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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2020
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-12933 
___________________________________________________________
LAM RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________________________
Delaware
 
94-2634797
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
4650 Cushing Parkway,
Fremont,
California
 
94538
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (510) 572-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par Value $0.001 Per Share
LRCX
The Nasdaq Stock Market
 
 
(Nasdaq Global Select Market)
__________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of April 24, 2020, the Registrant had 145,162,229 shares of Common Stock outstanding.
 




LAM RESEARCH CORPORATION
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.




PART I. FINANCIAL INFORMATION

ITEM 1.
Financial Statements

LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
Revenue
$
2,503,625

 
$
2,439,048

 
$
7,252,872

 
$
7,292,412

Cost of goods sold
1,336,618

 
1,364,711

 
3,924,511

 
4,014,844

Gross margin
1,167,007

 
1,074,337

 
3,328,361

 
3,277,568

Research and development
307,914

 
318,514

 
913,602

 
895,742

Selling, general, and administrative
164,979

 
190,306

 
496,679

 
534,179

Total operating expenses
472,893

 
508,820

 
1,410,281

 
1,429,921

Operating income
694,114

 
565,517

 
1,918,080

 
1,847,647

Other (expense) income, net
(64,619
)
 
20,532

 
(91,271
)
 
(10,494
)
Income before income taxes
629,495

 
586,049

 
1,826,809

 
1,837,153

Income tax expense
(54,714
)
 
(38,659
)
 
(271,729
)
 
(187,548
)
Net income
$
574,781

 
$
547,390

 
$
1,555,080

 
$
1,649,605

Net income per share:
 
 
 
 
 
 
 
Basic
$
3.96

 
$
3.62

 
$
10.75

 
$
10.72

Diluted
$
3.88

 
$
3.47

 
$
10.39

 
$
10.20

Number of shares used in per share calculations:
 
 
 
 
 
 
 
Basic
145,301

 
151,201

 
144,654

 
153,891

Diluted
148,165

 
157,849

 
149,648

 
161,683













See Notes to Condensed Consolidated Financial Statements


3




LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
Net income
$
574,781

 
$
547,390

 
$
1,555,080

 
$
1,649,605

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(18,225
)
 
6,684

 
(19,412
)
 
(6,845
)
Cash flow hedges:
 
 
 
 
 
 
 
Net unrealized (losses) gains during the period
(29,456
)
 
(7,950
)
 
(26,068
)
 
4,038

Net (gains) losses reclassified into earnings
(924
)
 
2,086

 
1,810

 
(2,492
)
 
(30,380
)
 
(5,864
)
 
(24,258
)
 
1,546

Available-for-sale investments:
 
 
 
 
 
 
 
Net unrealized (losses) gains during the period
(4,129
)
 
1,143

 
(6,842
)
 
1,441

Net losses (gains) reclassified into earnings
27

 
(147
)
 
1,010

 
(201
)
 
(4,102
)
 
996

 
(5,832
)
 
1,240

Defined benefit plans, net change in unrealized component
278

 
216

 
856

 
(1,152
)
Other comprehensive (loss) income, net of tax
(52,429
)
 
2,032

 
(48,646
)
 
(5,211
)
Comprehensive income
$
522,352

 
$
549,422

 
$
1,506,434

 
$
1,644,394


See Notes to Condensed Consolidated Financial Statements
4


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
March 29,
2020
 
June 30,
2019
 
(unaudited)
 
(1)
ASSETS
 
 
 
Cash and cash equivalents
$
3,961,586

 
$
3,658,219

Investments
1,431,550

 
1,772,984

Accounts receivable, less allowance for doubtful accounts of $5,332 as of March 29, 2020, and $5,021 as of June 30, 2019
2,191,070

