net 7,437 17,184 12,927

Foreign exchange losses, net (17) (2,365) (1,375)

Other, net 4,101 25,987 (5,188)

$ (28,857) $ (7,166) $ (38,792)

Interest income decreased in the March 2021 quarter compared to the December 2020 quarter as a result of a lower cash balance and lower yield.

The decrease in interest income in the March 2021 quarter and in the nine months ended March 28, 2021 compared to the same periods in the prior year was as a result of lower yield.

Interest expense remained relatively flat in the March 2021 quarter compared to the December 2020 quarter as there was no significant debt activity.

Interest expense increased in the March 2021 quarter and in the nine months ended March 28, 2021 compared to the same periods in the prior year due to the May 2020 issuance of the $2.0 billion senior notes, partially offset by the retirement of $500 million of senior notes in March 2020 and conversions of the 2041 Notes.

The gains and losses on deferred compensation plan-related assets in the March 2021, December 2020, and March 2020 quarters were driven by fluctuations in the fair market value of the underlying funds.

Interest income increased in the September 2021 quarter compared to the June 2021 quarter as a result of realized investment gains.

The decrease in interest income in the September 2021 quarter compared to the same period in the prior year was as a result of lower interest rates and lower cash balances.

Interest expense decreased in the September 2021 quarter compared to the June 2021 and September 2020 quarters due to the payoff of the 2021 Seni or Notes.

The gains on deferred compensation plan-related assets in the September 2021, June 2021, and September 2020 quarters were driven by fluctuation in the fair market value of the underlying funds.

Foreign exchange fluctuations were primarily due to currency movements against portions of our unhedged balance sheet exposures.

Other, net generated income during the March 2021 quarter compared to expenses during the December 2020 and March 2020 quarters in part due to gains from our private equity investments.

The gains in other, net for the September 2021 and June 2021 quarters compared to losses in the September 2020 quarter were primarily driven by improvements in the fair market value of private equity investments;

the June 2021 quarter included an individually significant gain on one such equity investment.

Income Tax Expense

Our provision for income taxes and effective tax rate for the periods indicated were as follows:

Three Months Ended Nine Months Ended

2021 December 27,

2020 March 29,

2020 March 28,

2021 March 29,

Three Months Ended

September 26,

2021 June 27,

2021 September 27,

(in thousands, except percentages)

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Effective tax rate 12.2 % 12.5 % 10.7 %

The decrease in the effective tax rate for the March 2021 quarter compared to the December 2020 quarter was primarily due to stock-based compensation excess tax benefits and the change in level and proportion of income in higher and lower tax jurisdictions.

The decrease in the effective tax rate for the three and nine months ended March 28, 2021 compared to the same periods in the prior year was primarily due to stock-based compensation excess tax benefits in the three months ended March 2021 and a cumulative income tax benefit reversal due to a court ruling in the nine months ended March 2020, respectively.

The effective tax rate for the September 2021 quarter compared to the June 2021 quarter remained consistent.

The increase in the effective tax rate for the September 2021 quarter compared to the same period in the prior year was primarily due to the change in level and proportion of income in higher and lower tax jurisdictions.

We transferred our international sales operations from Switzerland to Malaysia, effective from fiscal year 2022.

Through fiscal year 2036, we expect to operate under various tax incentives in Malaysia which provide exemptions on foreign income earned and are contingent upon meeting certain conditions.

International revenues account for a significant portion of our total revenues, such that a material portion of our pre-tax income is earned and taxed outside the United States.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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.

The preparation of financial statements in conformity with U.S.

generally accepted accounting principles (“GAAP”) 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 base our estimates and assumptions on historical experience and on various other assumptions we believe 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, which could have a material impact on our business, results of operations, and financial condition.

Our critical accounting estimates include:

• the recognition and valuation of revenue from arrangements with multiple performance obligations which impacts revenue;

• the valuation of inventory, which impacts gross margin;

• the valuation of warranty reserves, which impacts gross margin;

• the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions, which impact our provision for income tax expenses;

• the valuation and recoverability of long-lived assets, which impacts gross margin and operating expenses when we record asset impairments or accelerate their depreciation or amortization.

We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements regarding the critical accounting estimates indicated above.

Revenue Recognition :

We recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services by following a five-step process, (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when or as we satisfy a performance obligation, as further described below.

Identify the contract with a customer .

We generally consider documentation of terms with an approved purchase order as a customer contract, provided that collection is considered probable, which is assessed based on the creditworthiness of the customer as determined by credit checks, payment histories, and/or other circumstances.

Identify the performance obligations in the contract .

Performance obligations include sales of systems, spare parts, and services.

In addition, our customer contracts contain provisions for installation and training services which have been deemed immaterial in the context of the contract.

Determine the transaction price .

The transaction price for our contracts with customers consists of both fixed and variable consideration provided it is probable that a significant reversal of revenue will not occur when the uncertainty related to variable consideration is resolved.

