What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-01 compared with 2021-10-26 · 69 added, 79 removed, 163 unchanged (48% of the section changed)

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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 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.

For a full understanding of our financial position and results of operations for the three and six months ended December 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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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.

In calendar year 2021, there were higher investments 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, and Internet of Things.

During the quarter-ended December 26, 2021, customer demand remained strong, h owever, we experienced supply chain constraints, and we expect these constraints to continue in the near term.

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.

Ov er 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.

The following table summarizes certain key financial information for the periods indicated below:

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2021 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 $ 8.44 $ 8.27

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;

In the December 2021 quarter, revenue decreased 2% compared to the September 2021 quarter, primarily as a result of supplier-related delays of critical parts given broad supply chain issues in the industry, partially offset by increased revenue for the customer support-related business.

The increase in gross margin as a percentage of revenue in the December 2021 quarter

compared to the September 2021 quarter was primarily driven improved customer and product mix, manufacturing-related spending reduction, and improved factory absorption and field utilizatio n, partially offset by increased variable compensation .

The increase in operating expenses in the December 2021 quarter compared to the September 2021 quarter was mainly driven by increases in employee-related expenses, rent expense and supplies expense, partially offset by decreases in outside services.

Our cash and cash equivalents, investments, and restricted cash and investments balances increased to $5.6 billion at the end of the December 2021 quarter compared to $4.9 billion at the end of the September 2021 quarter.

This increase was primarily the result of $1.4 billion of cash generated from operating activities, partially offset by $414.8 million of share repurchases, including net share settlement on employee stock-based compensation;

$211.2 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.

and $138.5 million of capital expenditures.

Employee headcount as of December 26, 2021 was approximately 16,300.

RESULTS OF OPERATIONS

Three Months Ended

September 26,

2021 June 27,

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

2021 December 27,

Revenue (in millions) $ 4,227 $ 4,304 $ 8,531 $ 6,633

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Europe 4 % 2 % 3 % 3 %

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

Revenue for the December 2021 quarter decreased 2% from the September 2021 quarter, due to supplier-related delays of critical parts given broad supply chain issues in the industry, partially offset by increased revenue for the customer support-related business.

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

Three Months Ended

September 26,

2021 June 27,

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

2021 December 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

September 26,

2021 June 27,

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

2021 December 27,

Memory 58 % 64 % 61 % 63 %

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Logic/integrated device manufacturing 11 % 11 % 11 % 6 %

Three Months Ended

September 26,

2021 June 27,

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

2021 December 27,

(in thousands, except percentages)

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Percent of revenue 46.8 % 45.9 % 46.4 % 46.9 %

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.

Gross margin as a percentage of revenue was higher in the December 2021 quarter compared to the September 2021 quarter primarily as a resul t of improved customer and product mix, manufacturing-related spending reduction, and improved factory absorption and field utilizatio n, partially offset by increased variable compensation.

The decrease in gross margin as a percentage of revenue in the six months ended December 2021 compared to the same period in the prior year was primarily driven by increased manufacturing-related spending, lower field utilization , and increased employee-related expenses.

Research and Development

Three Months Ended

September 26,

2021 June 27,

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

2021 December 27,

(in thousands, except percentages)

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Percent of revenue 9.6 % 8.9 % 9.2 % 11.0 %

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.

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

The increase in R&D expense in the December 2021 quarter compared to the September 2021 quarter was primarily driven by a $13 million increase in employee-related expenses primarily as a result of increased headcount and variable compensation.

The increase in R&D expense in the six months ended December 2021 compared to the same period in the prior year was primarily driven by an increase of $61 million in employee-related expenses mainly as a result of increased headcount, slightly offset by a decrease of $13 million in deferred compensation plan-related costs.

Selling, General, and Administrative

Three Months Ended

September 26,

2021 June 27,

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

2021 December 27,

(in thousands, except percentages)

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Percent of revenue 5.6 % 5.2 % 5.4 % 6.2 %

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

September 26,

2021 June 27,

SG&A expense during the December 2021 quart er increased in comparison to the September 2021 quarter, driven by a $14 million increase in employee-related expenses primarily as a result of increased headcount and variable compensation.

SG&A expense during the six months ended December 2021 increased compared to the same period in the prior year, primarily driven by increases of $32 million in employee-related expenses due in part to increased headcount and $13 million in spending for outside services.

Other Income (Expense), Net

Other income (expense), net consisted of the following:

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

2021 December 27,

(in thousands)

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Interest expense (46,765) (45,056) (91,821) (104,666)

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

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

(Losses) Gains on deferred compensation plan-related assets, net (56) 7,437 7,381 37,134

Foreign exchange gains (losses), net 731 (17) 714 (5,138)

Other, net 61,717 4,101 65,818 (7,818)

$ 17,999 $ (28,857) $ (10,858) $ (68,733)

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.

Interest income decreased in the December 2021 quarter compared to the September 2021 quarter primarily as a result of lower interest rates from a change in our investment mix.

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

Interest expense remained relatively flat in the December 2021 quarter compared to the September 2021 quarter as our debt balances remained flat.

Interest expense decreased in the six months ended December 2021 compared to the same period in the prior year due to the payoff of the 2021 Senior Notes.

The gains and losses on deferred compensation plan-related assets in the December 2021 and September 2021 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.

Other, net generated income for the December 2021 and September 2021 quarters primarily due to gains from our equity investments;

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

Refer to Note 5, “Other Income, (Expense), net,” of our Condensed Consolidated Financial Statements, included in Part 1 of this Form 10-Q for additional information.

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,

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

2021 December 27,

(in thousands, except percentages)

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Effective tax rate 11.9 % 12.2 % 12.0 % 11.0 %

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.

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

The increase in the effective tax rate for the six months ended December 2021 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.

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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.

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.

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.

Total gross cash, cash equivalents, investments, and restricted cash and investments balances were $5.6 billion at December 26, 2021 compared to $6.0 billion as of June 27, 2021.

This decrease was primarily driven by $1.7 billion of share repurchases, including net share settlement on employee stock-based compensation, $396.6 million in dividends paid, and $274.9 million of capital expenditures, partially offset by $1.9 billion 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 cash provided by operating activities of $1.9 billion during the six months ended December 26, 2021, consisted of (in thousands):

Net income $ 2,374,574

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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.

increases in inventory of $440.3 million, accounts receivable of $377.5 million, and prepaid expense and other assets of $24.9 million, along with a decrease in accrued expenses and other liabilities of $76.9 million.

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

increases in deferred profit of $166.6 million and trade accounts payable of $95.8 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.

Net cash provided by investing activities during the six months ended December 26, 2021, was $782.8 million, primarily consisting of net proceeds from sales of available-for-sale securities of $1.1 billion, partially offset by capital expenditures of $274.9 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.

Net cash used for financing activities during the six months ended December 26, 2021, was $2.0 billion, primarily consisting of $1.7 billion in treasury stock repurchases, including net share settlement on employee stock-based compensation, $396.6 million in dividends paid, and $8.0 million of cash paid for debt repayment, partially offset by $50.6 million combined proceeds from issuance of common stock and reissuance of treasury stock.

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.

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 December 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.

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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