Enhanced Investments - Financial Portal

Published: 2021-10-26 16:06:27 ET

lrcx-20210926

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 September 26, 2021


☐			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 October 22, 2021, the Registrant had 140,798,697 shares of Common Stock outstanding.

LAM RESEARCH CORPORATION

TABLE OF CONTENTS


		Page No.
	PART I. Financial Information

Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Statements of Operations for the three months ended September 26, 2021 and September 27, 2020	3
	Condensed Consolidated Statements of Comprehensive Income for the three months ended September 26, 2021, and September 27, 2020	4
	Condensed Consolidated Balance Sheets as of September 26, 2021, and June 27, 2021	5
	Condensed Consolidated Statements of Cash Flows for the three months ended September 26, 2021, and September 27, 2020	6
	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 26, 2021, and September 27, 2020	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	29

	PART II. Other Information

Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
Signatures		45

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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
		September 26, 2021		September 27, 2020
Revenue		$	4,304,465	$	3,177,080
Cost of goods sold		2,327,711		1,670,901
Gross margin		1,976,754		1,506,179
Research and development		382,327		355,367
Selling, general, and administrative		222,194		189,748
Total operating expenses		604,521		545,115
Operating income		1,372,233		961,064
Other expense, net		(28,857)		(38,792)
Income before income taxes		1,343,376		922,272
Income tax expense		(163,632)		(98,821)
Net income		$	1,179,744	$	823,451
Net income per share:
Basic		$	8.32	$	5.67
Diluted		$	8.27	$	5.59
Number of shares used in per share calculations:
Basic		141,743		145,267
Diluted		142,612		147,248

See Notes to Condensed Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Three Months Ended
		September 26, 2021		September 27, 2020
Net income		$	1,179,744	$	823,451
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(4,032)		12,124
Cash flow hedges:
Net unrealized losses during the period		(9,005)		(350)
Net (gains) losses reclassified into net income		(3,542)		767
		(12,547)		417
Available-for-sale investments:
Net unrealized losses during the period		(2,405)		(1,400)
Net losses reclassified into net income		1,145		402
		(1,260)		(998)
Defined benefit plans, net change in unrealized component		199		(4)
Other comprehensive (loss) income, net of tax		(17,640)		11,539
Comprehensive income		$	1,162,104	$	834,990

See Notes to Condensed Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	September 26, 2021		June 27, 2021
	(unaudited)		(1)
ASSETS
Cash and cash equivalents	$	4,042,151	$	4,418,263
Investments	569,472		1,310,872
Accounts receivable, less allowance of $5,361 as of September 26, 2021, and $5,255 as of June 27, 2021	3,397,180		3,026,430
Inventories	2,872,141		2,689,294
Prepaid expenses and other current assets	263,738		207,528
Total current assets	11,144,682		11,652,387
Property and equipment, net	1,372,533		1,303,479
Restricted cash and investments	251,448		252,487
Goodwill	1,489,945		1,490,134
Intangible assets, net	125,014		132,365
Other assets	1,181,930		1,061,300
Total assets	$	15,565,552	$	15,892,152
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable	$	837,708	$	829,710
Accrued expenses and other current liabilities	1,633,729		1,719,483
Deferred profit	931,415		967,325
Current portion of long-term debt and finance lease obligations	6,368		11,349
Total current liabilities	3,409,220		3,527,867
Long-term debt and finance lease obligations, less current portion	4,988,964		4,990,333
Income taxes payable	881,325		948,037
Other long-term liabilities	466,000		398,727
Total liabilities	9,745,509		9,864,964
Commitments and contingencies

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 as of September 26, 2021 and June 27, 2021; issued and outstanding, 140,811 shares as of September 26, 2021, and 142,501 shares as of June 27, 2021	141		143
Additional paid-in capital	7,111,803		7,052,962
Treasury stock, at cost; 152,503 shares as of September 26, 2021, and 150,766 shares as of June 27, 2021	(16,863,573)		(15,646,701)
Accumulated other comprehensive loss	(81,768)		(64,128)
Retained earnings	15,653,440		14,684,912
Total stockholders’ equity	5,820,043		6,027,188
Total liabilities and stockholders’ equity	$	15,565,552	$	15,892,152

