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Item 2. Management’s Discussion and Analysis

2022-04-26 compared with 2022-02-01 · 68 added, 61 removed, 171 unchanged (43% 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”), our quarterly report on form 10-Q for the fiscal quarter ended September 26, 2021, and our current reports on Form 8-K.

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”), our quarterly reports on form 10-Q for the fiscal quarters ended September 26, 2021 and December 26, 2021, 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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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 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.

For a full understanding of our financial position and results of operations for the three and nine months ended March 27, 2022, 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 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.

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 wafer fabrication equipment demand environment is strong in calendar year 2022 driven by increasing device manufacturing complexity and the robust secular demand for semiconductors for NAND, DRAM, and foundry logic markets.

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.

During the quarter-ended March 27, 2022, customer demand remained solid;

however, ongoing supply chain constraints broadened during the quarter and impacted our ability to fulfill demand.

We expect supply shortages as well as inflationary cost pressures to persist in at least the near term.

Risks and uncertainties related to the COVID-19 pandemic, broadening supply chain challenges, and inflationary pressures may continue to negatively impact our revenue and gross margin.

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

Three Months Ended

2021 September 26,

2022 December 26,

(in thousands, except per share data and percentages)

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Diluted net income per share $ 7.30 $ 8.44

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;

In the March 2022 quarter, revenue decreased 4% compared to the December 2021 quarter as a result of continued supplier-related delays in an already heavily constrained supply-chain environment.

The decrease in gross margin as a percentage of

revenue in the March 2022 quarter compared to the December 2021 quarter was primarily as a result of unfavorable customer and product mix;

increased spending due to supply chain, freight and logistics and inflationary pressures;

and lower factory absorption and field utilization, partially offset by decreased variable compensation.

The decrease in operating expenses in the March 2022 quarter compared to the December 2021 quarter was primarily driven by decreases in variable compensation, 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 $4.6 billion at the end of the March 2022 quarter compared to $5.6 billion at the end of the December 2021 quarter.

This decrease was primarily the result of $1.3 billion of share repurchases, including net share settlement on employee stock-based compensation;

$210.6 million of dividends paid to stockholders;

and $138.5 million of capital expenditures.

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

and $145.4 million of capital expenditures, partially offset by $757.7 million of cash generated from operating activities.

Employee headcount as of March 27, 2022 was approximately 16,900.

RESULTS OF OPERATIONS

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

Three Months Ended Nine Months Ended

2022 December 26,

2021 March 27,

2022 March 28,

Revenue (in millions) $ 4,060 $ 4,227 $ 12,591 $ 10,481

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Taiwan 16 % 18 % 16 % 15 %

Japan 12 % 11 % 11 % 11 %

Southeast Asia 9 % 9 % 9 % 8 %

Japan 9 % 12 % 11 % 10 %

United States 8 % 6 % 6 % 5 %

Europe 3 % 4 % 3 % 3 %

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.

Revenue for the March 2022 quarter decreased 4% from the December 2021 quarter due to continued supplier-related delays given the broad supply chain issues in the industry, which impacted our ability to fulfill demand.

Revenue for the nine months ended March 2022 increased 20% compared to the same period in the prior year driven by increased wafer fabrication equipment spending by semiconductor manufacturers.

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

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

Three Months Ended Nine Months Ended

2022 December 26,

2021 March 27,

2022 March 28,

(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 Six Months Ended

2021 September 26,

2021 December 26,

Three Months Ended Nine Months Ended

2022 December 26,

2021 March 27,

2022 March 28,

Memory 66 % 58 % 62 % 62 %

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Logic/integrated device manufacturing 13 % 11 % 12 % 7 %

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

Three Months Ended Nine Months Ended

2022 December 26,

2021 March 27,

2022 March 28,

(in thousands, except percentages)

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Percent of revenue 44.7 % 46.8 % 45.8 % 46.7 %

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.

Gross margin as a percentage of revenue was lower in the March 2022 quarter compared to the December 2021 quarter primarily as a result of unfavorable customer and product mix;

increased spending related to supply chain, freight and logistics and inflationary pressures;

and lower factory absorption and field utilization;

partially offset by decreased variable compensation.

The decrease i n gross margin as a percentage of revenue in the nine months ended March 2022 compared to the same period in the prior year was primarily driven by unfavorable customer and product mix, and lower field utilization.

