LAM RESEARCH CORP 10-Q

ITEM 1. Financial Statements LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended September 25, 2022 September 26, 2021 Revenue $ 5,074,121 $ 4,304,465 Cost of goods sold 2,737,286 2,327,711 Gross margin 2,336,835 1,976,754 Research and development 433,375 382,327 Selling, general, and administrative 205,620 222,194 Total operating expenses 638,995 604,521 Operating income 1,697,840 1,372,233 Other income (expense), net ( 43,095 ) ( 28,857 ) Income before income taxes 1,654,745 1,343,376 Income tax expense ( 228,866 ) ( 163,632 ) Net income $ 1,425,879 $ 1,179,744 Net income per share: Basic $ 10.42 $ 8.32 Diluted $ 10.39 $ 8.27 Number of shares used in per share calculations: Basic 136,891 141,743 Diluted 137,208 142,612 See Notes to Condensed Consolidated Financial Statements Lam Research Corporation 2023 Q1 10-Q 3 Table of Contents LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited) Three Months Ended September 25, 2022 September 26, 2021 Net income $ 1,425,879 $ 1,179,744 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment ( 33,609 ) ( 4,032 ) Cash flow hedges: Net unrealized gains (losses) during the period 18,803 ( 9,005 ) Net gains reclassified into net income ( 9,297 ) ( 3,542 ) 9,506 ( 12,547 ) Available-for-sale investments: Net unrealized gains (losses) during the period 80 ( 2,405 ) Net (gains) losses reclassified into net income ( 53 ) 1,145 27 ( 1,260 ) Defined benefit plans, net change in unrealized component 293 199 Other comprehensive (loss) income, net of tax ( 23,783 ) ( 17,640 ) Comprehensive income $ 1,402,096 $ 1,162,104 See Notes to Condensed Consolidated Financial Statements Lam Research Corporation 2023 Q1 10-Q 4 Table of Contents LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) September 25, 2022 June 26, 2022 (unaudited) (1) ASSETS Cash and cash equivalents $ 4,256,499 $ 3,522,001 Investments 120,551 135,731 Accounts receivable, less allowance of $ 5,536 as of September 25, 2022, and $ 5,606 as of June 26, 2022 4,569,735 4,313,818 Inventories 4,360,325 3,966,294 Prepaid expenses and other current assets 305,554 347,391 Total current assets 13,612,664 12,285,235 Property and equipment, net 1,718,791 1,647,587 Restricted cash and investments 250,955 251,534 Goodwill 1,514,547 1,515,113 Intangible assets, net 110,385 101,850 Other assets 1,513,940 1,394,313 Total assets $ 18,721,282 $ 17,195,632 LIABILITIES AND STOCKHOLDERS’ EQUITY Trade accounts payable $ 1,146,286 $ 1,011,208 Accrued expenses and other current liabilities 1,948,776 1,974,272 Deferred profit 1,951,210 1,571,898 Current portion of long-term debt and finance lease obligations 7,110 7,381 Total current liabilities 5,053,382 4,564,759 Long-term debt and finance lease obligations, less current portion 4,996,363 4,998,449 Income taxes payable 840,214 931,117 Other long-term liabilities 418,756 422,941 Total liabilities 11,308,715 10,917,266 Commitments and contingencies Stockholders’ equity: Preferred stock, at par value of $ 0.001 per share; authorized, 5,000 shares, none outstanding — — Common stock, at par value of $ 0.001 per share; authorized, 400,000 shares as of September 25, 2022 and June 26, 2022; issued and outstanding, 136,374 shares as of September 25, 2022, and 136,975 shares as of June 26, 2022 136 137 Additional paid-in capital 7,492,822 7,414,916 Treasury stock, at cost; 157,773 shares as of September 25, 2022, and 157,087 shares as of June 26, 2022 ( 19,591,249 ) ( 19,481,429 ) Accumulated other comprehensive loss ( 133,765 ) ( 109,982 ) Retained earnings 19,644,623 18,454,724 Total stockholders’ equity 7,412,567 6,278,366 Total liabilities and stockholders’ equity $ 18,721,282 $ 17,195,632 (1) Derived from audited financial statements See Notes to Condensed Consolidated Financial Statements Lam Research Corporation 2023 Q1 10-Q 5 Table of Contents LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended September 25, 2022 September 26, 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,425,879 $ 1,179,744 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 75,751 79,874 Deferred income taxes ( 133,616 ) ( 13,023 ) Equity-based compensation expense 71,110 58,099 Other, net ( 2,751 ) ( 8,690 ) Changes in operating assets and liabilities ( 246,785 ) ( 838,480 ) Net cash provided by operating activities 1,189,588 457,524 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures and intangible assets ( 140,063 ) ( 136,427 ) Purchases of available-for-sale securities — ( 25,297 ) Proceeds from maturities of available-for-sales securities 14,695 106,836 Proceeds from sales of available-for-sale securities — 656,504 Other, net ( 2,435 ) ( 4,923 ) Net cash (used for) provided by investing activities ( 127,803 ) 596,693 CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on debt ( 1,854 ) ( 