(1) Derived from audited financial statements

See Notes to Condensed Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (unaudited)


	Three Months Ended
	September 26, 2021		September 27, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	1,179,744		$	823,451
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	79,874		72,912
Deferred income taxes	(13,023)		(1,850)
Equity-based compensation expense	58,099		55,988







Other, net	(8,690)		4,339
Changes in operating assets and liabilities	(838,480)		(312,329)
Net cash provided by operating activities	457,524		642,511
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and intangible assets	(136,427)		(62,806)

Purchases of available-for-sale securities	(25,297)		(1,750,188)
Maturities of available-for-sales securities	106,836		597,252
Sales of available-for-sale securities	656,504		415,862





Other, net	(4,923)		(1,786)
Net cash provided by (used for) investing activities	596,693		(801,666)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt	(6,338)		(19,173)





Treasury stock purchases	(1,236,753)		(448,581)
Dividends paid	(185,431)		(167,129)

Proceeds from issuance of common stock	742		5,538

Other, net	188		(2,140)
Net cash used for financing activities	(1,427,592)		(631,485)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(3,776)		4,082
Net decrease in cash, cash equivalents, and restricted cash	(377,151)		(786,558)
Cash, cash equivalents, and restricted cash at beginning of period	4,670,750		5,169,083
Cash, cash equivalents, and restricted cash at end of period	$	4,293,599	$	4,382,525
Schedule of non-cash transactions:
Accrued payables for stock repurchases	126		18,599
Accrued payables for capital expenditures	66,117		37,733
Dividends payable	211,216		188,046
Transfers of finished goods inventory to property and equipment	15,518		29,019

Reconciliation of cash, cash equivalents, and restricted cash	September 26, 2021		September 27, 2020
Cash and cash equivalents	$	4,042,151	$	4,129,067
Restricted cash and cash equivalents	251,448		253,458
Total cash, cash equivalents, and restricted cash	$	4,293,599	$	4,382,525

See Notes to Condensed Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)






















	Three Months Ended
	September 26, 2021
	Common Stock Shares	Common Stock		Additional Paid-in Capital		Treasury Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Total
Balance at June 27, 2021	142,501	$	143	$	7,052,962	$	(15,646,701)	$	(64,128)	$	14,684,912	$	6,027,188
Issuance of common stock	47	—		742		—		—		—		742
Purchase of treasury stock	(1,737)	(2)		—		(1,216,872)		—		—		(1,216,874)

Equity-based compensation expense	—	—		58,099		—		—		—		58,099









Net income	—	—		—		—		—		1,179,744		1,179,744
Other comprehensive loss	—	—		—		—		(17,640)		—		(17,640)
Cash dividends declared ($1.50 per common share)	—	—		—		—		—		(211,216)		(211,216)
Balance at September 26, 2021	140,811	$	141	$	7,111,803	$	(16,863,573)	$	(81,768)	$	15,653,440	$	5,820,043























	Three Months Ended
	September 27, 2020
	Common Stock Shares	Common Stock		Additional Paid-in Capital		Treasury Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Total
Balance at June 28, 2020	145,331	$	145	$	6,695,858	$	(12,949,889)	$	(94,211)	$	11,520,591	$	5,172,494
Issuance of common stock	105	—		5,538		—		—		—		5,538
Purchase of treasury stock	(1,360)	(1)		—		(467,097)		—		—		(467,098)

Equity-based compensation expense	—	—		55,988		—		—		—		55,988
Effect of conversion of convertible notes	517	1		(527)		—		—		—		(526)


Reclassification from temporary to permanent equity	—	—		4,688		—		—		—		4,688
Adoption of ASU 2018-18	—	—		—		—		—		1,157		1,157



Net income	—	—		—		—		—		823,451		823,451
Other comprehensive income	—	—		—		—		11,539		—		11,539
Cash dividends declared ($1.30 per common share)	—	—		—		—		—		(188,046)		(188,046)
Balance at September 27, 2020	144,593	$	145	$	6,761,545	$	(13,416,986)	$	(82,672)	$	12,157,153	$	5,419,185

