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, in device complexity, and in the complexity of device manufacturing; 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; the performance and benefits of our products and services; 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; the opportunities in our industry for, and 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 ability to scale our operations to respond to changes in our business; our goals and initiatives with respect to environmental, social and governance matters, including emissions, and human capital, including inclusion and diversity; the value of our patents; the materiality of potential losses arising from legal proceedings; the probability of making payments under our guarantees; 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 30, 2024 (our “2024 Form 10-K”), and our current reports on Form 8-K. Such risks, uncertainties, and changes in condition, significance, value, and effect could cause our actual results to differ materially from those expressed in this report and in ways not readily foreseeable. 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 months ended September 29, 2024, 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 2024 Form 10-K. Lam Research Corporation 2025 Q1 10-Q 15 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 markets 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 opportunities 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. In calendar year 2024, we anticipate higher wafer fabrication equipment spending, driven by an increase in both memory and non-memory market segments versus calendar year 2023. In the short term, volatility in the semiconductor demand environment, as well as other risks and uncertainties, may 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. On May 21, 2024, the Company announced a ten-for-one stock split which was effective October 2, 2024. All references made to share or per share amounts throughout this Form 10-Q, including those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, have been retroactively adjusted to reflect the stock split. Lam Research Corporation 2025 Q1 10-Q 16 Table of Contents The following table summarizes certain key financial information for the periods indicated below: Three Months Ended September 29, 2024 June 30, 2024 (in thousands, except per share data and percentages) Revenue $ 4,167,976 $ 3,871,507 Gross margin $ 2,002,683 $ 1,840,098 Gross margin as a percent of total revenue 48.0 % 47.5 % Total operating expenses $ 738,486 $ 713,538 Net income $ 1,116,444 $ 1,020,282 Diluted net income per share $ 0.86 $ 0.78 In the September 2024 quarter, revenue increased 8% compared to the three months ended June 30, 2024 (the “June 2024 quarter”), driven by increases in systems revenue as a result of strengthened investments in the dynamic random access memory (“DRAM”) market segment as well as increases in customer support-related revenue. The deferred revenue balance was $2,047.0 million at the end of the September 2024 quarter, an increase relative to the balance at the end of the June 2024 quarter of $1,551.6 million, mainly due to an increase in customer 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 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 increase in gross margin as a percentage of revenue in the September 2024 quarter compared to the June 2024 quarter was primarily a result of improved factory efficiencies, partially offset by increased incentive compensation expense. The increase in operating expenses in the September 2024 quarter compared to the June 2024 quarter was driven by higher headcount and incentive compensation expense, as well as increases in outside services spend, partially offset by lower spending for supplies. Our cash, cash equivalents, and restricted cash balances increased to $6.1 billion at the end of the September 2024 quarter compared to $5.9 billion at the end of the June 2024 quarter. This increase was primarily the result of $1,568.5 million of cash generated from operating activities, partially offset by $997.0 million of share repurchases, including net share settlement of employee stock-based compensation; $261.0 million of dividends paid to stockholders; and $110.6 million of capital expenditures. Employee headcount as of September 29, 2024 was approximately 17,700. RESULTS OF OPERATIONS Revenue Three Months Ended September 29, 2024 June 30, 2024 September 24, 2023 Revenue (in millions) $ 4,168 $ 3,872 $ 3,482 China 37 % 39 % 48 % Korea 18 % 18 % 16 % Taiwan 15 % 15 % 7 % United States 12 % 10 % 8 % Japan 7 % 7 % 9 % Southeast Asia 6 % 8 % 5 % Europe 5 % 3 % 7 % The increase in revenue for the September 2024 quarter compared to the same period in 2023 is primarily due to increases in Foundry and DRAM spending by our customers, partially offset by decreases in non-volatile memory spending during this period. Lam Research Corporation 2025 Q1 10-Q 17 Table of Contents The following table presents our revenue disaggregated between systems and customer support-related revenue: Three Months Ended September 29, 2024 June 30, 2024 September 24, 2023 (In thousands) Systems revenue $ 2,392,730 $ 2,169,885 $ 2,056,655 Customer support-related revenue and other 1,775,246 1,701,622 1,425,407 $ 4,167,976 $ 3,871,507 $ 3,482,062 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 September 29, 2024 June 30, 2024 September 24, 2023 Memory 35 % 36 % 38 % Foundry 41 % 43 % 36 % Logic/integrated device manufacturing 24 % 21 % 26 % The decrease in the memory market segment for the September 2024 quarter compared to the June 2024 quarter is primarily attributable to decreases in non-volatile memory spending, partially offset by increased investments in DRAM. Additionally, the Logic market segment saw strengthened investments as compared to the June 2024 quarter. Gross Margin Three Months Ended September 29, 2024 June 30, 2024 September 24, 2023 (in thousands, except percentages) Gross margin $ 2,002,683 $ 1,840,098 $ 1,654,702 Percent of revenue 48.0 % 47.5 % 47.5 % Gross margin as a percentage of re venue was higher in the September 2024 quarter compared to the June 2024 quarter primarily as a result of improved factory efficiencies, partially offset by increased incentive compensation expense. The increase in gross margin as a percentage of revenue in the three months ended September 29, 2024 compared to the same period in the prior year was primarily due to improved factory efficiencies and reduced spending on material costs, offset by unfavorable changes in customer and product mix, increased transformational charges, and increased