6,338 ) Treasury stock purchases ( 109,779 ) ( 1,236,753 ) Dividends paid ( 205,615 ) ( 185,431 ) Proceeds from issuance of common stock 6,796 742 Other, net ( 489 ) 188 Net cash used for financing activities ( 310,941 ) ( 1,427,592 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 16,925 ) ( 3,776 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 733,919 ( 377,151 ) Cash, cash equivalents, and restricted cash at beginning of period 3,773,535 4,670,750 Cash, cash equivalents, and restricted cash at end of period $ 4,507,454 $ 4,293,599 Schedule of non-cash transactions: Accrued payables for stock repurchases $ 88 $ 126 Accrued payables for capital expenditures 79,173 66,117 Dividends payable 235,980 211,216 Transfers of finished goods inventory to property and equipment 20,798 15,518 Reconciliation of cash, cash equivalents, and restricted cash September 25, 2022 September 26, 2021 Cash and cash equivalents $ 4,256,499 $ 4,042,151 Restricted cash and cash equivalents 250,955 251,448 Total cash, cash equivalents, and restricted cash $ 4,507,454 $ 4,293,599 See Notes to Condensed Consolidated Financial Statements Lam Research Corporation 2023 Q1 10-Q 6 Table of Contents LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) (unaudited) Three Months Ended September 25, 2022 Common Stock Shares Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Comprehensive Loss Retained Earnings Total Balance at June 26, 2022 136,975 $ 137 $ 7,414,916 $ ( 19,481,429 ) $ ( 109,982 ) $ 18,454,724 $ 6,278,366 Issuance of common stock 85 — 6,796 — — — 6,796 Purchase of treasury stock ( 686 ) ( 1 ) — ( 109,820 ) — — ( 109,821 ) Equity-based compensation expense — — 71,110 — — — 71,110 Net income — — — — — 1,425,879 1,425,879 Other comprehensive loss — — — — ( 23,783 ) — ( 23,783 ) Cash dividends declared ($ 1.725 per common share) — — — — — ( 235,980 ) ( 235,980 ) Balance at September 25, 2022 136,374 $ 136 $ 7,492,822 $ ( 19,591,249 ) $ ( 133,765 ) $ 19,644,623 $ 7,412,567 Three Months Ended September 26, 2021 Common Stock Shares Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Comprehensive Loss Retained Earnings Total Balance at June 27, 2021 142,501 $ 143 $ 7,052,962 $ ( 15,646,701 ) $ ( 64,128 ) $ 14,684,912 $ 6,027,188 Issuance of common stock 47 — 742 — — — 742 Purchase of treasury stock ( 1,737 ) ( 2 ) — ( 1,216,872 ) — — ( 1,216,874 ) Equity-based compensation expense — — 58,099 — — — 58,099 Net income — — — — — 1,179,744 1,179,744 Other comprehensive loss — — — — ( 17,640 ) — ( 17,640 ) Cash dividends declared ($ 1.50 per common share) — — — — — ( 211,216 ) ( 211,216 ) Balance at September 26, 2021 140,811 $ 141 $ 7,111,803 $ ( 16,863,573 ) $ ( 81,768 ) $ 15,653,440 $ 5,820,043 See Notes to Condensed Consolidated Financial Statements Lam Research Corporation 2023 Q1 10-Q 7 Table of Contents LAM RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 25, 2022 (Unaudited) NOTE 1 — BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of Lam Research Corporation (“Lam Research” or the “Company”) for the fiscal year ended June 26, 2022, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended June 26, 2022 (the “2022 Form 10-K”). The Company’s reports on Form 10-K, Form 10-Q and Form 8-K are available online at the Securities and Exchange Commission website on the Internet. The address of that site is www.sec.gov . The Company also posts its reports on Form 10-K, Form 10-Q and Form 8-K on its corporate website at http://investor.lamresearch.com . The content on any website referred to in this Form 10-Q is not a part of or incorporated by reference in this Form 10-Q unless expressly noted. The condensed consolidated financial statements include the accounts of Lam Research and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s reporting period is a 52/53-week fiscal year. The Company’s current fiscal year will end June 25, 2023 and includes 52 weeks. The quarters ended September 25, 2022 (the “September 2022 quarter”) and September 26, 2021 included 13 weeks. NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted or Effective The Company has not adopted any new accounting standards during the first quarter of fiscal year 2023 that have a material impact on the Company’s Condensed Consolidated Financial Statements. Updates Not Yet Effective There are no new accounting pronouncements not yet adopted or effective that are expected to have a material impact on the Company’s Condensed Consolidated Financial Statements. NOTE 3 — REVENUE Deferred Revenue Revenue of $ 1,542.5 million included in deferred profit at June 26, 2022 was recognized during the three months ended September 25, 2022. The following table summarizes the transaction price for contracts that have not yet been recognized as revenue as of September 25, 2022 and when the Company expects