 
1,455,522

Inventories
1,674,740

 
1,540,140

Prepaid expenses and other current assets
149,839

 
133,544

Total current assets
9,408,785

 
8,560,409

Property and equipment, net
1,048,619

 
1,059,077

Restricted cash and investments
254,155

 
255,177

Goodwill
1,484,050

 
1,484,597

Intangible assets, net
182,682

 
216,950

Other assets
560,344

 
425,123

Total assets
$
12,938,635

 
$
12,001,333

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
498,860

 
$
376,561

Accrued expenses and other current liabilities
1,024,793

 
946,641

Deferred profit
539,601

 
381,317

Current portion of long-term debt and finance lease obligations
42,407

 
667,131

Total current liabilities
2,105,661

 
2,371,650

Long-term debt and finance lease obligations, less current portion
5,043,931

 
3,822,768

Income taxes payable
889,287

 
892,790

Other long-term liabilities
350,603

 
190,821

Total liabilities
8,389,482

 
7,278,029

Commitments and contingencies

 

Temporary equity, convertible notes
11,546

 
49,439

Stockholders’ equity:
 
 
 
Preferred stock, at par value of $0.001 per share; authorized, 5,000 shares, none outstanding

 

Common stock, at par value of $0.001 per share; authorized, 400,000 shares; issued and outstanding, 145,156 shares at March 29, 2020, and 144,433 shares at June 30, 2019
145

 
144

Additional paid-in capital
6,577,822

 
6,409,405

Treasury stock, at cost; 145,493 shares at March 29, 2020, and 140,573 shares at June 30, 2019
(12,918,730
)
 
(11,602,573
)
Accumulated other comprehensive loss
(112,676
)
 
(64,030
)
Retained earnings
10,991,046

 
9,930,919

Total stockholders’ equity
4,537,607

 
4,673,865

Total liabilities and stockholders’ equity
$
12,938,635

 
$
12,001,333

(1) Derived from audited financial statements


See Notes to Condensed Consolidated Financial Statements
5


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
1,555,080

 
$
1,649,605

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
197,442

 
243,873

Deferred income taxes
74,516

 
(75,105
)
Equity-based compensation expense
136,044

 
142,389

Amortization of note discounts and issuance costs
4,611

 
5,137

Other, net
11,510

 
(646
)
Changes in operating assets and liabilities
(665,800
)
 
330,273

Net cash provided by operating activities
1,313,403

 
2,295,526

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures and intangible assets
(152,685
)
 
(237,543
)
Purchases of available-for-sale securities
(1,889,823
)
 
(1,975,688
)
Maturities of available-for-sales securities
1,163,555

 
395,569

Sales of available-for-sale securities
1,065,618

 
809,379

Other, net
(540
)
 
(5,288
)
Net cash provided by (used for) investing activities
186,125

 
(1,013,571
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on debt
(664,589
)
 
(116,496
)
Net repayments of commercial paper

 
(61,754
)
Proceeds from borrowings on revolving credit facility
1,250,000

 

Proceeds from issuance of long-term debt, net of issuance costs

 
2,476,720

Treasury stock purchases
(1,328,632
)
 
(2,672,051
)
Dividends paid
(489,099
)
 
(513,475
)
Reissuance of treasury stock related to employee stock purchase plan
38,447

 
32,920

Proceeds from issuance of common stock
6,215

 
5,119

Other, net
328

 
(13,207
)
Net cash used for financing activities
(1,187,330
)
 
(862,224
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(9,853
)
 
(904
)
Net increase in cash, cash equivalents, and restricted cash
302,345

 
418,827

Cash, cash equivalents, and restricted cash at beginning of period
3,913,396

 
4,768,558

Cash, cash equivalents, and restricted cash at end of period
$
4,215,741

 
$
5,187,385

Schedule of non-cash transactions:
 
 
 
Accrued payables for stock repurchases
295

 
1,637

Accrued payables for capital expenditures
29,690

 
27,283

Dividends payable
167,740

 
164,874

Transfers of inventory to property and equipment, net
34,155

 
42,519

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash
March 29,
2020
 
March 31,
2019
Cash and cash equivalents
$
3,961,586

 
$
4,931,611

Restricted cash and investments
254,155

 
255,774

Total cash, cash equivalents, and restricted cash
$
4,215,741

 
$
5,187,385


See Notes to Condensed Consolidated Financial Statements
6


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
Three Months Ended
 
March 29, 2020
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Balance at December 29, 2019
142,462

 
$
142

 
$
6,528,821

 
$
(12,673,292
)
 
$
(60,247
)
 
$
10,584,005

 
$
4,379,429

Sale of common stock
1,047

 
1

 
1,713

 

 

 

 
1,714

Purchase of treasury stock
(1,576
)
 
(1
)
 

 
(245,438
)
 

 

 
(245,439
)
Equity-based compensation expense

 

 
47,414

 

 

 

 
47,414

Effect of conversion of convertible notes
3,223

 
3

 
(26,884
)
 

 

 

 
(26,881
)
Reclassification from temporary to permanent equity

 

 
26,758

 

 

 

 
26,758

Net income

 

 

 

 

 
574,781

 
574,781

Other comprehensive loss

 

 

 

 
(52,429
)
 

 
(52,429
)
Cash dividends declared ($1.15 per common share)

 

 

 

 

 
(167,740
)
 
(167,740
)
Balance at March 29, 2020
145,156

 
$
145

 
$
6,577,822

 
$
(12,918,730
)
 
$
(112,676
)
 
$
10,991,046

 
$
4,537,607

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
March 29, 2020

Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Balance at June 30, 2019
144,433

 
$
144

 
$
6,409,405

 
$
(11,602,573
)
 
$
(64,030
)
 
$
9,930,919

 
$
4,673,865

Sale of common stock
1,230

 
1

 
6,214

 

 

 

 
6,215

Purchase of treasury stock
(5,215
)
 
(4
)
 

 
(1,328,894
)
 

 

 
(1,328,898
)
Reissuance of treasury stock
296

 

 
25,710

 
12,737

 

 

 
38,447

Equity-based compensation expense

 

 
136,044

 

 

 

 
136,044

Effect of conversion of convertible notes
4,412

 
4

 
(37,444
)
 

 

 

 
(37,440
)
Reclassification from temporary to permanent equity

 

 
37,893

 

 

 

 
37,893

Adoption of ASU 2016-02

 

 

 

 

 
3,018

 
3,018

Net income

 

 

 

 

 
1,555,080

 
1,555,080

Other comprehensive loss

 

 

 

 
(48,646
)
 

 
(48,646
)
Cash dividends declared ($3.45 per common share)

 

 

 

 

 
(497,971
)
 
(497,971
)
Balance at March 29, 2020
145,156

 
$
145

 
$
6,577,822

 
$
(12,918,730
)
 
$
(112,676
)
 
$
10,991,046

 
$
4,537,607

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See Notes to Condensed Consolidated Financial Statements
7


 
Three Months Ended
 
March 31, 2019
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Balance at December 23, 2018
153,961

 
$
154

 
$
6,256,942

 
$
(9,573,486
)
 
$
(64,692
)
 
$
9,165,445

 
$
5,784,363

Sale of common stock
947

 
1

 
5,009

 

 

 

 
5,010

Purchase of treasury stock
(5,702
)
 
(6
)
 

 
(936,264
)
 

 

 
(936,270
)
Equity-based compensation expense

 

 
53,240

 

 

 

 
53,240

Effect of conversion of convertible notes
680

 
1

 
(6,921
)
 

 

 

 
(6,920
)
Reclassification from temporary to permanent equity

 

 
7,225

 

 

 

 
7,225

Net income

 

 

 

 

 
547,390

 
547,390

Other comprehensive income

 

 

 

 
2,032

 

 
2,032

Cash dividends declared ($1.10 per common share)

 

 

 

 

 
(164,874
)
 
(164,874
)
Balance at March 31, 2019
149,886

 
$
150

 
$
6,315,495

 
$
(10,509,750
)
 
$
(62,660
)
 
$
9,547,961

 
$
5,291,196

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
March 31, 2019

Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Balance at June 24, 2018
156,892

 
$
157

 
$
6,144,425

 
$
(7,846,476
)
 
$
(57,449
)
 
$
8,261,194

 
$
6,501,851

Sale of common stock
1,026

 
1

 
5,118

 

 

 

 
5,119

Purchase of treasury stock
(15,193
)
 
(15
)
 

 
(2,673,557
)
 

 

 
(2,673,572
)
Reissuance of treasury stock
273

 

 
22,637

 
10,283

 

 

 
32,920

Equity-based compensation expense

 

 
142,389

 

 

 

 
142,389

Effect of conversion of convertible notes
2,783

 
3

 
(27,470
)
 