See Notes to Condensed Consolidated Financial Statements

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LAM RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 26, 2021

(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 27, 2021, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended June 27, 2021 (the “2021 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 26, 2022 and includes 52 weeks. The quarters ended September 26, 2021 (the “September 2021 quarter”) and September 27, 2020 (the “September 2020 quarter”) included 13 weeks.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted

The Company did not adopt any new accounting standards during the first quarter of fiscal year 2022 that had a material impact on the Company’s Condensed Consolidated Financial Statements.

Updates Not Yet Adopted or Effective

There are no new accounting pronouncements not yet adopted or effective that are expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.

NOTE 3 — REVENUE

Deferred Revenue

Revenue of $565.7 million included in deferred revenue as of June 27, 2021 was recognized during the three months ended September 26, 2021.

The following table summarizes the transaction price for contracts that have not yet been recognized as revenue as of September 26, 2021 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	$	951,080	$	158,546	(1)	$	—	$	1,109,626

(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.

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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.

The following table presents the Company’s revenues disaggregated between system and its customer support-related revenue:


	Three Months Ended
		September 26, 2021		September 27, 2020
		(In thousands)
System revenue		$	2,924,883	$	2,148,241
Customer support-related revenue and other		1,379,582		1,028,839
		$	4,304,465	$	3,177,080

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
		September 26, 2021		September 27, 2020
		(In thousands)
China		$	1,607,710	$	1,174,669
Korea		918,137		756,257
Taiwan		638,066		446,091
Japan		468,731		392,526
Southeast Asia		365,248		203,339
United States		228,211		137,892
Europe		78,362		66,306
		$	4,304,465	$	3,177,080

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
		September 26, 2021		September 27, 2020
Memory		64	%	58	%
Foundry		25	%	36	%
Logic/integrated device manufacturing		11	%	6	%

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 option, 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.

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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
		September 26, 2021		September 27, 2020
		(in thousands)
Equity-based compensation expense		$	58,099	$	55,988
Income tax benefit recognized related to equity-based compensation expense		$	8,208	$	9,877

NOTE 5 — OTHER EXPENSE, NET

The significant components of other expense, net, are as follows:


	Three Months Ended
		September 26, 2021		September 27, 2020
		(in thousands)
Interest income		$	4,678	$	6,959
Interest expense		(45,056)		(52,115)
Gains on deferred compensation plan-related assets, net		7,437		12,927


Foreign exchange losses, net		(17)		(1,375)
Other, net		4,101		(5,188)
		$	(28,857)	$	(38,792)

NOTE 6 — INCOME TAX EXPENSE

The Company’s provision for income taxes and effective tax rate are as follows:


	Three Months Ended
		September 26, 2021			September 27, 2020
		(in thousands, except percentages)
Income tax expense		$	163,632		$	98,821
Effective tax rate		12.2		%	10.7		%

The difference between the U.S. federal statutory tax rate of 21% and the Company’s effective tax rate for the three months ended September 26, 2021 and the three months ended September 27, 2020 was primarily due to income in lower tax jurisdictions.

The Company transferred its international sales operations from Switzerland to Malaysia, effective from fiscal year 2022. Through fiscal year 2036, the Company expects to operate under various tax incentives in Malaysia which provide exemptions on foreign income earned and are contingent upon meeting certain conditions.

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 September 26, 2021, 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 uncertain tax positions as a result of tax examinations or lapses of statutes of limitation. The change in uncertain tax positions as a result of lapses of statutes of limitation may range up to $8.0 million.

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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, and convertible notes. The following table reconciles the inputs to the basic and diluted computations for net income per share.


