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 available 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; business process improvements and initiatives; 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 25, 2023 (our “2023 Form 10-K”), our quarterly report on Form 10-Q for the fiscal quarter ended September 24, 2023, 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 six months ended December 24, 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 2023 Form 10-K. Lam Research Corporation 2024 Q2 10-Q 17 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, artificial intelligence, 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, including our close to customer focus; (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. Overall calendar year 2023 customer demand weakened due to wafer fabrication equipment spending reductions resulting primarily from weakness in the memory market. In addition, the U.S. government’s restrictions on sales of equipment, parts and service for specific technologies and customers in China further impacted equipment demand in the year. As a result of the reduced business levels in calendar year 2023, we initiated a restructuring plan in the quarter ended March 26, 2023 designed to better align the Company’s cost structure with our outlook. We incurred a charge for the workforce actions associated with the restructuring plan of approximately $107.1 million in the second half of fiscal year 2023 and $7.3 million in the first half of fiscal year 2024. We continue to work towards a number of business process improvements and initiatives throughout the 2024 fiscal year and expect to incur expenditures from these activities in the range of $300 million, inclusive of the restructuring activity. Risks and uncertainties such as trade restrictions and the semiconductor demand environment may continue to negatively impact our revenue and operating 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 available market for our products and services in the deposition, etch, and clean businesses. Lam Research Corporation 2024 Q2 10-Q 18 Table of Contents The following table summarizes certain key financial information for the periods indicated below: Three Months Ended December 24, 2023 September 24, 2023 (in thousands, except per share data and percentages) Revenue $ 3,758,259 $ 3,482,062 Gross margin $ 1,757,455 $ 1,654,702 Gross margin as a percent of total revenue 46.8 % 47.5 % Total operating expenses $ 700,243 $ 631,673 Net income $ 954,266 $ 887,398 Diluted net income per share $ 7.22 $ 6.66 In the December 2023 quarter, reve nue increased 8% compared to the September 2023 quarter, mainly due to increased investments in the dynamic random access memory (“DRAM”) market segment. The deferred revenue balance was $1,928.0 million at the end of the December 2023 quarter, an increase to the balance at the end of the September 2023 quarter of $1,690.4 million, mainly due to an increase in advanced deposits. 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 delivery of products, which has impacted, 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 December 2023 quarter compared to the September 2023 quarter was primarily a result of restructuring-related activities, deferred compensation plan-related costs and unfavorable product mix, partially offset by favorable customer mix. The increase in operating expenses in the December 2023 quarter compared to the September 2023 quarter was driven by increases in deferred compensation plan and employee-related costs, and spending for outside services and supplies, including transformational charges. Our cash and cash equivalents, investments, and restricted cash and investments balances increased to $5.6 billion at the end of the December 2023 quarter compared to $5.2 billion at the end of the September 2023 quarter. This increase was primarily the result of $1,453.8 million of cash generated from operating activities, partially offset by $645.5 million of share repurchases, including net share settlement of employee stock-based compensation; $264.4 million of dividends paid to stockholders; and $115.3 million of capital expenditures. Employee headcount as of December 24, 2023 was approximately 17,200. RESULTS OF OPERATIONS Revenue Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 Revenue (in millions) $ 3,758 $ 3,482 $ 7,240 $ 10,352 China 40 % 48 % 44 % 27 % Korea 19 % 16 % 17 % 19 % Japan 14 % 9 % 12 % 10 % Taiwan 13 % 7 % 10 % 20 % United States 5 % 8 % 7 % 8 % Europe 5 % 7 % 6 % 6 % Southeast Asia 4 % 5 % 4 % 10 % Revenue for the December 2023 quart er increased 8% fro m the September 2023 quarter primarily as a result of strengthening investments in the DRAM market segment. Lam Research Corporation 2024 Q2 10-Q 19 Table of Contents The following table presents our revenue disaggregated between system and customer support-related revenue: Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 (In thousands) Systems revenue $ 2,299,286 $ 2,056,655 $ 4,355,941 $ 6,729,505 Customer support-related revenue and other 1,458,973 1,425,407 2,884,380 3,622,185 $ 3,758,259 $ 3,482,062 $ 7,240,321 $ 10,351,690 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 percentage of leading- and non-leading-edge equipment and upgrade revenue from each of the markets we serve was as follows: Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 Memory 48 % 38 % 43 % 50 % Foundry 38 % 36 % 37 % 33 % Logic/integrated device manufacturing 14 % 26 % 20 % 17 % The increase in the memory market segment for the December 2023 quarter compared to the September 2023 quarter is primarily due to increases in DRAM spending by our customers during the period. The decrease in the memory market segment for the six months ended December 24, 2023 as compared to the same period in 2022 is primarily due to decreases in NAND spending by our customers during this time period. Gross Margin Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 (in thousands, except percentages) Gross margin $ 1,757,455 $ 1,654,702 $ 3,412,157 $ 4,713,184 Percent of revenue 46.8 % 47.5 % 47.1 % 45.5 % Gross margin as a percentage of revenue was lower in the December 2023 quarter compared to the September 2023 quarter primarily a result of costs associated with restructuring-related activities, deferred compensation plan-related costs and unfavorable product mix, partially offset by favorable customer mix. The increase in gross margin as a percentage of revenue in the six months ended December 24, 2023 compared to the same period in the prior year was primarily due to favorable customer mix as well as reduced spending on material costs, partially offset by increased costs associated with restructuring-related activities. Research and Development Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 (in thousands, except percentages) Research & development (“R&D”) $ 469,712 $ 422,629 $ 892,341 $ 895,760 Percent of revenue 12.5 % 12.1 % 12.3 % 8.7 % We co ntinued to make significant R&D investments in the December 2023 quarter focused on leading-edge deposition, etch, clean and other semiconductor manufactu ring processes. The increase in R&D expense in the December 2023 quarter compared to the September 2023 quarter was primarily driven by increases in deferred compensation plan-related costs, employee-related costs, and supplies expense. Lam Research Corporation 2024 Q2 10-Q 20 Table of Contents R&D expense in the six months ended December 24, 2023 was flat to the same period in the prior year, as increase in deferred compensation plan-related costs were largely offset by decreases in spending for outside services. Selling, General, and Administrative Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 (in thousands, except percentages) Selling, general, and administrative (“SG&A”) $ 228,843 $ 207,023 $ 435,866 $ 439,422 Percent of revenue 6.1 % 5.9 % 6.0 % 4.2 % SG&A expense during the December 2023 qua rter increased in comparison to the September 2023 qua rter, primar ily driven by increases in deferred compensation plan-related and transformational costs, as well as increased spending for outside services. SG&A expense during the six months ended December 24, 2023 was flat to the same period in the prior year, as increases in transformational and deferred compensation-related costs were largely offset by decreases in spending for supplies and outside services. Restructuring Charges, Net Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 (in thousands, except percentages) Restructuring charges, net $ 16,645 $ 9,961 $ 26,606 $ — Percent of revenue 0.4 % 0.3 % 0.4 % — % During fiscal year 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 1,650 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. The restructuring charges in the December 2023 quarter increased compared to the September 2023 quarter, due primarily to increases in facility-related restructuring charges. During the six months ended December 24, 2023, net restructuring costs of $22.9 million and $3.7 million were recorded in restructuring charges, net - cost of goods sold, and restructuring charges, net - operating expenses, respectively in our Condensed Consolidated Financial Statements, included in Part I of this Form 10-Q. Please refer to Note 15, “Restructuring charges, net,” to our Condensed Consolidated Financial Statements, included in Part I of this Form 10-Q for additional information. No restructuring charges were recognized during the six months ended December 25, 2022. Other Income (Expense), Net Other income (expense), net consisted of the following: Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 (in thousands) Interest income $ 57,595 $ 56,564 $ 114,159 $ 41,181 Interest expense (46,313) (45,331) (91,644) (92,713) Gains (losses) on deferred compensation plan-related assets, net 25,530 (2,901) 22,629 (1,855) Foreign exchange (losses) gains, net (568) 1,269 701 (3,293) Other, net (6,405) (7,000) (13,405) (14,649) $ 29,839 $ 2,601 $ 32,440 $ (71,329) Lam Research Corporation 2024 Q2 10-Q 21 Table of Contents Interest income for the three months ended December 24, 2023 is consistent with interest income for the three months ended September 24, 2023. Interest income increased for the six months ended December 24, 2023, compared to the same period in 2022, primarily because of higher yields and higher cash balances. Interest expense is consistent across all periods presented. The gains and losses on deferred compensation plan-related assets, net 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 losses in other, net for the three months and six months ended December 24, 2023 were lower compared to the three months ended September 24, 2023 and six months ended December 25, 2022, respectively, primarily driven by fluctuations in the fair market value of equity investments. Income Tax Expense Our provision for income taxes and effective tax rate for the periods indicated were as follows: Three Months Ended Six Months Ended December 24, 2023 September 24, 2023 December 24, 2023 December 25, 2022 (in thousands, except percentages) Income tax expense $ 132,785 $ 138,232 $ 271,017 $ 412,287 Effective tax rate 12.2 % 13.5 % 12.8 % 12.5 % The decrease in the effective tax rate for the December 2023 quarter compared to the September 2023 quarter was primarily due to the change in level and proportion of income in higher and lower tax jurisdictions, and the recognition of previously unrecognized tax benefits from lapses of statutes of limitation in the December 2023 quarter. The effective tax rate for the six months ended December 24, 2023, compared to the same period in the prior year remained consistent. 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 2023 Form 10-K for additional information. On August 16, 2022, the IRA was signed into law. In general, the provisions of the IRA are effective beginning with our fiscal year 2024, with certain exceptions. The IRA includes a new 15% corporate minimum tax. We have evaluated the potential impacts of the IRA and do not expect it to have a material impact on our effective tax rate. However, we expect future guidance from the Treasury Department and will further analyze when the guidance is issued. 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 A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make certain judgments, estimates and assumptions that could affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on historical experience and on various other assumptions we believe to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates, which could have a material impact on our business, results of operations, and financial condition. Our critical accounting estimates include: • the recognition and valuation of revenue from arrangements with multiple performance obligations which impacts revenue; • the valuation of inventory, which impacts gross margin; Lam Research Corporation 2024 Q2 10-Q 22 Table of Contents • the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions, which impact our provision for income tax expenses; and • the valuation and recoverability of long-lived assets, which impacts gross margin and operating expenses when we record asset impairments or accelerate their depreciation or amortization. Refer to our “Critical Accounting Policies and Estimates” included in Part II, Item 7 of our 2023 Form 10-K for a discussion of the critical accounting estimates identified above. Recent Accounting Pronouncements 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 December 24, 2023, flat to June 25, 2023. Cash generated from operating activities totaling $2,405.0 million was offset by $1,488.7 million of share repurchases, including net share settlement on employee stock-based compensation; $494.7 million in dividends paid; and $254.1 million of repayment of debt largely associated with the purchase of certain properties under finance leases. Net cash provided by operating activities of $2,405.0 million during the six months ended December 24, 2023, consisted of (in thousands): Net income $ 1,841,664 Non-cash charges: Depreciation and amortization 181,420 Equity-based compensation expense 137,112 Deferred income taxes (112,985) Changes in operating asset and liability accounts 353,760 Other 4,032 $ 2,405,003 Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following sources of cash: decreases in inventory of $350.2 million and accounts receivable of $114.6 million and increases in deferred gross profit of $97.7 million, and trade accounts payable of $14.5 million. These sources of cash are offset by the following uses of cash: a decrease in accrued expenses and other liabilities of $189.8 million and an increase in prepaid expenses and other current assets of $33.4 million. Cash Flow from Investing Activities Net cash used for investing activities during the six months ended December 24, 2023, was $176.6 million, primarily consisting of $192.3 million in capital expenditures, partially offset by proceeds from maturities of available-for-sale securities of $23.1 million. Cash Flow from Financing Activities Net cash used for financing activities during the six months ended December 24, 2023, was $2.2 billion, primarily consisting of $1,488.7 million in treasury stock repurchases, including net share settlement on employee stock-based compensation, $494.7 million in dividends paid, and $254.1 million of repayment of debt, largely associated with the purchase of certain properties under finance leases. 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 December 24, 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. Lam Research Corporation 2024 Q2 10-Q 23 Table of Contents In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on demand for our products and services. While we have substantial cash balances, we may require additional funding and need or choose to raise the required funds through borrowings or public or private sales of debt or equity securities. We believe that, if necessary, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives. However, domestic and global macroeconomic and political conditions 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.