 

 

 
(27,467
)
Exercise of warrants
4,105

 
4

 
(12
)
 

 

 

 
(8
)
Reclassification from temporary to permanent equity

 

 
28,408

 

 

 

 
28,408

Adoption of ASU 2014-09

 

 

 

 

 
139,355

 
139,355

Adoption of ASU 2016-16

 

 

 

 

 
(443
)
 
(443
)
Adoption of ASU 2018-02

 

 

 

 
(2,227
)
 
2,227

 

Net income

 

 

 

 

 
1,649,605

 
1,649,605

Other comprehensive loss

 

 

 

 
(2,984
)
 

 
(2,984
)
Cash dividends declared ($3.30 per common share)

 

 

 

 

 
(503,977
)
 
(503,977
)
Balance at March 31, 2019
149,886

 
$
150

 
$
6,315,495

 
$
(10,509,750
)
 
$
(62,660
)
 
$
9,547,961

 
$
5,291,196

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


See Notes to Condensed Consolidated Financial Statements
8


LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 29, 2020
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of Lam Research Corporation (“Lam Research” or the “Company”) for the fiscal year ended June 30, 2019, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended June 30, 2019 (the “2019 Form 10-K”). The Company’s reports on Form 10-K, Form 10-Q and Form 8-K are available online at the Securities and Exchange Commission website on the Internet. The address of that site is www.sec.gov. The Company also posts its reports on Form 10-K, Form 10-Q and Form 8-K on its corporate website at http://investor.lamresearch.com. The content on any website referred to in this Form 10-Q is not a part of or incorporated by reference in this Form 10-Q unless expressly noted.
The condensed consolidated financial statements include the accounts of Lam Research and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s reporting period is a 52/53-week fiscal year. The Company’s current fiscal year will end June 28, 2020 and includes 52 weeks. The quarters ended March 29, 2020 (the “March 2020 quarter”) and March 31, 2019 (the “March 2019 quarter”) included 13 weeks and 14 weeks, respectively.
Reclassifications: Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases.” The amendment establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. In January 2018 and July 2018 the FASB issued ASU 2018-01 and ASU 2018-11 amending the effects of ASU 2016-02, which in combination with ASU 2016-02 were codified as Accounting Standard Codification topic 842 (“ASC 842”). The Company adopted ASC 842 on the first day of the current fiscal year, July 1, 2019, under the modified-retrospective approach, applying the amendments to prospective reporting periods. Results for reporting periods beginning on or after July 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under ASC 840. 
The Company elected the package of practical expedients that allowed the Company not to reassess (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct lease costs for existing leases. The Company did not elect to use hindsight in connection with the adoption of ASC 842. 
The Company adopted ASC 842 by recording operating right-of-use assets of $110.8 million, net of deferred rent liabilities of $3.0 million that were reclassified to operating right-of-use assets, and operating lease liabilities of $113.8 million.  The Company also recognized an adjustment of $3.0 million to retained earnings, net of tax; a reduction of $40.4 million to property and equipment, net; and a reduction of $43.8 million to finance leases ($42.3 million of which was previously recognized in long-term debt and finance lease obligations, less current portion and the remaining was previously recognized in current portion of long-term debt and finance lease obligations) related to its de-recognition of its previously recorded build-to-suit arrangements. The adoption of the standard did not materially impact the Company’s Condensed Consolidated Statement of Operations and had no impact on cash flows.  
Updates Not Yet Effective
In June 2016, the FASB released ASU 2016-13, “Financial Instruments Credit Losses.” The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including but not limited to, available for sale debt securities and accounts receivable. The FASB issued a subsequent amendment to the initial guidance in November 2019 within

