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; 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 theSecurities and Exchange Commission ("SEC"), such as our annual report on Form 10-K for the year endedJune 27, 2021 (our "2021 Form 10-K"), our quarterly report on form 10-Q for the fiscal quarter endedSeptember 26, 2021 , and our current reports on Form 8-K. Such risks, uncertainties, and changes in condition, significance, value, and effect could cause our actual results to differ materially from those expressed in this report and in ways not readily foreseeable. 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 endedDecember 26, 2021 , and the related Management's Discussion and Analysis of Financial Condition and Results of Operations below, you should also read the Condensed Consolidated Financial Statements and notes presented in this Form 10-Q and the financial statements and notes in our 2021 Form 10-K. 25
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EXECUTIVE SUMMARYLam 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, 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 competency in deposition, etch, and clean to facilitate some of the most significant innovations in semiconductor device manufacturing. OurCustomer 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; and (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 2021, there were higher investments in wafer fabrication equipment spending driven by increasing device manufacturing complexity and the robust secular demand for semiconductors in a number of markets including artificial intelligence, 5G networks, high-performance computing, and Internet of Things. During the quarter-endedDecember 26, 2021 , customer demand remained strong, however, we experienced supply chain constraints, and we expect these constraints to continue in the near term. Risks and uncertainties related to the COVID-19 pandemic remain, which may continue to negatively impact our revenue and gross margin. Over the longer term, we believe that secular demand for semiconductors will continue to drive sustainable growth for our products and services, and that technology inflections in our industry, including 3D device scaling, multiple patterning, process flow, and advanced packaging chip integration, will lead to an increase in the served addressable market for our products and services in the deposition, etch, and clean businesses. The following table summarizes certain key financial information for the periods indicated below: Three Months Ended December 26, September 26, 2021 2021 (in thousands, except per share data and percentages) Revenue$ 4,226,604 $ 4,304,465 Gross margin$ 1,977,916 $ 1,976,754 Gross margin as a percent of total revenue 46.8 % 45.9 % Total operating expenses$ 639,777 $ 604,521 Net income$ 1,194,830 $ 1,179,744 Diluted net income per share$ 8.44
In theDecember 2021 quarter, revenue decreased 2% compared to theSeptember 2021 quarter, primarily as a result of supplier-related delays of critical parts given broad supply chain issues in the industry, partially offset by increased revenue for the customer support-related business. The increase in gross margin as a percentage of revenue in theDecember 2021 quarter 26
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compared to theSeptember 2021 quarter was primarily driven improved customer and product mix, manufacturing-related spending reduction, and improved factory absorption and field utilization, partially offset by increased variable compensation. The increase in operating expenses in theDecember 2021 quarter compared to theSeptember 2021 quarter was mainly driven by increases in employee-related expenses, rent expense and supplies expense, partially offset by decreases in outside services. Our cash and cash equivalents, investments, and restricted cash and investments balances increased to$5.6 billion at the end of theDecember 2021 quarter compared to$4.9 billion at the end of theSeptember 2021 quarter. This increase was primarily the result of$1.4 billion of cash generated from operating activities, partially offset by$414.8 million of share repurchases, including net share settlement on employee stock-based compensation;$211.2 million of dividends paid to stockholders; and$138.5 million of capital expenditures. Employee headcount as ofDecember 26, 2021 was approximately 16,300. RESULTS OF OPERATIONS Revenue Three Months Ended Six Months Ended December 26, September 26, December 26, December 27, 2021 2021 2021 2020 Revenue (in millions)$ 4,227 $ 4,304 $ 8,531 $ 6,633 China 26 % 37 % 31 % 36 % Korea 25 % 21 % 23 % 22 % Taiwan 18 % 15 % 17 % 16 % Japan 12 % 11 % 11 % 11 % Southeast Asia 9 % 8 % 9 % 8 % United States 6 % 6 % 6 % 4 % Europe 4 % 2 % 3 % 3 % Revenue for theDecember 2021 quarter decreased 2% from theSeptember 2021 quarter, due to supplier-related delays of critical parts given broad supply chain issues in the industry, partially offset by increased revenue for the customer support-related business. The following table presents our revenue disaggregated between system and customer support-related revenue: Three Months Ended Six Months Ended December 26, September 26, December 26, December 27, 2021 2021 2021 2020 (In thousands) System revenue$ 2,740,173 $ 2,924,883 $ 5,665,056 $ 4,455,662 Customer support-related revenue and other 1,486,431 1,379,582 2,866,013 2,177,655$ 4,226,604 $ 4,304,465 $ 8,531,069 $ 6,633,317 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 Six Months Ended December 26, September 26, December 26, December 27, 2021 2021 2021 2020 Memory 58 % 64 % 61 % 63 % Foundry 31 % 25 % 28 % 31 % Logic/integrated device manufacturing 11 % 11 % 11 % 6 % 27