employee-related expenses. Research and Development Three Months Ended September 29, 2024 June 30, 2024 September 24, 2023 (in thousands, except percentages) Research & development (“R&D”) $ 495,358 $ 497,829 $ 422,629 Percent of revenue 11.9 % 12.9 % 12.1 % We co ntinued to make significant R&D investments in the September 2024 quarter focused on leading-edge deposition, etch, clean and other semiconductor manufactu ring processes. Th e decrease in R&D expense in the September 2024 quarter compared to the June 2024 quarter was primarily driven by a decrease in supplies spending, partially offset by increased headcount and incentive compensation expense, as well as higher elective deferred compensation plan-related costs. R&D expense in the three months ended September 29, 2024 increased compared to the same period in the prior year, driven by increases in headcount and incentive compensation expense, elective deferred compensation plan-related costs, as well as higher spending on outside services. Lam Research Corporation 2025 Q1 10-Q 18 Table of Contents Selling, General, and Administrative Three Months Ended September 29, 2024 June 30, 2024 September 24, 2023 (in thousands, except percentages) Selling, general, and administrative (“SG&A”) $ 243,128 $ 216,477 $ 207,023 Percent of revenue 5.8 % 5.6 % 5.9 % SG&A expense during the September 2024 quarter increased in comparison to the June 2024 quarter, primarily driven by increases in headcount and incentive compensation expense. SG&A expense during the three months ended September 29, 2024 increased compared to the same period in the prior year, driven by higher spending for transformational activities, as well as increases in headcount and incentive compensation expense. Restructuring Charges, N et Three Months Ended September 29, 2024 June 30, 2024 September 24, 2023 (in thousands, except percentages) Restructuring charges, net $ — $ 4,508 $ 9,961 Percent of revenue — % 0.1 % 0.3 % In fiscal year 2023, we initiated a restructuring plan that continued into fiscal year 2024, designed to better align our cost structure with our outlook for the economic environment and business opportunities. Under the plan we terminated approximately 1,760 employees, incurring expenses related to employee severance and separation costs. Employee severance and separation costs were primarily related 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 plan was substantially completed as of June 30, 2024. Please refer to Note 14, “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 September 29, 2024 June 30, 2024 September 24, 2023 (in thousands) Interest income $ 68,449 $ 66,027 $ 56,564 Interest expense (44,946) (46,439) (45,331) Gains (losses) on deferred compensation plan-related assets, net 17,420 9,643 (2,901) Foreign exchange (losses) gains, net (9,686) (1,194) 1,269 Other, net (1,156) (241) (7,000) $ 30,081 $ 27,796 $ 2,601 Interest income increased in the September 2024 quarter as compared to the June 2024 quarter, primarily due to higher cash balances. Interest income increased for the three months ended September 29, 2024, compared to the same period in 2023, because of higher yields and higher cash balances. Interest expense was flat for 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. Lam Research Corporation 2025 Q1 10-Q 19 Table of Contents The variations in other, net for the September 2024 quarter compared to the June 2024 quarter and September 2023 quarter were 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 September 29, 2024 June 30, 2024 September 24, 2023 (in thousands, except percentages) Income tax expense $ 177,834 $ 134,074 $ 138,232 Effective tax rate 13.7 % 11.6 % 13.5 % The increase in the effective tax rate for the September 2024 quarter compared to the June 2024 quarter was primarily due to the change in level and proportion of income in higher and lower tax jurisdictions. The effective tax rate for the September quarter 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 2024 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 Our critical accounting policies and estimates are unchanged from those disclosed in “Critical Accounting Policies and Estimates” in Part II, Item 7 of our 2024 Form 10-K. 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, and restricted cash balances were $6.1 billion at September 29, 2024 compared to $5.9 billion as of June 30, 2024. This slight increase was primarily driven by cash generated from operating activities totaling $1,568.5 million, partially offset by $997.0 million of share repurchases, including net share settlement on employee stock-based compensation; $261.0 million in dividends paid; and $110.6 million in capital expenditures. Net cash provided by operating activities of $1,568.5 million during the three months ended September 29, 2024, consisted of (in thousands): Net income $ 1,116,444 Non-cash charges: Depreciation and amortization 94,295 Equity-based compensation expense 80,011 Deferred income taxes (108,722) Changes in operating asset and liability accounts 386,900 Other (457) $ 1,568,471 Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following sources of cash: an increase in deferred gross profit of $519.5 million, an increase in accrued expenses and other liabilities of $240.4 million and an increase in trade accounts payable of $82.6 million. These sources of cash are offset by the following uses of cash: increases in accounts receivable of $414.1 million, inventory of $23.8 million, and prepaid expenses and other current assets of $17.8 million. Lam Research Corporation 2025 Q1 10-Q 20 Table of Contents Cash Flow from Investing Activities Net cash used for investing activities during the three months ended September 29, 2024, was $110.6 million, primarily consisting of capital expenditures. Cash Flow from Financing Activities Net cash used for financing activities during the three months ended September 29, 2024, was $1,259.3 million, primarily consisting of $997.0 million in treasury stock repurchases, including net share settlement on employee stock-based compensation, and $261.0 million in dividends paid. 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 and cash equivalents as of September 29, 2024, 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 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. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk For financial market risks related to changes in interest rates and foreign currency exchange rates, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, in our 2024 Form 10-K. Our exposure related to market risk has not changed materially since June 30, 2024.