9




ASU 2019-11. The Company is required to adopt these amendments starting in the first quarter of fiscal year 2021 using a modified-retrospective approach. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its Condensed Consolidated Financial Statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808).” The amendment clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606 when the counterparty is a customer for a good or service that is a distinct unit of account. The amendment also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. The standard should be applied retrospectively to the period when the Company initially adopted ASC 606. The Company does not expect the adoption of this standard to have a material impact on its Condensed Consolidated Financial Statements.
In April 2019, the FASB issued ASU 2019-04,”Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, that clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective starting in the first quarter of fiscal year 2021. The Company does not expect adoption of this standard to have a material impact on its Condensed Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU may be applied prospectively through December 31, 2022. The Company expects to adopt this guidance and apply it to reference rate reform effected arrangement modifications.
NOTE 3 — REVENUE
Deferred Revenue
Revenue of $67.7 million and $391.6 million included in deferred revenue at June 30, 2019 was recognized during the three and nine months ended March 29, 2020.
The following table summarizes the transaction price for contracts that have not yet been recognized as revenue as of March 29, 2020 and when the Company expects to recognize the amounts as revenue:
 
Less than 1 Year
 
1-3 Years
 
More than 3 Years
 
Total
 
(In thousands)
Deferred revenue
$
688,830

 
$
37,389

(1) 
$

 
$
726,219


(1) This amount is reported in Deferred profit on the Company's Condensed Consolidated Balance Sheets as the customers can demand the liability to be performed at any time.
Disaggregation of Revenue
The Company operates in one reportable business segment: manufacturing and servicing of wafer processing semiconductor manufacturing equipment. The Company’s material operating segments qualify for aggregation due to their customer base and similarities in economic characteristics, nature of products and services, and processes for procurement, manufacturing, and distribution.
The Company operates in seven geographic regions: United States, China, Europe, Japan, Korea, Southeast Asia, and Taiwan. For geographical reporting, revenue is attributed to the geographic location in which the customers’ facilities are located. The Company serves three primary markets: memory, foundry, and logic/integrated device manufacturing.

10




The following table presents the Company’s revenues disaggregated between system and its customer support-related revenue:
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
 
(In thousands)
System revenue
$
1,647,560

 
$
1,612,382

 
$
4,759,881

 
$
4,880,731

Customer support-related revenue and other
856,065

 
826,666

 
2,492,991

 
2,411,681

 
$
2,503,625

 
$
2,439,048

 
$
7,252,872

 
$
7,292,412


System revenue includes sales of new leading-edge equipment in deposition, etch and clean markets.
Customer support-related revenue includes sales of customer service, spares, upgrades, and non-leading-edge equipment from the Company’s Reliant product line.
The following table presents the Company’s revenues disaggregated by geographic region:
 
Three Months Ended
 
Nine Months Ended
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
 
(In thousands)
China
$
792,412

 
$
415,999

 
$
2,142,366

 
$
1,371,612

Korea
589,072

 
609,892

 
1,503,733

 
1,621,165

Taiwan
515,485

 
570,300

 
1,587,848

 
1,275,883

Japan
239,751

 
403,592

 
721,664

 
1,765,449

United States
215,015

 
230,636

 
622,399

 
486,436

Europe
89,090

 
88,266

 
214,139

 
288,164

Southeast Asia
62,800

 
120,363

 
460,723

 
483,703


$
2,503,625

 
$
2,439,048

 
$
7,252,872

 
$
7,292,412


The following table presents the percentages of leading- and non-leading-edge equipment and upgrade revenue to each of the primary markets the Company serves:
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
Memory
56
%
 
61
%
 
57
%
 
72
%
Foundry
31
%
 
27
%
 
31
%
 
19
%
Logic/integrated device manufacturing
13
%
 
12
%
 
12
%
 
9
%

NOTE 4 — EQUITY-BASED COMPENSATION PLANS
The Lam Research Corporation 2015 Stock Incentive Plan, as amended (the “2015 Plan”), provides for the grant of non-qualified equity-based awards of the Company’s Common Stock to eligible employees and non-employee directors, including stock options, restricted stock units (“RSUs”), and market-based performance RSUs (“market-based PRSUs”). An option is a right to purchase Common Stock at a set price. An RSU award is an agreement to issue a set number of shares of Common Stock at the time of vesting. The Company’s market-based PRSUs contain both a market condition and a service condition. The Company’s options, RSU, and market-based PRSU awards typically vest over a period of three years. The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions.