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Table of Contents Gross Margin Three Months Ended Six Months Ended December 26, September 26, December 26, December 27, 2021 2021 2021 2020 (in thousands, except percentages) Gross margin$ 1,977,916 $ 1,976,754 $ 3,954,670 $ 3,109,974 Percent of revenue 46.8 % 45.9 % 46.4 % 46.9 % Gross margin as a percentage of revenue was higher in theDecember 2021 quarter compared to theSeptember 2021 quarter primarily as a result of improved customer and product mix, manufacturing-related spending reduction, and improved factory absorption and field utilization, partially offset by increased variable compensation. The decrease in gross margin as a percentage of revenue in the six months endedDecember 2021 compared to the same period in the prior year was primarily driven by increased manufacturing-related spending, lower field utilization, and increased employee-related expenses. Research and Development Three Months Ended Six Months Ended December 26, September 26, December 26, December 27, 2021 2021 2021 2020 (in thousands, except percentages) Research & development ("R&D")$ 403,644 $ 382,327 $ 785,971 $ 730,539 Percent of revenue 9.6 % 8.9 % 9.2 % 11.0 % We continued to make significant R&D investments in theDecember 2021 quarter focused on leading-edge deposition, etch, clean and other semiconductor manufacturing processes. The increase in R&D expense in theDecember 2021 quarter compared to theSeptember 2021 quarter was primarily driven by a$13 million increase in employee-related expenses primarily as a result of increased headcount and variable compensation. The increase in R&D expense in the six months endedDecember 2021 compared to the same period in the prior year was primarily driven by an increase of$61 million in employee-related expenses mainly as a result of increased headcount, slightly offset by a decrease of$13 million in deferred compensation plan-related costs. Selling, General, and Administrative Three Months Ended Six Months Ended December 26, September 26, December 26, December 27, 2021 2021 2021 2020 (in thousands, except percentages) Selling, general, and administrative ("SG&A")$ 236,133 $ 222,194 $ 458,327 $ 408,647 Percent of revenue 5.6 % 5.2 % 5.4 % 6.2 % SG&A expense during theDecember 2021 quarter increased in comparison to theSeptember 2021 quarter, driven by a$14 million increase in employee-related expenses primarily as a result of increased headcount and variable compensation. SG&A expense during the six months endedDecember 2021 increased compared to the same period in the prior year, primarily driven by increases of$32 million in employee-related expenses due in part to increased headcount and$13 million in spending for outside services. 28
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Other Income (Expense), Net Other income (expense), net consisted of the following: Three Months Ended Six Months Ended December 26, September 26, December 26, December 27, 2021 2021 2021 2020 (in thousands) Interest income$ 2,372 $ 4,678 $ 7,050 $ 11,755 Interest expense (46,765) (45,056) (91,821) (104,666) (Losses) Gains on deferred compensation plan-related assets, net (56) 7,437 7,381 37,134 Foreign exchange gains (losses), net 731 (17) 714 (5,138) Other, net 61,717 4,101 65,818 (7,818)$ 17,999 $ (28,857) $ (10,858) $ (68,733) Interest income decreased in theDecember 2021 quarter compared to theSeptember 2021 quarter primarily as a result of lower interest rates from a change in our investment mix. The decrease in interest income in the six months endedDecember 2021 compared to the same period in the prior year was as a result of lower cash balances and interest rates. Interest expense remained relatively flat in theDecember 2021 quarter compared to theSeptember 2021 quarter as our debt balances remained flat. Interest expense decreased in the six months endedDecember 2021 compared to the same period in the prior year due to the payoff of the 2021 Senior Notes. The gains and losses on deferred compensation plan-related assets in theDecember 2021 andSeptember 2021 quarters were driven by fluctuation in the fair market value of the underlying funds. Foreign exchange fluctuations were primarily due to currency movements against portions of our unhedged balance sheet exposures. Other, net generated income for theDecember 2021 andSeptember 2021 quarters primarily due to gains from our equity investments; theDecember 2021 quarter included an individually significant gain on one such equity investment. Refer to Note 5, "Other Income, (Expense), net," of our Condensed Consolidated Financial Statements, included in Part 1 of this Form 10-Q for additional information. 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 26, September 26, December 26, December 27, 2021 2021 2021 2020 (in thousands, except percentages) Income tax expense$ 161,308 $ 163,632 $ 324,940 $ 209,375 Effective tax rate 11.9 % 12.2 % 12.0 % 11.0 % The effective tax rate for theDecember 2021 quarter compared to theSeptember 2021 quarter remained consistent. The increase in the effective tax rate for the six months endedDecember 2021 compared to the same period in the prior year was primarily due to the change in level and proportion of income in higher and lower tax jurisdictions. We transferred our international sales operations fromSwitzerland toMalaysia , effective from fiscal year 2022. Through fiscal year 2036, we expect to operate under various tax incentives inMalaysia which provide exemptions on foreign income earned and are contingent upon meeting certain conditions. 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 outsidethe United States . International pre-tax income is taxable inthe 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 2021 Form 10-K for additional information. 29