Fixed consideration includes amounts to be contractually billed to the customer while variable consideration includes estimates for discounts and credits for future usage which are based on contractual terms outlined in volume purchase agreements and other factors known at the time.

We generally invoice customers at shipment and for professional services either as provided or upon meeting certain milestones.

Customer invoices are generally due within 30 to 90 days after issuance.

Our contracts with customers typically do not include significant financing components as the period between the transfer of performance obligations and timing of payment are generally within one year.

Allocate the transaction price to the performance obligations in the contract .

For contracts that contain multiple performance obligations, we allocate the transaction price to the performance obligations in the contract on a relative standalone selling price

Standalone selling prices are based on multiple factors including, but not limited to historical discounting trends for products and services and pricing practices in different geographies.

Recognize revenue when or as we satisfy a performance obligation .

Revenue for systems and spares are recognized at a point in time, which is generally upon shipment or delivery.

Revenue from services is recognized over time as services are completed or ratably over the contractual period of generally one year or less.

Inventory Valuation :

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.

Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost.

Estimates of market value include but are not limited to management’s forecasts related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, general semiconductor market conditions, and possible alternative uses.

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 goods sold in the period in which we make the revision.

We record a provision for estimated warranty expenses to cost of sales for each system when we recognize revenue.

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.

Income Taxes :

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards.

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 will not be able to realize all or part of our net deferred tax assets, an adjustment will 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 will be realized, then the previously provided valuation allowance will be reversed.

We recognize the benefit from a tax position only if it is more likely than not that the position will be sustained upon audit based solely on the technical merits of the tax position.

Our policy is to include interest and penalties related to uncertain tax positions as a component of income tax expense.

Long-lived Assets :

We review goodwill at least annually for impairment.

If certain events or indicators of impairment occur between annual impairment tests, we will perform an impairment test at that date.

In testing for a potential impairment of goodwill, we:

(1) allocate goodwill to the reporting units to which the acquired goodwill relates;

(2) estimate the fair value of our reporting units;

and (3) determine the carrying value (book value) of those reporting units.

Prior to this allocation of the assets to the reporting units, we assess long-lived assets for impairment.

Furthermore, if the estimated fair value of a reporting unit is less than the carrying value, we must estimate the fair value of all identifiable assets and liabilities of that reporting unit, in a manner similar to a purchase price allocation for an acquired business.

This can require independent valuations of certain internally generated and unrecognized intangible assets such as in-process R&D and developed technology.

Only after this process is completed can the amount of goodwill impairment, if any, be determined.

In our goodwill impairment process we first assess qualitative factors to determine whether it is necessary to perform a quantitative analysis.

We do not calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount.

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis.

We determine the fair value of our reporting units by using an income approach.

Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.

In estimating the fair value of a reporting unit, we make estimates and judgments about the future cash flows of our reporting units, including estimated growth rates and assumptions about the economic environment.

Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses, there is significant judgment involved in determining the cash flows attributable to a reporting unit.

In addition, we make certain judgments about allocating shared assets to the estimated balance sheets of our reporting units.

Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge.

As a result, several factors could result in an impairment of a material amount of our goodwill balance in future periods, including but not limited to:

(1) weakening of the global economy, weakness in the semiconductor equipment industry, or our failure to reach internal forecasts, which could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted cash flow value of our reporting units;

and (2) a decline in our Common Stock price and resulting market capitalization, to the extent we determine that the decline is sustained and indicates a reduction in the fair value of our reporting units below their carrying value.

Further, the value assigned to intangible assets, other than goodwill, is based on estimates and judgments regarding expectations such as the success and lifecycle of products and technology acquired.

If actual product acceptance differs significantly from the estimates, we may be required to record an impairment charge to write down the asset to its realizable value.

For other long-lived assets, we routinely consider whether indicators of impairment are present.

If such indicators are present, we determine whether the sum of the estimated undiscounted cash flows attributable to the assets is less than their carrying value.

If the sum is less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values.

Fair value is determined by discounted future cash flows, appraisals or other methods.

We recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value.

The fair value of the asset then becomes the asset’s new carrying value, which we depreciate over the remaining estimated useful life of the asset.

Assets to be disposed of are reported at the lower of the carrying amount or fair value.

In addition, for fully amortized intangible assets, we de-recognize the gross cost and accumulated amortization in the period we determine the intangible asset no longer enhances future cash flows.

Refer to our “Critical Accounting Policies and Estimates” included in Part II, Item 7 of our 2021 Form 10-K for a discussion of our critical accounting policies and estimates.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our Condensed Consolidated Financial Statements, see Note 2 - Recent Accounting Pronouncements, of our Condensed Consolidated Financial Statements, included in Part 1 of this Form 10-Q.

There are no new accounting pronouncements not yet adopted or effective that are expected to have a material impact on our Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Total gross cash, cash equivalents, investments, and restricted cash and investments balances were $6.0 billion at March 28, 2021 compared to $7.0 billion as of June 28, 2020.