11




The Company recognized the following equity-based compensation expense (including expense related to the employee stock purchase plan) and related income tax benefit in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
 
(in thousands)
Equity-based compensation expense
$
47,414

 
$
53,240

 
$
136,044

 
$
142,389

Income tax benefit recognized related to equity-based compensation expense
$
24,457

 
$
28,337

 
$
38,736

 
$
42,204



Restricted Stock
During the nine months ended March 29, 2020, the Company issued both service-based RSUs and market-based performance RSUs (“PRSUs”). The fair value of the Company’s service-based RSUs was calculated based on the fair market value of the Company’s stock at the grant date, discounted for dividends. The fair value of the Company’s market-based PRSUs was calculated using a Monte Carlo simulation model at the date of the grant. Market-based PRSUs generally vest three years from the grant date if certain performance criteria are achieved and require continued employment. Based upon the terms of such awards, the number of shares that can be earned over the performance periods is based on the Company’s Common Stock price performance compared to the market price performance of the Philadelphia Semiconductor Sector Total Return Index (“XSOX”), ranging from 0% to 150% of target. The stock price performance or market price performance is measured using the closing price for the 50-trading days prior to the dates the performance period begins and ends. The target number of shares represented by the market-based PRSUs is increased by 2% of target for each 1% that Common Stock price performance, as adjusted for the reinvestment of dividends on Common Stock on the ex-dividend date, exceeds the market price performance of the XSOX index. The result of the vesting formula is rounded down to the nearest whole number.

The following table summarizes restricted stock activity:
 
Service-based RSUs Outstanding
 
Market-based PRSUs Outstanding
 
Number of
Shares
 
Weighted-
Average
Grant Date Fair Value
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
June 30, 2019
1,796,885

 
$
159.36

 
434,774

 
$
144.57

Granted
579,220

 
281.72

 
171,526

 
320.69

Vested
(879,402
)
 
151.23

 
(257,787
)
 
111.75

Expired or Forfeited
(76,783
)
 
169.03

 
(28,008
)
 
159.04

March 29, 2020
1,419,920

 
$
213.75

 
320,505

 
$
207.95


Stock Options
The fair value of the Company’s stock options granted during the nine months ended March 29, 2020 was estimated using a Black-Scholes options valuation model, which requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award.

The following table summarizes stock option activity:
 
Options Outstanding
 
Number of
Shares
 
Weighted-
Average
Exercise Price
June 30, 2019
494,883

 
$
115.96

Granted
34,236

 
300.33

Exercised
(93,225
)
 
66.65

Expired or forfeited
(4,948
)
 
179.39

March 29, 2020
430,946

 
$
140.54




12




NOTE 5 — OTHER (EXPENSE) INCOME, NET
The significant components of other (expense) income, net, are as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
 
(in thousands)
Interest income
$
18,856

 
$
26,966

 
$
76,094

 
$
63,709

Interest expense
(41,580
)
 
(30,263
)
 
(128,190
)
 
(71,835
)
(Losses) gains on deferred compensation plan-related assets, net
(33,828
)
 
21,395

 
(20,135
)
 
4,235

Foreign exchange gains (losses), net
480

 
720

 
(2,336
)
 
3,352

Other, net
(8,547
)
 
1,714

 
(16,704
)
 
(9,955
)
 
$
(64,619
)
 
$
20,532

 
$
(91,271
)
 
$
(10,494
)

NOTE 6 — INCOME TAX EXPENSE
The Company recorded an income tax expense of $54.7 million and $271.7 million for the three and nine months ended March 29, 2020, which yielded an effective tax rate of approximately 8.7% and 14.9%, respectively.
The difference between the U.S. federal statutory tax rate of 21% and the Company’s effective tax rate for the three months ended March 29, 2020 was primarily due to income in lower tax jurisdictions and stock-based compensation excess tax benefits.
In November 2019, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) rejected the en banc appeal petitioned by Altera Corporation (“Altera”) in July 2019. The Company has evaluated the impact of this decision and views the denial as an indication that Altera’s position of excluding stock-based compensation expense in an inter-company cost-sharing arrangement is unlikely to be sustained upon further litigation. As a result, the Company has reversed $74.5 million of net tax assets associated with stock-based compensation benefits related to previous years in the Condensed Consolidated Financial Statements in the three months ended December 29, 2019. In conclusion, the Company is no longer reflecting a net tax benefit within its financial statements related to excluding stock-based compensation from its inter-company cost-sharing arrangement. If, at a future date, Altera secured a favorable ruling from the Supreme Court, the Company would re-evaluate the decision to record an income tax benefit at that time. Please refer to Note 7, “Income Taxes,” to the Company’s Consolidated Financial Statements in Part II, Item 8 of its 2019 Form 10-K for additional information.
The Internal Revenue Service (“IRS”) is examining the Company’s U.S. federal income tax return for the fiscal year ended June 24, 2018. As of March 29, 2020, no significant adjustments have been proposed by the IRS. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the IRS will occur.
The Company is in various stages of examinations in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of statute of limitations. The change in unrecognized tax benefits as a result of lapses of statute of limitations may range up to $10.0 million.

