LAM RESEARCH CORP 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS With the exception of historical facts, the statements contained in this discussion are forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified as forward-looking, by use of phrases and words such as “believe,” “estimated,” “anticipate,” “expect,” “probable,” “intend,” “plan,” “aim,” “may,” “should,” “could,” “would,” “will,” “continue,” and other future-oriented terms. The identification of certain statements as “forward-looking” does not mean that other statements not specifically identified are not forward-looking. Forward-looking statements include but are not limited to statements that relate to: trends and opportunities in the global economic environment; trends and opportunities in the semiconductor industry, including in the end markets and applications for semiconductors, and in device complexity; growth or decline in the industry and the market for, and spending on, wafer fabrication equipment; the anticipated levels of, and rates of change in, margins, market share, served addressable market, capital expenditures, research and development expenditures, international sales, revenue (actual and/or deferred), operating expenses and earnings generally; management’s plans and objectives for our current and future operations and business focus; restructuring activities; volatility in our quarterly results; the makeup of our customer base; customer and end user requirements and our ability to satisfy those requirements; customer spending and demand for our products and services, and the reliability of indicators of change in customer spending and demand; the effect of variability in our customers’ business plans or demand for our products and services; our competition, and our ability to defend our market share and to gain new market share; the success of joint development and collaboration relationships with customers, suppliers, or others; outsourced activities; our supply chain and the role of suppliers in our business, including the impacts of supply chain constraints and material costs; our leadership and competency, and our ability to facilitate innovation; our research and development programs; our ability to create sustainable differentiation; technology inflections in the industry and our ability to identify those inflections and to invest in research and development programs to meet them; our ability to deliver multi-product solutions; the resources invested to comply with evolving standards and the impact of such efforts; changes in state, federal and international tax laws, our estimated annual tax rate and the factors that affect our tax rates; legal and regulatory compliance; the estimates we make, and the accruals we record, in order to implement our critical accounting policies (including but not limited to the adequacy of prior tax payments, future tax benefits or liabilities, and the adequacy of our accruals relating to them); hedging transactions; debt or financing arrangements; our investment portfolio; our access to capital markets; uses of, payments of, and impact of interest rate fluctuations on, our debt; our intention to pay quarterly dividends and the amounts thereof, if any; our ability and intention to repurchase our shares; credit risks; controls and procedures; recognition or amortization of expenses; our ability to manage and grow our cash position; our strategic relevance with our customers; our ability to scale our operations to respond to changes in our business; the value of our patents; the materiality of potential losses arising from legal proceedings; the probability of making payments under our guarantees; the impact of the COVID-19 pandemic; and the sufficiency of our financial resources or liquidity to support future business activities (including but not limited to operations, investments, debt service requirements, dividends, and capital expenditures). Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value, and effect, including without limitation those discussed below under the heading “Risk Factors” within Part II Item 1A and elsewhere in this report and other documents we file from time to time with the Securities and Exchange Commission (“SEC”), such as our annual report on Form 10-K for the year ended June 26, 2022 (our “2022 Form 10-K”), our quarterly reports on Form 10-Q for the fiscal quarters ended September 25, 2022 and December 25, 2022, and our current reports on Form 8-K. Such risks, uncertainties, and changes in condition, significance, value, and effect could cause our actual results to differ materially from those expressed in this report and in ways not readily foreseeable. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on information currently and reasonably known to us. We do not undertake any obligation to release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances that occur after the date of this report or to reflect the occurrence or effect of anticipated or unanticipated events. Documents To Review In Connection With Management’s Discussion and Analysis Of Financial Condition and Results Of Operations For a full understanding of our financial position and results of operations for the three and nine months ended March 26, 2023, 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 2022 Form 10-K. Lam Research Corporation 2023 Q3 10-Q 22 Table of Contents EXECUTIVE SUMMARY Lam Research Corporation is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. We have built a strong global presence with core competencies in areas like nanoscale applications enablement, chemistry, plasma and fluidics, advanced systems engineering and a broad range of operational disciplines. Our products and services are designed to help our customers build smaller and better performing devices that are used in a variety of electronic products, including mobile phones, personal computers, servers, wearables, automotive vehicles, and data storage devices. Our customer base includes leading semiconductor memory, foundry, and integrated device manufacturers that make products such as non-volatile memory, dynamic random-access memory, and logic devices. Their continued success is part of our commitment to driving semiconductor breakthroughs that define the next generation. Our core technical competency is integrating hardware, process, materials, software, and process control, enabling results on the wafer. Semiconductor manufacturing, our customers’ business, involves the complete fabrication of multiple dies or integrated circuits on a wafer. This involves the repetition of a set of core processes and can require hundreds of individual steps. Fabricating these devices requires highly sophisticated process technologies to integrate an increasing array of new materials with precise control at the atomic scale. Along with meeting technical requirements, wafer processing equipment must deliver high productivity and be cost-effective. Demand from cloud computing, 5G, the Internet of Things, and other markets is driving the need for increasingly powerful and cost-efficient semiconductors. At the same time, there are growing technical challenges with traditional two-dimensional scaling. These trends are driving significant inflections in semiconductor manufacturing, such as the increasing importance of vertical scaling strategies like three-dimensional architecture as well as multiple patterning to enable shrinks. We believe we are in a strong position with our leadership and expertise in deposition, etch, and clean to facilitate some of the most significant innovations in semiconductor device manufacturing. Our Customer Support Business Group provides products and services to maximize installed equipment performance, predictability, and operational efficiency. Several factors create opportunity for sustainable differentiation for us: (i) our focus on research and development, with several on-going programs relating to sustaining engineering, product and process development, and concept and feasibility; (ii) our ability to effectively leverage cycles of learning from our broad installed base; (iii) our collaborative focus with semi-ecosystem partners; (iv) our ability to identify and invest in the breadth of our product portfolio to meet technology inflections; and (v) our focus on delivering our multi-product solutions with a goal to enhance the value of Lam’s solutions to our customers. In the quarter-ended March 26, 2023, customer demand weakened due to wafer fabrication equipment spending reductions resulting primarily from incremental demand weakness in memory. We did, however, continue to see improvement in supply chain constraints and were able to fulfill shipments of nearly all our outstanding back order systems. As a result of expected reduced business levels we initiated a restructuring plan in the March 2023 quarter designed to better align the Company’s cost structure with its outlook. We incurred a charge for the workforce actions associated with the restructuring plan in the March quarter of approximately $98.5 million. Over the course of calendar year 2023, we are projecting expenditures in the range of $250 million associated with various business process improvements and initiatives, inclusive of the March 2023 quarter restructuring activity. Risks and uncertainties related to the COVID-19 pandemic, supply chain challenges, and inflationary pressures may continue to negatively impact our revenue and gross margin. Over the longer term, we believe that secular demand for semiconductors combined with technology inflections in our industry, including 3D device scaling, multiple patterning, process flow, and advanced packaging chip integration, will drive sustainable growth and lead to an increase in the served addressable market for our products and services in the deposition, etch, and clean businesses. Lam Research Corporation 2023 Q3 10-Q 23 Table of Contents The following table summarizes certain key financial information for the periods indicated below: Three Months Ended March 26, 2023 December 25, 2022 (in thousands, except per share data and percentages) Revenue $ 3,869,569 $ 5,277,569 Gross margin $ 1,605,612 $ 2,376,349 Gross margin as a percent of total revenue 41.5 % 45.0 % Total operating expenses $ 663,359 $ 696,187 Net income $ 814,008 $ 1,468,507 Diluted net income per share $ 6.01 $ 10.77 In the March 2023 quarter, reve nue decreased 27% compared to the December 2022 quarter, driven by a decrease in both systems and customer-support related revenue as a result of the weakening demand environment, compounded by regulatory trade restrictions imposed on shipments of wafer fabrication equipment and related parts and service to certain customers in China. The deferred revenue balance was $2,002.7 million at the end of the March 2023 quarter, consistent with the balance at the end of the December 2022 quarter of $1,984.0 million. Advanced deposit additions from newer customers increased during the March 2023 quarter, offsetting the decline in deferred balances related to shipments we completed of tools that had critical parts outstanding. We aim to balance the requirements of our customers with the availability of resources, as well as performance to our operational and financial objectives. As a result, from time to time, we exercise discretion and judgment as to the timing and prioritization of manufacturing and deliveries of products, which has impacted, including in the current fiscal year, and may in the future impact, the timing of revenue recognition with respect to such products. The decrease in gross margin as a percentage of revenue in the March 2023 quarter compared to the December 2022 quarter was primarily a result of costs associated with restructuring related activities and product rationalization charges, as well as unfavorable absorption costs due to lower business volumes and customer and product mix. The decrease in operating expenses in the March 2023 quarter compared to the December 2022 quarter was primarily driven by decreases in outside service spending and supplies expense, partially offset by an increase in restructuring related charges, employee-related expenses from seasonality, product rationalization costs and transformational costs. Our cash and cash equivalents, investments, and restricted cash and investments balances increased to $5.6 billion at the end of the March 2023 quarter compared to $4.8 billion at the end of the December 2022 quarter. This increase was primarily the result of $1,726.4 million of cash generated from operating activities, partially offset by $581.9 million of share repurchases, including net share settlement of employee stock-based compensation, $234.0 million of dividends paid to stockholders; and $119.5 million of capital expenditures. Employee headcount as of March 26, 2023 was approximately 18,700. We expect the employee headcount balance to decrease further in the June 2023 quarter as many of the employees impacted by our restructuring activity have termination dates in early April. RESULTS OF OPERATIONS Revenue Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 Revenue (in millions) $ 3,870 $ 5,278 $ 14,221 $ 12,591 Korea 22 % 20 % 20 % 23 % China 22 % 24 % 26 % 32 % Taiwan 18 % 19 % 20 % 16 % United States 16 % 10 % 9 % 6 % Japan 10 % 11 % 10 % 11 % Europe 8 % 6 % 6 % 3 % Southeast Asia 4 % 10 % 9 % 9 % Revenue for the March 2023 quarter decreased 27% from the December 2022 quarter primarily from reductions in wafer fabrication equipment spending as well as from regulatory trade restrictions imposed on shipments of wafer fabrication equipment and related parts and services to China. Lam Research Corporation 2023 Q3 10-Q 24 Table of Contents The following table presents our revenue disaggregated between system and customer support-related revenue: Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 (In thousands) System revenue $ 2,256,033 $ 3,547,518 $ 8,985,538 $ 8,315,898 Customer support-related revenue and other 1,613,536 1,730,051 5,235,721 4,275,587 $ 3,869,569 $ 5,277,569 $ 14,221,259 $ 12,591,485 Please refer to Note 3, “Revenue,” to the Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding the composition of the two categories into which revenue has been disaggregated. The following table presents the percentages of leading- and non-leading-edge equipment and upgrade revenue to each of the primary markets we serve: Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 Memory 32 % 50 % 46 % 62 % Foundry 46 % 31 % 18 % 26 % Logic/integrated device manufacturing 22 % 19 % 36 % 12 % The decrease in the memory market for the nine months ended March 26, 2023 as compared to the same period in 2022, is primarily due to decreases in NAND investments by our customers during this time period. Gross Margin Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 (in thousands, except percentages) Gross margin $ 1,605,612 $ 2,376,349 $ 6,318,796 $ 5,771,295 Percent of revenue 41.5 % 45.0 % 44.4 % 45.8 % Gross margin as a percentage of revenue was lower in the March 2023 quarter compared to the December 2022 quarter primarily due to $66.7 million in restructuring-related charges and $26.8 million in costs associated with product rationalization, as well as unfavorable customer and product mix. The decrease in gross m argin as a percentage of revenue in the nine months ended March 26, 2023 compared to the same period in the prior year was primarily driven by costs associated with restructuring related activities, product rationalization, as well as higher levels of manufacturing-related spending as a result of increased inflationary pressures, partially offset by favorable customer and product mix. Research and Development Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 (in thousands, except percentages) Research & development (“R&D”) $ 429,451 $ 462,385 $ 1,325,211 $ 1,193,091 Percent of revenue 11.1 % 8.8 % 9.3 % 9.5 % We co ntinued to make significant R&D investments in the March 2023 quarter focused on leading-edge deposition, etch, clean and other semiconductor manufacturing processes. The decrease in R&D expense in the March 2023 quarter compared to the December 2022 quarter was primarily driven by a decrease of $22.1 million in supplies expense and $11.5 million in outside services. Lam Research Corporation 2023 Q3 10-Q 25 Table of Contents The increase in R&D expense in the nine months ended March 26, 2023 compared to the same period in the prior year was primarily driven by a $46.8 million increase in employee-related expenses mainly as a result of increased headcount and a $31.9 million increase in spending for supplies. Selling, General, and Administrative Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 (in thousands, except percentages) Selling, general, and administrative (“SG&A”) $ 193,500 $ 233,802 $ 632,922 $ 675,735 Percent of revenue 5.0 % 4.4 % 4.5 % 5.4 % SG&A expense during the March 2023 qua rter decreased in comparison to the December 2022 quarter, primarily driven by a decrease of $24.5 million in outside service spending. SG&A expense during the nine months ended March 26, 2023 decreased compared to the same period in the prior year, primarily driven by a decrease of $34.6 million in amortization for intangible assets, as the intangible assets associated with our Novellus Systems, Inc. transactions have fully amortized. Restructuring Charges, Net Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 (in thousands, except percentages) Restructuring charges, net $ 107,128 $ — $ 107,128 $ — Percent of revenue 2.8 % — % 0.8 % — % In the three and nine months ended March 26, 2023, we initiated a restructuring plan designed to better align our cost structure with our outlook for the economic environment and business opportunities. Under the plan we terminated approximately 1,400 employees, incurring expenses related to employee severance and separation costs. Employee severance and separation costs primarily relate to severance, non-cash severance, including equity award compensation expense, pension and other termination benefits. Additionally, we made a strategic decision to relocate certain manufacturing activities to pre-existing facilities. During the three and nine months ended March 26, 2023 net restructuring costs of $66.7 million and $40.4 million were recorded in restructuring charges, net - cost of goods sold, and restructuring charges, net - operating expenses, respectively of our Condensed Consolidated Financial Statements, included in Part I of this Form 10-Q. Please refer to Note 18, “Restructuring charges, net,” to our Condensed Consolidated Financial Statements, included in Part I of this Form 10-Q for additional information. Other Income (Expense), Net Other income (expense), net consisted of the following: Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 (in thousands) Interest income $ 41,974 $ 26,125 $ 83,155 $ 8,988 Interest expense (47,217) (46,661) (139,930) (138,531) Gains (losses) on deferred compensation plan-related assets, net 5,443 10,871 3,588 (5,737) Foreign exchange (losses) gains, net (5,519) (10,114) (8,812) 1,657 Other, net 1,988 (8,455) (12,661) 65,363 $ (3,331) $ (28,234) $ (74,660) $ (68,260) Interest income increased for the March 2023 quart er compared to the December 2022 quarter, primarily because of higher yields and higher average balances. Interest income increased for the nine months ended March 26, 2023, compared to the same period in 2022, primarily because of higher yields. Lam Research Corporation 2023 Q3 10-Q 26 Table of Contents Interest expense is consistent across all periods presented. The gains and losses on deferred compensation plan-related assets were driven by fluctuations in the fair market value of the underlying funds for all periods presented. Foreign exchange fluctuations were primarily due to currency movements against portions of our unhedged balance sheet exposures for all periods presented. The gains and losses in other, net for the three and nine months ended March 26, 2023, were driven by fluctuations in fair value of equity investments. For the nine months ended March 27, 2022, other, net includes an unrealized gain totaling $63.6 million associated with an equity investment that completed a business combination and public offering during that period. Income Tax Expense Our provision for income taxes and effective tax rate for the periods indicated were as follows: Three Months Ended Nine Months Ended March 26, 2023 December 25, 2022 March 26, 2023 March 27, 2022 (in thousands, except percentages) Income tax expense $ 124,914 $ 183,421 $ 537,201 $ 437,857 Effective tax rate 13.3 % 11.1 % 12.7 % 11.4 % The increase in the effective tax rate for the March 2023 quarter compared to the December 2022 quarter was primarily due to the change in level and proportion of income in higher and lower tax jurisdictions, recognition of previously unrecognized tax benefits from lapses of statutes of limitation, and a net tax benefit associated with legal entity restructuring in the December 2022 quarter. The increase in the effective tax rate for the nine months ended March 26, 2023 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 lower stock-based compensation excess tax benefits in the nine months ended March 26, 2023. International revenues account for a significant portion of our total revenues, such that a material portion of our pre-tax income is earned and taxed outside the United States. International pre-tax income is taxable in the United States at a lower effective tax rate than the federal statutory tax rate. Please refer to Note 7, “Income Taxes,” to our Consolidated Financial Statements in Part II, Item 8 of our 2022 Form 10-K for additional information. We re-evaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Refer to our “Critical Accounting Policies and Estimates” included in Part II, Item 7 of our 2022 Form 10-K for a discussion of our critical accounting policies and estimates. Recent Accounting Pronouncements For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our Condensed Consolidated Financial Statements, see Note 2 - Recent Accounting Pronouncements, of our Condensed Consolidated Financial Statements, included in Part 1 of this Form 10-Q. LIQUIDITY AND CAPITAL RESOURCES Total gross cash, cash equivalents, investments, and restricted cash and investments balances were $5.6 billion at March 26, 2023 compared to $3.9 billion as of June 26, 2022. This increase was primarily driven by $4,056.2 million of cash generated from operating activities, partially offset by $1,148.0 million of share repurchases, including net share settlement on employee stock-based compensation; $675.6 million in dividends paid; and $422.9 million of capital expenditures. Lam Research Corporation 2023 Q3 10-Q 27 Table of Contents Net cash provided by operating activities of $4,056.2 million during the nine months ended March 26, 2023, consisted of (in thousands): Net income $ 3,708,394 Non-cash charges: Depreciation and amortization 252,828 Equity-based compensation expense 218,105 Deferred income taxes (133,101) Changes in operating asset and liability accounts (1,550) Other 11,537 $ 4,056,213 Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in inventory of $964.0 million, along with a decrease in trade accounts payable of $392.0 million, and accrued expenses and other liabilities of $101.5 million. The uses of cash are offset by the following sources of cash: decreases in accounts receivable of $1,058.5 million, deferred profit of $268.9 million, and prepaid expense and other assets of $128.5 million. Cash Flow from Investing Activities Net cash used for investing activities during the nine months ended March 26, 2023, was $479.4 million, primarily consisting of $422.9 million in capital expenditures and $120.0 million of net cash disbursed for business acquisitions, partially offset by proceeds from maturities of available-for-sale securities of $71.9 million. Cash Flow from Financing Activities Net cash used for financing activities during the nine months ended March 26, 2023, was $1,792.7 million, primarily consisting of $1,148.0 million in treasury stock repurchases, including net share settlement on employee stock-based compensation, and $675.6 million in dividends paid, partially offset by $52.7 million combined proceeds from issuance of common stock. Liquidity Given that the semiconductor industry is highly competitive and has historically experienced rapid changes in demand, we believe that maintaining sufficient liquidity reserves is important to support sustaining levels of investment in R&D and capital infrastructure. Anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash, cash equivalents, and short-term investments as of March 26, 2023, 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, factors outside of our control, including uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets, have in the past, are currently, 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. In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on demand for our products and services. While we have substantial cash balances, we may require additional funding and need or choose to raise the required funds through borrowings or public or private sales of debt or equity securities. We believe that, if necessary, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives. However, domestic and global macroeconomic and political conditions, or the ongoing COVID-19 pandemic, could cause disruptions to the capital markets and otherwise make any financing more challenging, and there can be no assurance that we will be able to obtain such financing on commercially reasonable terms or at all.