LAM RESEARCH CORP 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS With the exception of historical facts, the statements contained in this discussion are forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified as forward-looking, by use of phrases and words such as “believe,” “estimated,” “anticipate,” “expect,” “probable,” “intend,” “plan,” “aim,” “may,” “should,” “could,” “would,” “will,” “continue,” and other future-oriented terms. The identification of certain statements as “forward-looking” does not mean that other statements not specifically identified are not forward-looking. Forward-looking statements include but are not limited to statements that relate to: 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; management’s plans and objectives for our current and future operations and business focus; volatility in our quarterly results; the makeup of our customer base; customer and end user requirements and our ability to satisfy those requirements; 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; the success of joint development and collaboration relationships with customers, suppliers, or others; outsourced activities; 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 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; our access to capital markets; uses of, payments of, and impact of interest rate fluctuations on, our debt; our intention to pay quarterly dividends and the amounts thereof, if any; our ability and intention to repurchase our shares; credit risks; controls and procedures; recognition or amortization of expenses; our ability to manage and grow our cash position; our strategic relevance with our customers; our ability to scale our operations to respond to changes in our business; the value of our patents; the materiality of potential losses arising from legal proceedings; 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 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on information currently and reasonably known to us. 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 23 Table of Contents 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 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 Lam Research Corporation is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. 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 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. 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. Semiconductor manufacturing, our customers’ business, involves the complete fabrication of multiple dies or integrated circuits on a wafer. This involves the repetition of a set of core processes and can require hundreds of individual steps. Fabricating these devices requires highly sophisticated process technologies to integrate an increasing array of new materials with precise control at the atomic scale. Along with meeting technical requirements, wafer processing equipment must deliver high productivity and be cost-effective. 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. 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: (i) our focus on research and development, with several on-going programs relating to sustaining engineering, product and process development, and concept and feasibility; (ii) our ability to effectively leverage cycles of learning from our broad installed base; (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. Over the longer term, we believe that secular demand for semiconductors will continue to drive sustainable growth for our products and services, and that technology inflections in our industry, including 3D device scaling, multiple patterning, process flow, and advanced packaging chip integration, will lead to an increase in the served addressable market for our products and services in the deposition, etch, and clean businesses. 24 Table of Contents The following table summarizes certain key financial information for the periods indicated below: Three Months Ended September 26, 2021 June 27, 2021 September 27, 2020 (in thousands, except per share data and percentages) Revenue $ 4,304,465 $ 4,145,179 $ 3,177,080 Gross margin $ 1,976,754 $ 1,915,201 $ 1,506,179 Gross margin as a percent of total revenue 45.9 % 46.2 % 47.4 % Total operating expenses $ 604,521 $ 599,274 $ 545,115 Net income $ 1,179,744 $ 1,144,657 $ 823,451 Diluted net income per share $ 8.27 $ 7.98 $ 5.59 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 $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 Revenue Three Months Ended September 26, 2021 June 27, 2021 September 27, 2020 Revenue (in millions) $ 4,304 $ 4,145 $ 3,177 China 37 % 37 % 37 % Korea 21 % 30 % 24 % Taiwan 15 % 13 % 14 % Japan 11 % 9 % 12 % Southeast Asia 8 % 3 % 7 % United States 6 % 5 % 4 % Europe 2 % 3 % 2 % 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 September 26, 2021 June 27, 2021 September 27, 2020 (In thousands) System revenue $ 2,924,883 $ 2,763,877 $ 2,148,241 Customer support-related revenue and other 1,379,582 1,381,302 1,028,839 $ 4,304,465 $ 4,145,179 $ 3,177,080 25 Table of Contents Please refer to Note 3, “Revenue,” to the Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding the composition of the two categories into which revenue has been disaggregated. 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 September 26, 2021 June 27, 2021 September 27, 2020 Memory 64 % 59 % 58 % Foundry 25 % 35 % 36 % Logic/integrated device manufacturing 11 % 6 % 6 % Gross Margin Three Months Ended September 26, 2021 June 27, 2021 September 27, 2020 (in thousands, except percentages) Gross margin $ 1,976,754 $ 1,915,201 $ 1,506,179 Percent of revenue 45.9 % 46.2 % 47.4 % 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 September 26, 2021 June 27, 2021 September 27, 2020 (in thousands, except percentages) Research & development (“R&D”) $ 382,327 $ 381,749 $ 355,367 Percent of revenue 8.9 % 9.2 % 11.2 % 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 September 26, 2021 June 27, 2021 September 27, 2020 (in thousands, except percentages) Selling, general, and administrative (“SG&A”) $ 222,194 $ 217,525 $ 189,748 Percent of revenue 5.2 % 5.2 % 6.0 % 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. 26 Table of Contents 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 September 26, 2021 June 27, 2021 September 27, 2020 (in thousands) Interest income $ 4,678 $ 3,723 $ 6,959 Interest expense (45,056) (51,695) (52,115) 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 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. 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 September 26, 2021 June 27, 2021 September 27, 2020 (in thousands, except percentages) Income tax expense $ 163,632 $ 164,104 $ 98,821 Effective tax rate 12.2 % 12.5 % 10.7 % 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. International pre-tax income is taxable in the United States at a lower effective tax rate than the federal statutory tax rate. Please refer to Note 7, “Income Taxes,” to our Consolidated Financial Statements in Part II, Item 8 of our 2021 Form 10-K for additional information. 27 Table of Contents We re-evaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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 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 $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 $457.5 million during the three months ended September 26, 2021, consisted of (in thousands): Net income $ 1,179,744 Non-cash charges: Depreciation and amortization 79,874 Equity-based compensation expense 58,099 Deferred income taxes (13,023) Changes in operating asset and liability accounts (838,480) Other (8,690) $ 457,524 Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: 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 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 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. Liquidity 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 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. 28 Table of Contents 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. While we have substantial cash balances, we may require additional funding and need or choose to raise the required funds through borrowings or public or private sales of debt or equity securities. 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 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.