13




NOTE 7 — NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, restricted stock units, convertible notes, and warrants. Dilutive shares outstanding include the effect of the convertible notes. Refer to Note 12 - Long-term Debt and Other Borrowings for additional information regarding the Company’s convertible notes. The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share. 
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
 
(in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income
$
574,781

 
$
547,390

 
$
1,555,080

 
$
1,649,605

Denominator:
 
 
 
 
 
 
 
Basic average shares outstanding
145,301

 
151,201

 
144,654

 
153,891

Effect of potential dilutive securities:
 
 
 
 
 
 
 
Employee stock plans
1,453

 
1,413

 
1,390

 
1,461

Convertible notes
1,411

 
5,235

 
3,604

 
5,663

Warrants

 

 

 
668

Diluted average shares outstanding
148,165

 
157,849

 
149,648

 
161,683

Net income per share - basic
$
3.96

 
$
3.62

 
$
10.75

 
$
10.72

Net income per share - diluted
$
3.88

 
$
3.47

 
$
10.39

 
$
10.20



For purposes of computing diluted net income per share, weighted-average common shares do not include potentially dilutive securities that are anti-dilutive under the treasury stock method. The following potentially dilutive securities were excluded:
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2020
 
March 31,
2019
 
March 29,
2020
 
March 31,
2019
 
(in thousands)
Options and RSUs
40

 
640

 
13

 
717


NOTE 8 — FINANCIAL INSTRUMENTS
The Company maintains an investment portfolio of various holdings, types, and maturities. The Company’s mutual funds, which are related to the Company’s obligations under the deferred compensation plan, are classified as trading securities. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Differences between the cost and fair value of trading securities are recognized as other income (expense) in the Condensed Consolidated Statements of Operations. All of the Company’s other investments are classified as available-for-sale and consequently are recorded in the Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.
Fair Value
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.
A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. The level of an asset or liability in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities with sufficient volume and frequency of transactions.

14




Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or model-derived valuations techniques for which all significant inputs are observable in the market or can be corroborated by observable market data, for substantially the full term of the assets or liabilities.
Level 3: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities and based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data.
The Company’s primary financial instruments include its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and leases, and foreign currency related derivative instruments. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of lease obligations approximate their carrying value as the substantial majority of these obligations have interest rates that adjust to market rates on a periodic basis. Refer to Note 12 - Long-Term Debt and Other Borrowings for additional information regarding the fair value of the Company’s senior notes and convertible senior notes.
The following table sets forth the Company’s cash, cash equivalents, investments, restricted cash and investments, and other assets measured at fair value on a recurring basis as of March 29, 2020, and June 30, 2019:
 
March 29, 2020
 
 
 
 
 
 
 
 
 
(Reported Within)
 
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
 
(in thousands)
Cash
$
1,486,663

 
$

 
$

 
$
1,486,663

 
$
1,482,536

 
$

 
$
4,127

 
$

Time deposit
1,735,157

 

 

 
1,735,157

 
1,485,129

 

 
250,028

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
944,788

 

 

 
944,788

 
944,788

 

 

 

U.S. Treasury and agencies
429,712

 
995

 

 
430,707

 
37,501

 
393,206

 

 

Mutual funds
68,757

 
3,354

 
(491
)
 
71,620

 

 

 

 
71,620

Level 1 Total
1,443,257

 
4,349

 
(491
)
 
1,447,115

 
982,289

 
393,206

 

 
71,620

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
2,011

 
1

 