Research and Development

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

Three Months Ended Nine Months Ended

2022 December 26,

2021 March 27,

2022 March 28,

(in thousands, except percentages)

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Percent of revenue 10.0 % 9.6 % 9.5 % 10.6 %

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.

We co ntinued to make significant R&D investments in the March 2022 quarter focused on leading-edge deposition, etch, clean and other semiconductor manufacturing processes.

The increase in R&D expense in the March 2022 quarter compared to the December 2021 quarter was primarily driven by increases in employee-related expenses as a result of increased headcount and seasonality, mostly offset by decreases in variable compensation.

The increase in R&D expense in the nine months ended March 2022 compared to the same period in the prior year was primarily driven by increases of $78 million in employee-related expenses mainly as a result of increased headcount and $18 million in spending for supplies, partially offset by a decrease of $22 million in deferred compensation plan-related costs.

Selling, General, and Administrative

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

Three Months Ended Nine Months Ended

2022 December 26,

2021 March 27,

2022 March 28,

(in thousands, except percentages)

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Percent of revenue 5.4 % 5.6 % 5.4 % 5.8 %

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.

SG&A expense during the March 2022 quart er decreased in comparison to the December 2021 quarter, primarily driven by a decrease in variable compensation.

SG&A expense during the nine months ended March 2022 increased compared to the same period in the prior year, primarily driven by increases of $31 million in employee-related expenses, $25 million in outside service spending, and $20 million in rent and utility expenses, partially offset by a decrease of $15 million in deferred compensation plan-related costs.

Other Income (Expense), Net

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

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

Three Months Ended Nine Months Ended

2022 December 26,

2021 March 27,

2022 March 28,

(in thousands)

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$ (57,402) $ 17,999 $ (68,260) $ (104,053)

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.

Interest income decreased in the March 2022 quarter compared to the December 2021 quarter and in the nine months ended March 2022 compared to the same period in the prior year primarily as a result of lower cash and investment balances.

Interest expense remained relatively flat in the March 2022 quarter compared to the December 2021 quarter as our debt balances remained flat.

Interest expense decreased in the nine months ended March 2022 compared to the same period in the prior year due to the payoff of $800 million of our notes in June 2021.

The gains and losses on deferred compensation plan-related assets in the periods presented 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 for the December 2021 and September 2021 quarters primarily due to gains from our equity investments;

Other, net generated income for the nine months ended March 2022 and December 2021 quarter primarily due to gains from our equity investments;

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

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

Three Months Ended Six Months Ended

2021 September 26,

2021 December 26,

Three Months Ended Nine Months Ended

2022 December 26,

2021 March 27,

2022 March 28,

(in thousands, except percentages)

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Effective tax rate 10.0 % 11.9 % 11.4 % 9.7 %

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.

The decrease in the effective tax rate for the March 2022 quarter compared to the December 2021 quarter was primarily due to stock-based compensation excess tax benefits.

The increase in the effective tax rate for the nine months ended March 2022 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 and higher stock-based compensation excess tax benefits in the nine months ended March 2021.

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

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LIQUIDITY AND CAPITAL RESOURCES

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.

Total gross cash, cash equivalents, investments, and restricted cash and investments balances were $4.6 billion at March 27, 2022 compared to $6.0 billion as of June 27, 2021.

This decrease was primarily driven by $3.0 billion of share repurchases, including net share settlement on employee stock-based compensation, $607.2 million in dividends paid, and $420.3 million of capital expenditures, partially offset by $2.7 billion of cash generated from operating activities.

Cash Flow from Operating Activities

Net cash provided by operating activities of $1.9 billion during the six months ended December 26, 2021, consisted of (in thousands):

Net cash provided by operating activities of $2.7 billion during the nine months ended March 27, 2022, consisted of (in thousands):

Net income $ 3,396,352

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Cash Flow from Investing Activities

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.

Net cash provided by investing activities during the nine months ended March 27, 2022, was $688.2 million, primarily consisting of net proceeds from sales of available-for-sale securities of $1.1 billion, partially offset by capital expenditures of $420.3 million.

Cash Flow from Financing Activities

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.

Net cash used for financing activities during the nine months ended March 27, 2022, was $3.6 billion, primarily consisting of $3.0 billion in treasury stock repurchases, including net share settlement on employee stock-based compensation,and $607.2 million in dividends paid, partially offset by $51.1 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 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.

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 27, 2022, 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