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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 2021 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 atDecember 26, 2021 compared to$6.0 billion as ofJune 27, 2021 . This decrease was primarily driven by$1.7 billion of share repurchases, including net share settlement on employee stock-based compensation,$396.6 million in dividends paid, and$274.9 million of capital expenditures, partially offset by$1.9 billion of cash generated from operating activities. Cash Flow from Operating Activities Net cash provided by operating activities of$1.9 billion during the six months endedDecember 26, 2021 , consisted of (in thousands): Net income$ 2,374,574 Non-cash charges: Depreciation and amortization 161,579 Equity-based compensation expense 120,933 Deferred income taxes (26,573)
Changes in operating asset and liability accounts (657,279) Other
(75,204)$ 1,898,030 Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in inventory of$440.3 million , accounts receivable of$377.5 million , and prepaid expense and other assets of$24.9 million , along with a decrease in accrued expenses and other liabilities of$76.9 million . The uses of cash are offset by the following sources of cash: increases in deferred profit of$166.6 million and trade accounts payable of$95.8 million . Cash Flow from Investing Activities Net cash provided by investing activities during the six months endedDecember 26, 2021 , was$782.8 million , primarily consisting of net proceeds from sales of available-for-sale securities of$1.1 billion , partially offset by capital expenditures of$274.9 million . Cash Flow from Financing Activities Net cash used for financing activities during the six months endedDecember 26, 2021 , was$2.0 billion , primarily consisting of$1.7 billion in treasury stock repurchases, including net share settlement on employee stock-based compensation,$396.6 million in dividends paid, and$8.0 million of cash paid for debt repayment, partially offset by$50.6 million combined proceeds from issuance of common stock and reissuance of treasury stock. 30
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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 ofDecember 26, 2021 , are expected to be sufficient to support our anticipated levels of operations, investments, debt service requirements, capital expenditures, capital redistributions, and dividends through at least the next twelve months. However, uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets, have in the past, and could in the future, impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors. 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, the ongoing COVID-19 pandemic has in the past caused disruption in the capital markets and were it to do the same in the future, that could 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, marketable equity security prices, and foreign currency exchange rates, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in our 2021 Form 10-K. Other than as noted below, our exposure related to market risk has not changed materially sinceJune 27, 2021 . All of the potential changes noted below are based on sensitivity analysis performed on our financial position as ofDecember 26, 2021 . Actual results may differ materially.Fixed Income Securities Our investments in various interest earning securities carry a degree of market risk for changes in interest rates. At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines in interest rates could have a material adverse impact on interest income for our investment portfolio. We target to maintain a conservative investment policy, which focuses on the safety and preservation of our capital by limiting default risk, market risk, reinvestment risk, and concentration risk. The following table presents the hypothetical fair values of fixed income securities that would result from selected potential decreases and increases in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS with a minimum interest rate of zero BPS. The hypothetical fair values as ofDecember 26, 2021 , were as follows: Fair Value Valuation of Securities as of Valuation of Securities Given an Interest Rate December 26, Given an Interest Rate Decrease of X Basis Points 2021 Increase of X Basis Points (150 BPS) (100 BPS) (50 BPS) 0.00% 50 BPS 100 BPS 150 BPS (in thousands) Corporate notes and bonds$ 302,750 $ 302,682 $ 302,345 $ 301,677 $ 300,944 $ 300,212 $ 299,479 Mortgage backed securities - commercial 4,341 4,330 4,313 4,293 4,574 4,255 4,236 Total$ 307,091 $ 307,012 $ 306,658 $ 305,970 $ 305,518 $ 304,467 $ 303,715 We mitigate default risk by investing in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to achieve portfolio liquidity and maintain a prudent amount of diversification. 31
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Equity Price Risk The values of our investments in publicly traded securities, including mutual funds related to our obligations under our deferred compensation plans, are subject to market price risk. The following table presents the hypothetical fair values of our publicly traded securities that would result from potential decreases and increases in the price of each security in the portfolio. Potential fluctuations in the price of each security in the portfolio of plus or minus 10%, 15%, or 25% were selected based on potential near-term changes in those security prices. The hypothetical fair values as ofDecember 26, 2021 , were as follows: Fair Value Valuation of Securities as of Valuation of Securities Given an X Decrease December 26, Given an X Increase in Stock Price 2021 in Stock Price (25)% (15)% (10)% 0.00% 10% 15% 25% (in thousands) Corporate equities$ 37,225 $ 42,188 $ 44,670 $ 49,633 $ 54,596 $ 57,078 $ 62,041 Mutual funds 81,476$ 92,339 $ 97,771 108,634$ 119,497 $ 124,929 $ 135,793 Total$ 118,701 $ 134,527 $ 142,441 $ 158,267 $ 174,093 $ 182,007 $ 197,834
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