This decrease was primarily driven by $2.3 billion of share repurchases, including net share settlement on employee stock-based compensation, $541.6 million in dividends paid, and $244.5 million of capital expenditures, partially offset by $2.2 billion of cash generated from operating activities.

Total gross cash, cash equivalents, investments, and restricted cash and investments balances were $4.9 billion at September 26, 2021 compared to $6.0 billion as of June 27, 2021.

This decrease was primarily driven by $1.2 billion of share repurchases, including net share settlement on employee stock-based compensation, $185.4 million in dividends paid, and $136.4 million of capital expenditures, partially offset by $457.5 million of cash generated from operating activities.

Cash Flow from Operating Activities

Net cash provided by operating activities of $2.2 billion during the nine months ended March 28, 2021, consisted of (in thousands):

Net cash provided by operating activities of $457.5 million during the three months ended September 26, 2021, consisted of (in thousands):

Net income $ 1,179,744

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Deferred income taxes (13,023)

Amortization of note discounts and issuance costs 4,251

Changes in operating asset and liability accounts (838,480)

Other (8,690)

Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash:

increases in accounts receivable of $710.0 million, inventory of $634.9 million, and prepaid expense and other assets of $41.4 million, along with a decrease in accrued expenses and other liabilities of $0.8 million.

The uses of cash are offset by the following sources of cash:

increases in trade accounts payable of $103.5 million and deferred profit of $274.5 million.

increases in accounts receivable of $370.7 million, inventory of $198.4 million, and prepaid expense and other assets of $55.3 million, along with decreases in accrued expenses and other liabilities of $180.9 million and deferred profit of $35.9 million.

The uses of cash are offset by the following source of cash:

increases in trade accounts payable of $2.7 million.

Cash Flow from Investing Activities

Net cash used for investing activities during the nine months ended March 28, 2021, was $615.8 million, primarily consisting of net purchases of available-for-sale securities of $335.4 million along with capital expenditures of $244.5 million.

Net cash provided by investing activities during the three months ended September 26, 2021, was $596.7 million, primarily consisting of net proceeds from sales of available-for-sale securities of $738.0 million, partially offset by capital expenditures of $136.4 million.

Cash Flow from Financing Activities

Net cash used for financing activities during the nine months ended March 28, 2021, was $2.8 billion, primarily consisting of $2.3 billion in treasury stock repurchases, including net share settlement on employee stock-based compensation, $541.6 million in dividends paid, and $40.0 million of cash paid for debt repayment, partially offset by $64.7 million combined proceeds from issuance of common stock and reissuance of treasury stock.

Net cash used for financing activities during the three months ended September 26, 2021, was $1.4 billion, primarily consisting of $1.2 billion in treasury stock repurchases, including net share settlement on employee stock-based compensation, $185.4 million in dividends paid, and $6.3 million of cash paid for debt repayment.

Given that the semiconductor industry is highly competitive and has historically experienced rapid changes in demand, we believe that maintaining sufficient liquidity reserves is important to support sustaining levels of investment in R&D and capital infrastructure.

Anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash, cash equivalents, and short-term investments as of March 28, 2021, are expected to be sufficient to support our anticipated levels of operations, investments, debt service requirements, capital expenditures, capital redistributions, and dividends through at least the next twelve months.

Anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash, cash equivalents, and short-term investments as of September 26, 2021, are expected to be sufficient to support our anticipated levels of operations, investments, debt service requirements, capital expenditures, capital redistributions, and dividends through at least the next twelve months.

However, uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets, have in the past, and could in the future, impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors.

Under certain circumstances, our 2041 Notes may be converted and settled in cash and shares of our Common Stock.

During the nine months ended March 28, 2021, approximately $31.2 million principal value of convertible 2041 Notes were converted and in the subsequent period through April 28, 2021, we received notices of conversion of an immaterial principal value of 2041 Notes, which will settle in the three months ending June 27, 2021.

During the three months ended March 28, 2021, we notified holders of the 2041 Notes of our intention to exercise the redemption option pursuant to Section 6.01 of the underlying indenture.

As such, the 2041 Notes outstanding on May 21, 2021 will be redeemed at a price equal to outstanding principal plus accrued and unpaid interest.

We expect to have sufficient levels of cash, cash equivalents, and short-term investments to fund the settlement of the 2041 Notes.

In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on demand for our products and services.

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We believe that, if necessary, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives.

However, the disruption in the capital markets caused by the COVID-19 pandemic could make any financing more challenging, and there can be no assurance that we will be able to obtain such financing on commercially reasonable terms or at all.

However, the ongoing COVID-19 pandemic has in the past caused disruption in the capital markets and were it to do the same in the future, that could make any financing more challenging, and there can be no assurance that we will be able to obtain such financing on commercially reasonable terms or at all.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis