LAM RESEARCH CORPORATION 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 and the semiconductor industry; 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; customer and end user requirements and our ability to satisfy those requirements; customer capital spending and their 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 equipment and services; changes in demand for our products and in our market share resulting from, among other things, any changes in our customers' proportion of capital expenditure (with respect to certain technology inflections); hedging transactions; debt or financing arrangements; our competition, and our ability to defend our market share and to gain new market share; our ability to obtain and qualify alternative sources of supply; changes in state, federal and international tax laws, our estimated annual tax rate and the factors that affect our tax rates; anticipated growth or decline in the industry and the total market for wafer fabrication equipment, our growth relative thereto and the resulting impact on us from such growth or decline; the success of joint development and collaboration relationships with customers, suppliers, or others; outsourced activities; the role of component suppliers in our business; our leadership and competency, and our ability to facilitate innovation; our ability to continue to, including the underlying factors that, create sustainable differentiation; the resources invested to comply with evolving standards and the impact of such efforts; 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); 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 28, 2020 (our "2020 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 endedSeptember 27, 2020 , 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 2020 Form 10-K. 26
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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, faster, 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. We aim to increase our strategic relevance with our customers by contributing more to their continued success. 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 the Cloud, 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 scaling. These trends are driving significant inflections in semiconductor manufacturing, such as the increasing importance of vertical 3D scaling strategies 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. We have a broad portfolio of products that provide complementary processing steps used throughout semiconductor manufacturing. OurCustomer Support Business Group focuses attention on delivering solutions that meet our customers' technical requirements and productivity needs during the equipment lifecycle. 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 ecosystem partners; and (iv) 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 2020, there has been an increase in wafer fabrication equipment spending by semiconductor manufacturers, driven by the robust secular demand for semiconductors in a number of markets including high-performance computing, mobile phones, and 5G networks. During the quarter-endedSeptember 27, 2020 , customer demand was strong, and we improved our production output levels as we operated under COVID-19-related safety protocols. While we are currently seeing improvements in both our own operations and those of our suppliers, we have experienced higher costs of goods sold related to freight and logistics. 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 our 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 September 27, June 28, September 29, 2020 2020 2019 (in thousands, except per share data and percentages) Revenue$ 3,177,080 $ 2,791,864 $ 2,165,746 Gross margin$ 1,506,179 $ 1,280,332 $ 981,710 Gross margin as a percent of total revenue 47.4 % 45.9 % 45.3 % Total operating expenses$ 545,115 $ 524,610 $ 444,255 Net income$ 823,451 $ 696,673 $ 465,789 Diluted net income per share$ 5.59 $ 4.73 $ 3.09 27
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In theSeptember 2020 quarter, revenue increased 14% compared to theJune 2020 quarter, primarily as a result of increased investments from our foundry customers. The increase in gross margin as a percentage of revenue in theSeptember 2020 quarter compared to theJune 2020 quarter was primarily driven by customer and product mix, and higher factory output and field utilization. The increase in operating expenses in theSeptember 2020 quarter compared to theJune 2020 quarter was mainly driven by increases in employee-related costs, outside services and spending for supplies, partially offset by lower costs related to our deferred compensation plan liabilities. Our cash and cash equivalents, investments, and restricted cash and investments balances decreased slightly to$6.9 billion at the end of theSeptember 2020 quarter compared to$7.0 billion at the end of theJune 2020 quarter. This decrease was primarily the result of$448.6 million of share repurchases, including net share settlement on employee stock-based compensation;$167.1 million of dividends paid to stockholders; and$62.8 million of capital expenditures, partially offset by$642.5 million of cash generated from operating activities. Employee headcount as ofSeptember 27, 2020 was approximately 11,700. RESULTS OF OPERATIONS Revenue Three Months Ended September 27, June 28, September 29, 2020 2020 2019 Revenue (in millions)$ 3,177 $ 2,792 $ 2,166 China 37 % 34 % 27 % Korea 24 % 32 % 21 % Taiwan 14 % 11 % 18 % Japan 12 % 8 % 13 % Southeast Asia 7 % 5 % 10 % United States 4 % 7 % 8 % Europe 2 % 3 % 3 %
Revenue for the
Three Months Ended
September 27, June 28, September 29,
2020 2020 2019
(In thousands)
System revenue $ 2,148,241 $ 1,865,249 $ 1,365,228
Customer support-related revenue and other 1,028,839 926,615 800,518
$ 3,177,080 $ 2,791,864 $ 2,165,746
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
September 27, June 28, September 29,
2020 2020 2019
Memory 58 % 61 % 64 %
Foundry 36 % 29 % 25 %
Logic/integrated device manufacturing 6 % 10 % 11 %
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Gross Margin
Three Months Ended
September 27, June 28, September 29,
2020 2020 2019
(in thousands, except percentages)
Gross margin $ 1,506,179 $ 1,280,332 $ 981,710
Percent of revenue 47.4 % 45.9 % 45.3 %
Gross margin as a percentage of revenue was higher in the September 2020 quarter
compared to the June 2020 quarter primarily due to customer and product mix, and
higher factory output and field utilization.
The increase in gross margin as a percentage of revenue in the September 2020
quarter compared to the September 2019 quarter was driven by customer and
product mix, partially offset by higher factory spend and lower field
utilization as a result of COVID-19 disruptions.
Research and Development
Three Months Ended
September 27, June 28, September 29,
2020 2020 2019
(in thousands, except percentages)
Research & development ("R&D") $ 355,367 $ 338,810 $ 286,827
Percent of revenue 11.2 % 12.1 % 13.2 %
We continued to make significant R&D investments in the September 2020 quarter
focused on leading-edge deposition, etch, clean and other semiconductor
manufacturing processes. The increase in R&D expense in the September 2020
quarter compared to the June 2020 quarter was primarily driven by increases of
$7 million in spending for supplies and $7 million in outside services.
The increase in R&D expense in the September 2020 quarter compared to the same
period in the prior year was primarily driven by increases of $38 million in
employee-related expenses due to increased headcount, $15 million in spending
for supplies, and $10 million in outside services.
Selling, General, and Administrative
Three Months Ended
September 27, June 28, September 29,
2020 2020 2019
(in thousands, except percentages)
Selling, general, and administrative ("SG&A") $ 189,748 $ 185,800 $ 157,428
Percent of revenue 6.0 % 6.7 % 7.3 %
SG&A expense during the September 2020 quarter increased slightly in comparison
to the June 2020 quarter.
SG&A expense during the September 2020 quarter increased compared to the same
period in the prior year primarily as a result of an increase of $22 million in
employee-related expenses due to increased headcount.
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Other Expense, Net
Other expense, net consisted of the following:
Three Months Ended
September 27, June 28, September 29,
2020 2020 2019
(in thousands)
Interest income $ 6,959 $ 9,339 $ 31,784
Interest expense (52,115) (49,250) (43,995)
Gains (losses) on deferred compensation plan-related
assets, net 12,927 26,134 (436)
Foreign exchange losses, net (1,375) (981) (529)
Other, net (5,188) 7,205 448
$ (38,792) $ (7,553) $ (12,728)
Interest income decreased in the September 2020 quarter compared to the June
2020 and September 2019 quarters as a result of lower yield.
Interest expense increased in the September 2020 quarter compared to the June
2020 quarter primarily due to the full quarter impact of the May 2020 issuance
of $2.0 billion of senior notes. Interest expense increased in the September
2020 quarter compared to the same period in 2019 due to the issuance of the $2.0
billion senior notes, partially offset by the retirement of $500 million senior
notes in March 2020 and conversions of the 2041 Notes.
The gains on deferred compensation plan-related assets in the September 2020 and
June 2020 quarters compared to the September 2019 quarter were driven by an
improvement in the fair market value of the underlying funds.
Foreign exchange fluctuations are primarily due to currency movements against
portions of our unhedged balance sheet exposures.
Other, net expense was higher in the September 2020 quarter compared to the June
2020 quarter primarily due to loss on extinguishment of debt in the September
2020 quarter and investment gains associated with our private equity investments
in the June 2020 quarter. Other, net expense was higher in the September 2020
quarter compared to the same period in 2019 primarily due to loss on
extinguishment of debt.