to recognize the amounts as revenue: Less than 1 Year 1-3 Years More than 3 Years Total (In thousands) Deferred revenue $ 2,540,799 $ 200,655 (1) $ 13,330 (1) $ 2,754,784 (1) This amount is reported in Deferred profit on the Company's Condensed Consolidated Balance Sheets as the customers can demand the liability to be performed at any time. Disaggregation of Revenue The Company operates in one reportable business segment: manufacturing and servicing of wafer processing semiconductor manufacturing equipment. The Company’s material operating segments qualify for aggregation due to their customer base and similarities in economic characteristics, nature of products and services, and processes for procurement, manufacturing, and distribution. The Company operates in seven geographic regions: United States, China, Europe, Japan, Korea, Southeast Asia, and Taiwan. For geographical reporting, revenue is attributed to the geographic location in which the customers’ facilities are located. The Company serves three primary markets: memory, foundry, and logic/integrated device manufacturing. Lam Research Corporation 2023 Q1 10-Q 8 Table of Contents The following table presents the Company’s revenues disaggregated between system and its customer support-related revenue: Three Months Ended September 25, 2022 September 26, 2021 (In thousands) System revenue $ 3,181,987 $ 2,924,883 Customer support-related revenue and other 1,892,134 1,379,582 $ 5,074,121 $ 4,304,465 System revenue includes sales of new leading-edge equipment in deposition, etch and clean markets. Customer support-related revenue includes sales of customer service, spares, upgrades, and non-leading-edge equipment from the Company’s Reliant product line. The following table presents the Company’s revenues disaggregated by geographic region: Three Months Ended September 25, 2022 September 26, 2021 (In thousands) China $ 1,530,475 $ 1,607,710 Taiwan 1,120,946 638,066 Korea 855,378 918,137 Southeast Asia 541,064 365,248 Japan 458,693 468,731 United States 304,977 228,211 Europe 262,588 78,362 $ 5,074,121 $ 4,304,465 The following table presents the percentages of leading- and non-leading-edge equipment and upgrade revenue to each of the primary markets the Company serves: Three Months Ended September 25, 2022 September 26, 2021 Memory 52 % 64 % Foundry 34 % 25 % Logic/integrated device manufacturing 14 % 11 % NOTE 4 — EQUITY-BASED COMPENSATION PLANS The Lam Research Corporation 2015 Stock Incentive Plan, as amended, provides for the grant of non-qualified equity-based awards of the Company’s Common Stock to eligible employees and non-employee directors, including stock options, restricted stock units (“RSUs”), and market-based performance RSUs (“market-based PRSUs”). An option is a right to purchase Common Stock at a set price. An RSU award is an agreement to issue a set number of shares of Common Stock at the time of vesting. The Company’s market-based PRSUs contain both a market condition and a service condition. The Company’s option, RSU, and market-based PRSU awards typically vest over a period of three years . The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions. Lam Research Corporation 2023 Q1 10-Q 9 Table of Contents The Company recognized the following equity-based compensation expense (including expense related to the employee stock purchase plan) and related income tax benefit in the Condensed Consolidated Statements of Operations: Three Months Ended September 25, 2022 September 26, 2021 (in thousands) Equity-based compensation expense $ 71,110 $ 58,099 Income tax benefit recognized related to equity-based compensation expense $ 11,528 $ 8,208 NOTE 5 — OTHER INCOME (EXPENSE), NET The significant components of other income (expense), net, are as follows: Three Months Ended September 25, 2022 September 26, 2021 (in thousands) Interest income $ 15,056 $ 4,678 Interest expense ( 46,052 ) ( 45,056 ) (Losses) gains on deferred compensation plan-related assets, net ( 12,726 ) 7,437 Foreign exchange gains (losses), net 6,821 ( 17 ) Other, net ( 6,194 ) 4,101 $ ( 43,095 ) $ ( 28,857 ) NOTE 6 — INCOME TAX EXPENSE The Company’s provision for income taxes and effective tax rate are as follows: Three Months Ended September 25, 2022 September 26, 2021 (in thousands, except percentages) Income tax expense $ 228,866 $ 163,632 Effective tax rate 13.8 % 12.2 % The difference between the U.S. federal statutory tax rate of 21% and the Company’s effective tax rate for the three months ended September 25, 2022 and September 26, 2021 was primarily due to income in lower tax jurisdictions. The Internal Revenue Service (“IRS”) has examined the Company’s U.S. federal income tax return for the fiscal year ended June 24, 2018. As of September 25, 2022, the IRS has proposed adjustments resulting in a tax liability increase of approximately $ 50.0 million, which was previously reserved. The Company has agreed to pay the amount and has made a partial cash settlement in the September quarter with the remaining settlement expected to be paid based on the IRS requirements. The Company is in various stages of examinations in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its uncertain tax positions as a result of tax examinations or lapses of statutes of limitation. The change in uncertain tax positions as a result of lapses of statutes of limitation may range up to $ 18.8 million. Lam Research Corporation 2023 Q1 10-Q 10 Table of Contents NOTE 7 — NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, restricted stock units, and convertible notes. The following table reconciles the inputs to the basic and diluted computations for net income per share. Three Months Ended September 25, 2022 September 26, 2021 (in thousands, except per share data) Numerator: Net income $ 1,425,879 $ 1,179,744 Denominator: Basic average shares outstanding 136,891 141,743 Effect of potential dilutive securities: Employee stock plans 317 869 Diluted average shares outstanding 137,208 142,612 Net income per share - basic $ 10.42 $ 8.32 Net income per share - diluted $ 10.39 $ 8.27 For purposes of computing diluted net income per share, weighted-average common shares do not include potentially dilutive securities that are anti-dilutive under the treasury stock method. The impact from potentially dilutive securities, including options and RSUs, was not material for the three months ended September 25, 2022 and September 26, 2021. NOTE 8 — FINANCIAL INSTRUMENTS The Company maintains an investment portfolio of various holdings, types, and maturities. The Company’s mutual funds, which are related to the Company’s obligations under the deferred compensation plan, are classified as trading securities. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Differences between the cost and fair value of trading securities are recognized as other income (expense), net in the Condensed Consolidated Statements of Operations. All of the Company’s debt securities are classified as available-for-sale and consequently are recorded in the Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses associated with market valuation changes, unrelated to credit losses, reported as a separate component of accumulated other comprehensive income (loss), net of tax; and credit losses, if any, recognized as other income (expense), net in the Condensed Consolidated Statements of Operations. The Company periodically invests in equity securities. For equity investments that do not have a readily determinable fair value, the Company records them using either 1) the measurement alternative which measures the equity investments at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes; or 2) the equity method whereby the Company recognizes its proportional share of the income or loss from the equity method investment on a one-quarter lag. The equity method is utilized when the Company does not have the ability to control the investee but is deemed to have the ability to exercise significant influence over the investee’s operating or financial policies. For equity investments that have a readily determinable fair value, the Company records them at fair market value on a recurring basis based upon quoted market prices. Realized and unrealized gains and losses resulting from application of the measurement alternative, the impact of the application of the equity method to the Company’s equity investments, and recognition of changes in fair market value, as applicable, are recognized as other income (expense), net in the Condensed Consolidated Statements of Operations. Fair Value The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability. A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. The level of an asset or liability in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories: Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities with sufficient volume and frequency of transactions. Lam Research Corporation 2023 Q1 10-Q 11 Table of Contents Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active for identical assets or liabilities, or model-derived valuations techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities and based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data. The Company engages with pricing vendors to provide fair values for a majority of its Level 1 and Level 2 investments. The vendors provide either a quoted market price or use observable inputs without applying significant adjustments in their pricing. Significant observable inputs include interest rates and yield curves observable at commonly quoted intervals, volatility and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the foreign currency rates, forward rate curves, currency volatility and interest rates and considers nonperformance risk of the Company and its counterparties. The Company’s primary financial instruments include its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and leases, and foreign currency related derivative instruments. The estimated fair value of cash, time deposits, accounts receivable, and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of lease obligations approximate their carrying value as the majority of these obligations have interest rates that adjust to market rates on a periodic basis. The fair value of the Company’s senior notes is based on the quoted price (level 2); the fair value of the Company's senior notes have not changed materially to that disclosed in Note 14, “Long Term Debt and Other Borrowings,” to our Consolidated Financial Statements in Part II, Item 8 of our 2022 Form 10-K. Equity Investments measured at fair value on a non-recurring basis As of September 25, 2022, and June 26, 2022, equity investments of $ 126.0 million and $ 125.2 million, respectively, were reported in other assets in the Condensed Consolidated Balance Sheets. Net gains resulting from the application of the measurement alternative to the Company’s equity investments were immaterial for the three months ended September 25, 2022, and September 26, 2021. Debt and Equity Investments measured at fair value on a recurring basis The following tables set forth the Company’s cash, cash equivalents, investments, restricted cash and investments, and other assets measured at fair value on a recurring basis as of September 25, 2022, and June 26, 2022: September 25, 2022 (Reported Within) Cost Unrealized Gain Unrealized (Loss) Fair Value Cash and Cash Equivalents Investments Restricted Cash & Investments Other Assets (in thousands) Level 1: Money market funds $ 1,237,763 $ — $ — $ 1,237,763 $ 1,237,763 $ — $ — $ — Mutual funds 82,051 9,915 ( 2,518 ) 89,448 — — — 89,448 Level 1 Total 1,319,814 9,915 ( 2,518 ) 1,327,211 1,237,763 — — 89,448 Level 2: Corporate notes and bonds 122,644 — ( 2,093 ) 120,551 — 120,551 — — Level 2 Total 122,644 — ( 2,093 ) 120,551 — 120,551 — — Total subject to fair value hierarchy $ 1,442,458 $ 9,915 $ ( 4,611 ) $ 1,447,762 Cash $ 1,644,514 $ 1,643,586 $ — $ 928 $ — Time deposits 1,625,177 1,375,150 — 250,027 — Total $ 4,717,453 $ 4,256,499 $ 120,551 $ 250,955 $ 89,448 Lam Research Corporation 2023 Q1 10-Q 12 Table of Contents June 26, 2022 (Reported Within) Cost Unrealized Gain Unrealized (Loss) Fair Value Cash and Cash Equivalents Investments Restricted Cash & Investments Other Assets (in thousands) Level 1: Money market funds $ 712,076 $ — $ — $ 712,076 $ 712,076 $ — $ — $ — Mutual funds 84,851 12,027 ( 1,659 ) 95,219 — — — 95,219 Level 1 Total 796,927 12,027 ( 1,659 ) 807,295 712,076 — — 95,219 Level 2: Corporate notes and bonds 137,859 — ( 2,128 ) 135,731 — 135,731 — — Level 2 Total 137,859 — ( 2,128 ) 135,731 — 135,731 — — Total subject to fair value hierarchy $ 934,786 $ 12,027 $ ( 3,787 ) $ 943,026 Cash $ 1,017,253 $ 1,015,747 $ — $ 1,506 $ — Time deposits 2,044,206 1,794,178 — 250,028 — Total $ 4,004,485 $ 3,522,001 $ 135,731 $ 251,534 $ 95,219 The Company accounts for its investment portfolio at fair value. Realized gains (losses) for investment sales are specifically identified. Management assesses the fair value of investments in debt securities that are not actively traded through consideration of interest rates and their impact on the present value of the cash flows to be received from the investments. The Company evaluates its investments with fair value less than amortized cost by first considering whether the Company has the intent to sell the security or whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In either such situation, the difference between fair value and amortized cost is recognized as a loss in the income statement. Where such sales are not likely to occur, the Company considers whether a portion of the loss is the result of a credit loss. To the extent such losses are the result of credit losses, those amounts are recognized in the income statement. All other differences between fair value and amortized cost are recognized in other comprehensive income. No such losses were recognized through the income statement during the three months ended September 25, 2022 and September 26, 2021. Gross realized gains/(losses) from sales of investments were insignificant in the three months ended September 25, 2022 and September 26, 2021. The following is an analysis of the Company’s investments in unrealized loss positions: September 25, 2022 Unrealized Losses Less than 12 Months Unrealized Losses 12 Months or Greater Total Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss (in thousands) Mutual funds $ 35,363 $ ( 2,259 ) $ 1,488 $ ( 259 ) $ 36,851 $ ( 2,518 ) Corporate notes and bonds 119,857 ( 2,093 ) — — 119,857 ( 2,093 ) $ 155,220 $ ( 4,352 ) $ 1,488 $ ( 259 ) $ 156,708 $ ( 4,611 ) The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities are as follows as of September 25, 2022: Cost Fair Value (in thousands) Due in one year or less $ 2,937,758 $ 2,936,838 Due after one year through five years 47,826 46,653 $ 2,985,584 $ 2,983,491 Lam Research Corporation 2023 Q1 10-Q 13 Table of Contents The Company has the ability, if necessary, to liquidate its investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than 12 months from the date of purchase nonetheless are classified as short-term on the accompanying Condensed Consolidated Balance Sheets. Derivative Instruments and Hedging The Company’s hedging strategies and policies are unchanged to those disclosed in Note 9, “Financial Instruments,” to our Consolidated Financial Statements in Part II, Item 8 of our 2022 Form 10-K. The financial statement impacts from derivative instruments and hedging activities were not material as of and for the three months ended September 25, 2022 and September 26, 2021. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit at large, global financial institutions. Such deposits may be in excess of insured limits. Management believes that the financial institutions that hold the Company’s cash are creditworthy and, accordingly, minimal credit risk exists with respect to these balances. The Company’s overall portfolio of available-for-sale securities must maintain an average minimum rating of “AA-” or “Aa3” as rated by Standard and Poor’s, Fitch Ratings, or Moody’s Investor Services. To ensure diversification and minimize concentration, the Company’s policy limits the amount of credit exposure with any one financial institution or commercial issuer. The Company is exposed to credit losses in the event of nonperformance by counterparties on foreign currency and interest rate hedge contracts that are used to mitigate the effect of exchange rate and interest rate fluctuations, and on contracts related to structured share repurchase arrangements. These counterparties are large global financial institutions, and, to date, no such counterparty has failed to meet its financial obligations to the Company. Credit risk evaluations, including trade references, bank references, and Dun & Bradstreet ratings, are performed on all new customers and the Company monitors its customers’ financial condition and payment performance. In general, the Company does not require collateral on sales. NOTE 9 — INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. System shipments to customers in Japan, for which title does not transfer until customer acceptance, are classified as finished goods inventory and carried at cost until title transfers. Inventories consist of the following: September 25, 2022 June 26, 2022 (in thousands) Raw materials $ 2,680,368 $ 2,401,490 Work-in-process 515,938 471,348 Finished goods 1,164,019 1,093,456 $ 4,360,325 $ 3,966,294 NOTE 10 — GOODWILL AND INTANGIBLE ASSETS Goodwill The balance of goodwill is approximately $ 1.5 billion as of September 25, 2022 and June 26, 2022. As of September 25, 2022 and June 26, 2022, $ 62.0 million of the goodwill balance is tax deductible and the remaining balance is not tax deductible due to purchase accounting and applicable foreign law. Lam Research Corporation 2023 Q1 10-Q 14 Table of Contents Intangible Assets The following table provides the Company’s intangible assets, other than goodwill: September 25, 2022 June 26, 2022 Gross Accumulated Amortization Net Gross Accumulated Amortization Net (in thousands) Customer relationships $ 633,152 $ ( 628,075 ) $ 5,077 $ 633,252 $ ( 627,376 ) $ 5,876 Existing technology 676,701 ( 665,506 ) 11,195 676,924 ( 664,278 ) 12,646 Patents and other intangible assets 188,277 ( 94,164 ) 94,113 167,821 ( 84,493 ) 83,328 Total intangible assets $ 1,498,130 $ ( 1,387,745 ) $ 110,385 $ 1,477,997 $ ( 1,376,147 ) $ 101,850 The Company recognized $ 11.6 million and $ 19.1 million in intangible asset amortization expense during the three months ended September 25, 2022 and September 26, 2021, respectively. The estimated future amortization expense of intangible assets as of September 25, 2022, is reflected in the table below. The table excludes $ 28.9 million of capitalized costs for internal-use software that have not been placed into service. Fiscal Year Amount (in thousands) 2023 (remaining 9 months) $ 28,451 2024 25,452 2025 14,626 2026 6,429 2027 4,103 Thereafter 2,469 $ 81,530 NOTE 11 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: September 25, 2022 June 26, 2022 (in thousands) Accrued compensation $ 487,304 $ 481,070 Warranty reserves 257,082 