 
2,012

 

 
2,012

 

 

Foreign government bonds
32,230

 
48

 
(47
)
 
32,231

 

 
32,231

 

 

Corporate notes and bonds
998,591

 
658

 
(6,280
)
 
992,969

 
11,632

 
981,337

 

 

Mortgage backed securities — residential
3,628

 
59

 

 
3,687

 

 
3,687

 

 

Mortgage backed securities — commercial
18,957

 
120

 

 
19,077

 

 
19,077

 

 

Level 2 Total
1,055,417

 
886

 
(6,327
)
 
1,049,976

 
11,632

 
1,038,344

 

 

Total
$
5,720,494

 
$
5,235

 
$
(6,818
)
 
$
5,718,911

 
$
3,961,586

 
$
1,431,550

 
$
254,155

 
$
71,620

 

15




 
June 30, 2019
 
 
 
 
 
 
 
 
 
(Reported Within)
 
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
 
(in thousands)
Cash
$
467,460

 
$

 
$

 
$
467,460

 
$
462,310

 
$

 
$
5,150

 
$

Time deposit
1,563,686

 

 

 
1,563,686

 
1,313,659

 

 
250,027

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1,644,659

 

 

 
1,644,659

 
1,644,659

 

 

 

U.S. Treasury and agencies
465,655

 
283

 
(24
)
 
465,914

 
86,981

 
378,933

 

 

Mutual funds
76,961

 
1,063

 
(283
)
 
77,741

 

 

 

 
77,741

Level 1 Total
2,187,275

 
1,346

 
(307
)
 
2,188,314

 
1,731,640

 
378,933

 

 
77,741

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
16,005

 
5

 
(41
)
 
15,969

 

 
15,969

 

 

Foreign government bonds
24,408

 
35

 

 
24,443

 

 
24,443

 

 

Corporate notes and bonds
1,466,167

 
2,310

 
(99
)
 
1,468,378

 
150,610

 
1,317,768

 

 

Mortgage backed securities — residential
6,148

 

 
(4
)
 
6,144

 

 
6,144

 

 

Mortgage backed securities — commercial
29,587

 
140

 

 
29,727

 

 
29,727

 

 

Level 2 Total
1,542,315

 
2,490

 
(144
)
 
1,544,661

 
150,610

 
1,394,051

 

 

Total
$
5,760,736

 
$
3,836

 
$
(451
)
 
$
5,764,121

 
$
3,658,219

 
$
1,772,984

 
$
255,177

 
$
77,741


The Company accounts for its investment portfolio at fair value. Realized gains (losses) for investment sales are specifically identified. Management assesses the fair value of investments in debt securities that are not actively traded through consideration of interest rates and their impact on the present value of the cash flows to be received from the investments. The Company also considers whether changes in the credit ratings of the issuer could impact the assessment of fair value. Additionally, the Company also considers factors such as the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.
The Company did not recognize any losses on investments due to other-than-temporary impairments during the three and nine months ended March 29, 2020 or March 31, 2019. Additionally, gross realized gains/(losses) from sales of investments were insignificant in the three and nine months ended March 29, 2020 and March 31, 2019.
The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:
 
March 29, 2020
 
Unrealized Losses
Less than 12 Months
 
Unrealized Losses
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Loss
 
Fair Value
 
Gross
Unrealized
Loss
 
Fair Value
 
Gross
Unrealized
Loss
 
(in thousands)
Mutual funds
$
6,363

 
$
(193
)
 
$
8,108

 
$
(298
)
 
$
14,471

 
$
(491
)
Foreign government bonds
3,900

 
(47
)
 

 

 
3,900

 
(47
)
Corporate notes and bonds
676,318

 
(6,280
)
 

 

 
676,318

 
(6,280
)
 
$
686,581

 
$
(6,520
)
 
$
8,108

 
$
(298
)
 
$
694,689

 
$
(6,818
)



16




The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities are as follows as of March 29, 2020:
 
Cost
 
Estimated
Fair
Value
 
(in thousands)
Due in one year or less
$
3,794,435

 
$
3,793,166

Due after one year through five years
349,695

 
346,732

Due in more than five years
20,944

 
20,730

 
$
4,165,074