Income Tax Expense
Our provision for income taxes and effective tax rate for the periods indicated
were as follows:
Three Months Ended
September 27, June 28, September 29,
2020 2020 2019
(in thousands, except percentages)
Income tax expense $ 98,821 $ 51,496 $ 58,938
Effective tax rate 10.7 % 6.9 % 11.2 %
The increase in the effective tax rate for the three months ended September 2020
compared to the three months ended June 2020 was primarily due to the change in
level and proportion of income in higher and lower tax jurisdictions and the
true-ups of prior year tax returns in the three months ended June 2020 .
The decrease in the effective tax rate for the three months ended September 2020
compared to the three months ended September 2019 was primarily due to the
change in level and proportion of income in higher and lower tax jurisdictions.
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 2020 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.
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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 withU.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; •the valuation of warranty reserves, which impacts gross margin; •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. We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements regarding the critical accounting estimates indicated above. Revenue Recognition: We recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services by following a five-step process, (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when or as we satisfy a performance obligation, as further described below. Identify the contract with a customer. We generally consider documentation of terms with an approved purchase order as a customer contract, provided that collection is considered probable, which is assessed based on the creditworthiness of the customer as determined by credit checks, payment histories, and/or other circumstances. Identify the performance obligations in the contract. Performance obligations include sales of systems, spare parts, and services. In addition, our customer contracts contain provisions for installation and training services which have been deemed immaterial in the context of the contract. Determine the transaction price. The transaction price for our contracts with customers consists of both fixed and variable consideration provided it is probable that a significant reversal of revenue will not occur when the uncertainty related to variable consideration is resolved. Fixed consideration includes amounts to be contractually billed to the customer while variable consideration includes estimates for discounts and credits for future usage which are based on contractual terms outlined in volume purchase agreements and other factors known at the time. We generally invoice customers at shipment and for professional services either as provided or upon meeting certain milestones. Customer invoices are generally due within 30 to 90 days after issuance. Our contracts with customers typically do not include significant financing components as the period between the transfer of performance obligations and timing of payment are generally within one year. Allocate the transaction price to the performance obligations in the contract. For contracts that contain multiple performance obligations, we allocate the transaction price to the performance obligations in the contract on a relative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to historical discounting trends for products and services and pricing practices in different geographies. Recognize revenue when or as we satisfy a performance obligation. Revenue for systems and spares are recognized at a point in time, which is generally upon shipment or delivery. Revenue from services is recognized over time as services are completed or ratably over the contractual period of generally one year or less. 31
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Inventory Valuation: Our policy is to assess the valuation of all inventories
including manufacturing raw materials, work-in-process, finished goods, and
spare parts in each reporting period. Obsolete inventory or inventory in excess
of management's estimated usage requirement is written down to its estimated net
realizable value if less than cost. Estimates of market value include but are
not limited to management's forecasts related to our future manufacturing
schedules, customer demand, technological and/or market obsolescence, general
semiconductor market conditions, and possible alternative uses. If future
customer demand or market conditions are less favorable than our projections,
additional inventory write-downs may be required and would be reflected in cost
of goods sold in the period in which we make the revision.
Warranty: We record a provision for estimated warranty expenses to cost of sales
for each system when we recognize revenue. We periodically monitor the
performance and cost of warranty activities, if actual costs incurred are
different than our estimates, we may recognize adjustments to provisions in the
period in which those differences arise or are identified. We do not maintain
general or unspecified reserves; all warranty reserves are related to specific
systems.
Income Taxes: Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, as well as the
tax effect of carryforwards. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
Realization of our net deferred tax assets is dependent on future taxable
income. We believe it is more likely than not that such assets will be realized;
however, ultimate realization could be negatively impacted by market conditions
and other variables not known or anticipated at this time. In the event that we
determine that we will not be able to realize all or part of our net deferred
tax assets, an adjustment will be charged to earnings in the period such
determination is made. Likewise, if we later determine that it is more likely
than not that the deferred tax assets will be realized, then the previously
provided valuation allowance will be reversed.
We recognize the benefit from a tax position only if it is more likely than not
that the position will be sustained upon audit based solely on the technical
merits of the tax position. Our policy is to include interest and penalties
related to uncertain tax positions as a component of income tax expense.
Long-lived Assets: We review goodwill at least annually for impairment. If
certain events or indicators of impairment occur between annual impairment
tests, we will perform an impairment test at that date. In testing for a
potential impairment of goodwill, we: (1) allocate goodwill to the reporting
units to which the acquired goodwill relates; (2) estimate the fair value of our
reporting units; and (3) determine the carrying value (book value) of those
reporting units. Prior to this allocation of the assets to the reporting units,
we assess long-lived assets for impairment. Furthermore, if the estimated fair
value of a reporting unit is less than the carrying value, we must estimate the
fair value of all identifiable assets and liabilities of that reporting unit, in
a manner similar to a purchase price allocation for an acquired business. This
can require independent valuations of certain internally generated and
unrecognized intangible assets such as in-process R&D and developed technology.
Only after this process is completed can the amount of goodwill impairment, if
any, be determined. In our goodwill impairment process we first assess
qualitative factors to determine whether it is necessary to perform a
quantitative analysis. We do not calculate the fair value of a reporting unit
unless we determine, based on a qualitative assessment, that it is more likely
than not that the reporting unit's fair value is less than its carrying amount.
The process of evaluating the potential impairment of goodwill is subjective and
requires significant judgment at many points during the analysis. We determine
the fair value of our reporting units by using an income approach. Under the
income approach, we determine fair value based on estimated future cash flows of
each reporting unit, discounted by an estimated weighted-average cost of
capital, which reflects the overall level of inherent risk of a reporting unit
and the rate of return an outside investor would expect to earn.
In estimating the fair value of a reporting unit, we make estimates and
judgments about the future cash flows of our reporting units, including
estimated growth rates and assumptions about the economic environment. Although
our cash flow forecasts are based on assumptions that are consistent with the
plans and estimates we are using to manage the underlying businesses, there is
significant judgment involved in determining the cash flows attributable to a
reporting unit. In addition, we make certain judgments about allocating shared
assets to the estimated balance sheets of our reporting units. Changes in
judgment on these assumptions and estimates could result in a goodwill
impairment charge.
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As a result, several factors could result in an impairment of a material amount of our goodwill balance in future periods, including but not limited to: (1) weakening of the global economy, weakness in the semiconductor equipment industry, or our failure to reach internal forecasts, which could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted cash flow value of our reporting units; and (2) a decline in our Common Stock price and resulting market capitalization, to the extent we determine that the decline is sustained and indicates a reduction in the fair value of our reporting units below their carrying value. Further, the value assigned to intangible assets, other than goodwill, is based on estimates and judgments regarding expectations such as the success and lifecycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, we may be required to record an impairment charge to write down the asset to its realizable value. For other long-lived assets, we routinely consider whether indicators of impairment are present. If such indicators are present, we determine whether the sum of the estimated undiscounted cash flows attributable to the assets is less than their carrying value. If the sum is less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. We recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset's carrying value. The fair value of the asset then becomes the asset's new carrying value, which we depreciate over the remaining estimated useful life of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value. In addition, for fully amortized intangible assets, we de-recognize the gross cost and accumulated amortization in the period we determine the intangible asset no longer enhances future cash flows. 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$6.9 billion atSeptember 27, 2020 compared to$7.0 billion as ofJune 28, 2020 . This slight decrease was primarily driven by$448.6 million of share repurchases, including net share settlement on employee stock-based compensation, along with$167.1 million of dividends paid to stockholders and$62.8 million of capital expenditures, partially offset by$642.5 million of cash generated from operating activities. Cash Flow from Operating Activities Net cash provided by operating activities of$642.5 million during the three months endedSeptember 27, 2020 , consisted of (in thousands): Net income$ 823,451 Non-cash charges: Depreciation and amortization 72,912 Equity-based compensation expense 55,988 Deferred income taxes (1,850)
Amortization of note discounts and issuance costs 1,422
Changes in operating asset and liability accounts (312,329) Other
2,917
$ 642,511
Significant changes in operating asset and liability accounts, net of foreign
exchange impact, included the following uses of cash: increases in accounts
receivable of $220.8 million , inventory of $266.7 million , and prepaid expense
and other assets of $10.9 million . The uses of cash are offset by sources of
cash from the following: increases in deferred profit of $117.2 million , trade
accounts payable of $68.1 million , and accrued expense and other liabilities of
$0.8 million .
Cash Flow from Investing Activities
Net cash used for investing activities during the three months ended
September 27, 2020 , was $801.7 million , primarily consisting of net purchases of
available-for-sale securities of $737.1 million along with capital expenditures
of $62.8 million .
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Cash Flow from Financing Activities Net cash used for financing activities during the three months endedSeptember 27, 2020 , was$631.5 million , primarily consisting of$448.6 million in treasury stock repurchases, including net share settlement on employee stock-based compensation,$167.1 million in dividends paid, and$19.2 million of cash paid for debt repayment. 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 ofSeptember 27, 2020 , 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. Under certain circumstances, our 2041 Notes may be converted and settled in cash and shares of our Common Stock. During the three months endedSeptember 27, 2020 , approximately$18.1 million principal value of convertible 2041 Notes were converted and in the subsequent period throughOctober 27, 2020 , we received notice of conversion of an additional$1.5 million principal value of 2041 Notes, which will settle in the quarter endingDecember 27, 2020 . We expect to have sufficient levels of cash, cash equivalents, and short term investments to fund the near-term settlement of these Convertible Notes. 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 disruption in the capital markets caused by the COVID-19 pandemic 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 2020 Form 10-K. Other than as noted below, our exposure related to market risk has not changed materially sinceJune 28, 2020 . All of the potential changes noted below are based on sensitivity analysis performed on our financial position as ofSeptember 27, 2020 . 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. 34
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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.
The hypothetical fair values as of September 27, 2020 , were as follows:
Fair Value
Valuation of Securities as of Valuation of Securities
Given an Interest Rate September 27, Given an Interest Rate
Decrease of X Basis Points 2020 Increase of X Basis Points
(150 BPS) (100 BPS) (50 BPS) 0.00% 50 BPS 100 BPS 150 BPS
(in thousands)
U.S. Treasury and agencies $ 770,789 $ 770,789
767,419
Government-sponsored enterprises 3,528 3,528 3,528 3,512 3,471 3,430 3,389 Foreign government bonds 60,342 60,341 60,339 60,161 59,894 59,628 59,362 Corporate notes and bonds 1,929,676 1,929,620 1,928,863 1,923,558 1,916,751 1,909,941 1,903,129 Mortgage backed securities - residential 7,924 7,890 7,855 7,806 7,757 7,707 7,657 Mortgage backed securities - commercial 21,465 21,435 21,398 21,354 21,311 21,267 21,224 Total$ 2,793,724 $ 2,793,603 $ 2,792,772 $ 2,786,838 $ 2,778,117 $ 2,769,392 $ 2,760,666 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. ITEM 4. Controls and Procedures Design of Disclosure Controls and Procedures and Internal Control over Financial Reporting We maintain disclosure controls and procedures and internal control over final reporting that are designed to comply with Rule 13a-15 of the Exchange Act. In designing and evaluating the controls and procedures associated with each, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and that the effectiveness of controls cannot be absolute because the cost to design and implement a control to identify errors or mitigate the risk of errors occurring should not outweigh the potential loss caused by the errors that would likely be detected by the control. Moreover, we believe that a control system cannot be guaranteed to be 100% effective all of the time. Accordingly, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Disclosure Controls and Procedures As required by Exchange Act Rule 13a-15(b), as ofSeptember 27, 2020 , we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer, along with our Chief Financial Officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level. We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to correct any material deficiencies that we may discover. Our goal is to ensure that our senior management has timely access to material information that could affect our business. Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Effectiveness of Controls While we believe the present design of our disclosure controls and procedures and internal control over financial reporting is effective, future events affecting our business may cause us to modify our disclosure controls and procedures or internal control over financial reporting. 35
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