	Three Months Ended
		September 26, 2021		September 27, 2020
		(in thousands, except per share data)
Numerator:
Net income		$	1,179,744	$	823,451
Denominator:
Basic average shares outstanding		141,743		145,267
Effect of potential dilutive securities:
Employee stock plans		869		1,112
Convertible notes		—		869

Diluted average shares outstanding		142,612		147,248
Net income per share - basic		$	8.32	$	5.67
Net income per share - diluted		$	8.27	$	5.59

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 impact from potentially dilutive securities, including options and RSUs, was not material for the three months ended September 26, 2021 and September 27, 2020.

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 expense, net 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 associated with market valuation changes, unrelated to credit losses, reported as a separate component of accumulated other comprehensive income (loss), net of tax; and credit losses, if any, recognized as other expense, net in the Condensed Consolidated Statements of Operations.

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.

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.

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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 engages with pricing vendors to provide fair values for a majority of its Level 1 and Level 2 investments. The vendors provide either a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Significant observable inputs include interest rates and yield curves observable at commonly quoted intervals, volatility and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the foreign currency rates, forward rate curves, currency volatility and interest rates and considers nonperformance risk of the Company and its counterparties.

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 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.

Investments

The following tables set 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 September 26, 2021, and June 27, 2021:


	September 26, 2021
									(Reported Within)
	Cost		Unrealized Gain		Unrealized (Loss)		Fair Value		Cash and Cash Equivalents		Investments		Restricted Cash & Investments		Other Assets
	(in thousands)
Cash	$	1,063,562	$	—	$	—	$	1,063,562	$	1,062,142	$	—	$	1,420	$	—
Time deposits	1,920,427		—		—		1,920,427		1,670,399		—		250,028		—
Level 1:
Money market funds	1,309,610		—		—		1,309,610		1,309,610		—		—		—
U.S. Treasury and agencies	1,850		—		(1)		1,849		—		1,849		—		—
Mutual funds	81,576		19,389		(27)		100,938		—		—		—		100,938
Level 1 Total	1,393,036		19,389		(28)		1,412,397		1,309,610		1,849		—		100,938
Level 2:



Foreign government bonds	15,119		14		—		15,133		—		15,133		—		—
Corporate notes and bonds	535,888		766		(271)		536,383		—		536,383		—		—

Mortgage backed securities — commercial	16,164		1		(58)		16,107		—		16,107		—		—
Level 2 Total	567,171		781		(329)		567,623		—		567,623		—		—
Total	$	4,944,196	$	20,170	$	(357)	$	4,964,009	$	4,042,151	$	569,472	$	251,448	$	100,938

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	June 27, 2021
									(Reported Within)
	Cost		Unrealized Gain		Unrealized (Loss)		Fair Value		Cash and Cash Equivalents		Investments		Restricted Cash & Investments		Other Assets
	(in thousands)
Cash	$	875,738	$	—	$	—	$	875,738	$	873,278	$	—	$	2,460	$	—
Time deposits	1,548,874		—		—		1,548,874		1,298,847		—		250,027		—
Level 1:
Money market funds	2,246,138		—		—		2,246,138		2,246,138		—		—		—
U.S. Treasury and agencies	204,743		96		(47)		204,792		—		204,792		—		—
Mutual funds	80,694		15,510		(33)		96,171		—		—		—		96,171
Level 1 Total	2,531,575		15,606		(80)		2,547,101		2,246,138		204,792		—		96,171
Level 2:


Government-sponsored enterprises	3,498		7		—		3,505		—		3,505		—		—
Foreign government bonds	32,995		21		(4)		33,012		—		33,012		—		—
Corporate notes and bonds	1,043,308		2,247		(457)		1,045,098		—		1,045,098		—		—
Mortgage backed securities — residential	5,623		54		—		5,677		—		5,677		—		—
Mortgage backed securities — commercial	18,830		17		(59)		18,788		—		18,788		—		—
Level 2 Total	1,104,254		2,346		(520)		1,106,080		—		1,106,080		—		—
Total	$	6,060,441	$	17,952	$	(600)	$	6,077,793	$	4,418,263	$	1,310,872	$	252,487	$	96,171

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 evaluates its investments with fair value less than amortized cost by first considering whether the Company has the intent to sell the security or whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In either such situation, the difference between fair value and amortized cost is recognized as a loss in the income statement. Where such sales are not likely to occur, the Company considers whether a portion of the loss is the result of a credit loss. To the extent such losses are the result of credit losses, those amounts are recognized in the income statement. All other differences between fair value and amortized cost are recognized in other comprehensive income. No such losses were recognized through the income statement during the three months ended September 26, 2021 and September 27, 2020.

Gross realized gains/(losses) from sales of investments were insignificant in the three months ended September 26, 2021 and September 27, 2020.

The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:


	September 26, 2021
	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)
U.S. Treasury and agencies	$	1,848	$	(1)	$	—	$	—	$	1,848	$	(1)
Municipal notes and bonds	2,082		(27)		—		—		2,082		(27)



Corporate notes and bonds	155,500		(229)		7,673		(42)		163,173		(271)

Mortgage backed securities — commercial	14,988		(58)		—		—		14,988		(58)
	$	174,418	$	(315)	$	7,673	$	(42)	$	182,091	$	(357)

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The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities are as follows as of September 26, 2021:


	Cost		Fair Value
	(in thousands)
Due in one year or less	$	3,367,984	$	3,368,163
Due after one year through five years	404,834		405,155
Due in more than five years	26,240		26,191
	$	3,799,058	$	3,799,509

The Company has the ability, if necessary, to liquidate its investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than 12 months from the date of purchase nonetheless are classified as short-term on the accompanying Condensed Consolidated Balance Sheets.

Derivative Instruments and Hedging

The Company carries derivative financial instruments (“derivatives”) on its Condensed Consolidated Balance Sheets at their fair values. The Company enters into foreign currency forward contracts and foreign currency options with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate fluctuations. In addition, the Company enters into interest rate swap arrangements to manage interest rate risk. The counterparties to these derivatives are large global financial institutions that the Company believes are creditworthy, and therefore, it does not consider the risk of counterparty nonperformance to be material.

Under the master netting agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis on its balance sheet. As of September 26, 2021 and June 27, 2021, the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be immaterial to the Condensed Consolidated Balance Sheets.

Cash Flow Hedges

The Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations on non-U.S. dollar transactions or cash flows. The Company’s policy is to mitigate the foreign exchange risk arising from the fluctuations in the value of these non-U.S. dollar denominated transactions or cash flows through a foreign currency cash flow hedging program, using forward contracts and foreign currency options that generally expire within 12 months and no later than 24 months. These hedge contracts are designated as cash flow hedges and are carried on the Company’s balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income (loss) and subsequently recognized in revenue/expense in the same period the hedged items affect earnings.

In addition, the Company has entered into interest rate swap agreements to hedge against the variability of cash flows due to changes in certain benchmark interest rates on fixed rate debt. These instruments are designated as cash flow hedges at inception and are settled in conjunction with the issuance of debt. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive income (loss) and is amortized into income as the hedged item affects earnings.

At inception and at each quarter-end, hedges are tested prospectively and retrospectively for effectiveness using regression analysis. Changes in the fair value of foreign exchange contracts due to changes in time value are included in the assessment of effectiveness. To qualify for hedge accounting, the hedge relationship must meet criteria relating to both the derivative instrument and the hedged item. These criteria include identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows will be measured.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be tested to demonstrate an expectation of providing highly effective offsetting changes to future cash flows on hedged transactions. When derivative instruments are designated and qualify as effective cash flow hedges, the Company recognizes effective changes in the fair value of the hedging instrument within accumulated other comprehensive income (loss) until the hedged exposure is realized. Consequently, the Company’s results of operations are not subject to fluctuation as a result of changes in the fair value of the derivative instruments. If hedges are not highly effective or if the Company does not believe that the underlying hedged forecasted transactions will occur, the Company may not be able to account for its derivative

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instruments as cash flow hedges. If this were to occur, future changes in the fair values of the Company’s derivative instruments would be recognized in earnings. Additionally, related amounts previously recorded in other comprehensive income would be reclassified to earnings immediately.

As of September 26, 2021 and June 27, 2021, the fair value of outstanding cash flow hedges was not material. Additionally, as of September 26, 2021, the Company had an immaterial net gain or loss accumulated in other comprehensive income, net of tax, related to foreign exchange cash flow hedges and interest rate contracts which it expects to reclassify from other comprehensive income into earnings over the next 12 months.

The following table provides the total notional value of cash flow hedge instruments outstanding as of September 26, 2021:


	September 26, 2021
	(In thousands)
Buy Contracts	$	307,590
Sell Contracts	565,342

The effect of derivative instruments designated as cash flow hedges on the Company’s Condensed Consolidated Statements of Operations, including accumulated other comprehensive income (“AOCI”), was as follows:


		Three Months Ended
		September 26, 2021
	Location of Gain or (Loss) Recognized in or Reclassified into Net Income		Loss Recognized in AOCI		Gain (Loss) Reclassified from AOCI into Net Income
Derivatives in Cash Flow Hedging Relationships			(in thousands)
Foreign Exchange Contracts	Revenue		$	(5,936)	$	5,263
Foreign Exchange Contracts	Cost of goods sold		(3,761)		(643)
Foreign Exchange Contracts	Research and Development		(1,249)		—
Foreign Exchange Contracts	Selling, general, and administrative		(1,314)		(26)
Interest Rate Contracts	Other expense, net		—		(1,051)
			$	(12,260)	$	3,543


		Three Months Ended
		September 27, 2020
	Location of Gain or (Loss) Recognized in or Reclassified into Income		(Loss) Gain Recognized in AOCI		(Loss) Gain Reclassified from AOCI into Net Income
Derivatives in Cash Flow Hedging Relationships			(in thousands)
Foreign Exchange Contracts	Revenue		$	(3,281)	$	(835)
Foreign Exchange Contracts	Cost of goods sold		1,093		560
Foreign Exchange Contracts	Research and Development		394		—
Foreign Exchange Contracts	Selling, general, and administrative		1,640		305
Interest Rate Contracts	Other expense, net		—		(952)
			$	(154)	$	(922)

Balance Sheet Hedges

The Company also enters into foreign currency forward contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities, primarily cash, third-party accounts receivable, accounts payable, and intercompany receivables and payables. These forward contracts are not designated for hedge accounting treatment. Therefore, the change in the carrying value of these derivatives is recorded as a component of other expense, net and offsets the change in fair value of the foreign currency denominated assets and liabilities related to remeasurement, which are also recorded in other expense, net. As of September 26, 2021 and June 27, 2021, the fair value of outstanding balance sheet hedges was not material.

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The following table provides the total notional value of balance sheet hedge instruments outstanding as of September 26, 2021:


	September 26, 2021
	(In thousands)
Buy Contracts	$	161,560
Sell Contracts	312,721

The effect of the Company’s balance sheet hedge derivative instruments on the Company’s Condensed Consolidated Statements of Operations was as follows:

Three Months Ended

September 26,
2021

September 27,
2020

Derivatives Not Designated as Hedging Instruments:

Location
of Gain Recognized
in Income

Gain
Recognized
in Net Income

(in thousands)

Foreign Exchange Contracts

Other expense, net

6,520

2,747

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit at large global financial institutions. Such deposits may be in excess of insured limits. Management believes that the financial institutions that hold the Company’s cash are creditworthy and, accordingly, minimal credit risk exists with respect to these balances.

The Company’s overall portfolio of available-for-sale securities must maintain an average minimum rating of “AA-” or “Aa3” as rated by Standard and Poor’s, Fitch Ratings, or Moody’s Investor Services. To ensure diversification and minimize concentration, the Company’s policy limits the amount of credit exposure with any one financial institution or commercial issuer.

The Company is exposed to credit losses in the event of nonperformance by counterparties on foreign currency and interest rate hedge contracts that are used to mitigate the effect of exchange rate and interest rate fluctuations, and on contracts related to structured share repurchase arrangements. These counterparties are large global financial institutions, and, to date, no such counterparty has failed to meet its financial obligations to the Company.