232,248 Income and other taxes payable 373,227 465,601 Dividend payable 235,980 205,615 Other 595,183 589,738 $ 1,948,776 $ 1,974,272 NOTE 12 — LEASES The Company leases certain office spaces, manufacturing and warehouse spaces, equipment, and vehicles. While the majority of the Company’s lease arrangements are operating leases, the Company has certain leases that qualify as finance leases. Selected Leases and Related Guarantees The Company leases the majority of its administrative, research and development and manufacturing facilities, regional sales/service offices, and certain equipment under non-cancelable leases. Certain of the Company’s facility leases for buildings located at its Fremont, California headquarters, Tualatin, Oregon campus, and certain other facility leases provide the Company with options to extend the leases for additional periods or to purchase the facilities. Certain of the Company’s facility leases provide for periodic rent increases based on the general rate of inflation. Lam Research Corporation 2023 Q1 10-Q 15 Table of Contents The Company has finance leases for certain improved properties in Fremont and Livermore, California (the “California Facility Leases”). The Company is required to maintain cash collateral in an aggregate of approximately $ 250.0 million in separate interest-bearing accounts as security for the Company’s obligations. These amounts are recorded with other restricted cash and investments in the Company’s Condensed Consolidated Balance Sheet as of September 25, 2022. During the seven-year term of the California Facility Leases and when the terms of the California Facility Leases expire, the property subject to the California Facility Leases may be re-marketed. The Company has guaranteed to the lessor that each property will have a certain minimum residual value. The aggregate maximum guarantee made by the Company under the California Facility Leases is $ 298.4 million. NOTE 13 — COMMITMENTS AND CONTINGENCIES Refer to Note 1 2 - Leases for details regarding guarantees surrounding selected leases. Other Guarantees The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into insurance contracts that are intended to limit its exposure to such indemnifications. As of September 25, 2022, the Company had not recorded any liability on its Condensed Consolidated Financial Statements in connection with these indemnifications, as it does not believe that it is probable that any material amounts will be paid under these guarantees. Generally, the Company indemnifies, under pre-determined conditions and limitations, its customers for infringement of third-party intellectual property rights by the Company’s products or services. The Company seeks to limit its liability for such indemnity to an amount not to exceed the sales price of the products or services subject to its indemnification obligations. The Company does not believe that it is probable that any material amounts will be paid under these guarantees. The Company provides guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of September 25, 2022, the maximum potential amount of future payments that the Company could be required to make under these arrangements and letters of credit was $ 97.4 million. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid. In addition, the Company has entered into indemnification agreements with its directors, officers, and certain other employees, consistent with its Bylaws and Certificate of Incorporation; and under local law, the Company may be required to provide indemnification to its employees for actions within the scope of their employment. Although the Company maintains insurance contracts that cover some of the potential liability associated with these indemnification agreements, there is no guarantee that all such liabilities will be covered. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under such indemnification agreements or statutory obligations. Warranties The Company provides standard warranties on its systems. The liability amount is based on actual historical warranty spending activity by type of system, customer, and geographic region, modified for any known differences such as the impact of system reliability improvements. As of September 25, 2022, warranty reserves totaling $ 26.4 million were recognized in other long-term liabilities, the remainder were included in accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets. Changes in the Company’s product warranty reserves were as follows: Three Months Ended September 25, 2022 September 26, 2021 (in thousands) Balance at beginning of period $ 256,258 $ 191,758 Warranties issued during the period 88,213 70,672 Settlements made during the period ( 64,896 ) ( 60,292 ) Changes in liability for warranties issued during the period ( 1,269 ) — Changes in liability for pre-existing warranties 5,208 12,106 Balance at end of period $ 283,514 $ 214,244 Lam Research Corporation 2023 Q1 10-Q 16 Table of Contents Legal Proceedings While the Company is not currently a party to any legal proceedings that it believes material, the Company is either a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business, including intellectual property claims. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. Based on current information, the Company does not believe that a material loss from known matters is probable and therefore has not recorded an accrual of any material amount for litigation or other contingencies related to existing legal proceedings. NOTE 14 — STOCK REPURCHASE PROGRAM In May 2022, the Board of Directors authorized the Company to repurchase up to an additional $ 5.0 billion of Common Stock; this authorization supplements the remaining balances from any prior authorizations. These repurchases can be conducted on the open market or as private purchases and may include the use of derivative contracts with large financial institutions, in all cases subject to compliance with applicable law. This repurchase program has no termination date and may be suspended or discontinued at any time. Repurchases under the repurchase program were as follows during the periods indicated: Period Total Number of Shares Repurchased Total Cost of Repurchase Average Price Paid Per Share (1) Amount Available Under Repurchase Program (in thousands, except per share data) Available balance as of June 26, 2022 $ 5,514,636 Quarter ended September 25, 2022 675 (2) $ 104,982 $ 432.74 $ 5,409,654 (1) Average price paid per share excludes the effect of accelerated share repurchase activities. See additional disclosure below regarding the Company’s accelerated share repurchase activity during the three months ended September 25, 2022. (2) Includes shares received at final settlement of accelerated share repurchase agreements; see additional disclosures below regarding the Company’s accelerated share repurchase activity during the three months ended September 25, 2022. In addition to the shares repurchased under the Board-authorized repurchase program shown above, during the three months ended September 25, 2022, the Company acquired 11 thousand shares at a total cost of $ 4.8 million, which the Company withheld through net settlements to cover minimum tax withholding obligations upon the vesting of restricted stock unit awards granted under the Company’s equity compensation plans. The shares retained by the Company through these net share settlements are not a part of the Board-authorized repurchase program but instead are authorized under the Company’s equity compensation plan. Accelerated Share Repurchase Agreements On June 2, 2022, the Company entered into an accelerated share repurchase agreement (the "June 2022 ASR") with two financial institutions to repurchase a total of $ 500 million of Common Stock. The Company took an initial delivery of approximately 717 thousand shares, which represented 75 % of the prepayment amount divided by our closing stock price on June 2, 2022. The total number of shares received under the June 2022 ASR was based upon the average daily volume weighted average price of the Company’s Common Stock during the repurchase period, less an agreed upon discount. Final settlement of the June 2022 ASR occurred in September 2022, resulting in the receipt of approximately 433 thousand additional shares, which yielded a weighted-average share price of $ 435.20 for the transaction period. Lam Research Corporation 2023 Q1 10-Q 17 Table of Contents NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss, net of tax at September 25, 2022, as well as the activity for the three months ending September 25, 2022, were as follows: Accumulated Foreign Currency Translation Adjustment Accumulated Unrealized Gain or Loss on Cash flow hedges Accumulated Unrealized Holding Gain or Loss on Available-For-Sale Investments Accumulated Unrealized Components of Defined Benefit Plans Total (in thousands) Balance at June 26, 2022 $ ( 81,755 ) $ ( 12,330 ) $ ( 1,637 ) $ ( 14,260 ) $ ( 109,982 ) Other comprehensive (loss) income before reclassifications ( 33,609 ) 18,803 80 293 ( 14,433 ) Gains reclassified from accumulated other comprehensive loss to net income (1) — ( 9,297 ) ( 53 ) — ( 9,350 ) Net current-period other comprehensive loss ( 33,609 ) 9,506 27 293 ( 23,783 ) Balance at September 25, 2022 $ ( 115,364 ) $ ( 2,824 ) $ ( 1,610 ) $ ( 13,967 ) $ ( 133,765 ) (1) Amount of after-tax gains reclassified from AOCI into net income is not material in the aggregate, or to any individual location in our Condensed Consolidated Statements of Operations. Lam Research Corporation 2023 Q1 10-Q 18 Table of Contents