Credit risk evaluations, including trade references, bank references, and Dun & Bradstreet ratings, are performed on all new customers and the Company monitors its customers’ financial condition and payment performance. In general, the Company does not require collateral on sales.

NOTE 9 — INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. System shipments to customers in Japan, for which title does not transfer until customer acceptance, are classified as finished goods inventory and carried at cost until title transfers. Inventories consist of the following:


	September 26, 2021		June 27, 2021
	(in thousands)
Raw materials	$	1,612,811	$	1,519,456
Work-in-process	431,646		391,686
Finished goods	827,684		778,152
	$	2,872,141	$	2,689,294

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NOTE 10 — GOODWILL AND INTANGIBLE ASSETS

Goodwill

The balance of goodwill is approximately $1.5 billion as of September 26, 2021 and June 27, 2021. As of September 26, 2021 and June 27, 2021, $61.1 million of the goodwill balance is tax deductible and the remaining balance is not tax deductible due to purchase accounting and applicable foreign law.

Intangible Assets

The following table provides the Company’s intangible assets, other than goodwill:


	September 26, 2021						June 27, 2021
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
	(in thousands)
Customer relationships	$	630,268	$	(593,497)	$	36,771	$	630,303	$	(581,406)	$	48,897
Existing technology	669,285		(660,915)		8,370		669,359		(659,898)		9,461
Patents and other intangible assets	144,650		(64,777)		79,873		132,774		(58,767)		74,007

Total intangible assets	$	1,444,203	$	(1,319,189)	$	125,014	$	1,432,436	$	(1,300,071)	$	132,365

The Company recognized $19.1 million and $16.8 million in intangible asset amortization expense during the three months ended September 26, 2021 and September 27, 2020, respectively.

The estimated future amortization expense of intangible assets as of September 26, 2021, is reflected in the table below. The table excludes $12.0 million of capitalized costs for internal-use software that have not been placed into service.


Fiscal Year	Amount
	(in thousands)
2022 (remaining 9 months)	$	54,972
2023	28,079
2024	17,194
2025	8,863
2026	3,203
Thereafter	724
	$	113,035

NOTE 11 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:


	September 26, 2021		June 27, 2021
	(in thousands)
Accrued compensation	$	571,930	$	552,925
Warranty reserves	198,660		176,030
Income and other taxes payable	191,967		348,206
Dividend payable	211,216		185,431
Other	459,956		456,891
	$	1,633,729	$	1,719,483

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NOTE 12 — LONG-TERM DEBT AND OTHER BORROWINGS

As of September 26, 2021, and June 27, 2021, the Company’s outstanding debt consisted of the following:


	September 26, 2021					June 27, 2021
	Amount (in thousands)			Effective Interest Rate		Amount (in thousands)			Effective Interest Rate
Fixed-rate 3.80% Senior Notes Due March 15, 2025 ("2025 Notes")	500,000			3.87	%	500,000			3.87	%
Fixed-rate 3.75% Senior Notes Due March 15, 2026 ("2026 Notes")	750,000			3.86	%	750,000			3.86	%
Fixed-rate 4.00% Senior Notes Due March 15, 2029 ("2029 Notes")	1,000,000			4.09	%	1,000,000			4.09	%
Fixed-rate 1.90% Senior Note Due June 15, 2030 ("2030 Notes")	750,000			2.01	%	750,000			2.01	%
Fixed-rate 4.875% Senior Notes Due March 15, 2049 ("2049 Notes")	750,000			4.93	%	750,000			4.93	%
Fixed-rate 2.875% Senior Note Due June 15, 2050 ("2050 Notes")	750,000			2.93	%	750,000			2.93	%
Fixed-rate 3.125% Senior Note Due June 15, 2060 ("2060 Notes")	500,000			3.18	%	500,000			3.18	%


Total debt outstanding, at par	5,000,000					5,000,000
Unamortized discount	(37,634)					(38,243)
Fair value adjustment - interest rate contracts	6,174		(1)			6,621		(1)
Unamortized bond issuance costs	(7,291)					(7,443)
Total debt outstanding, at carrying value	$	4,961,249				$	4,960,935
Reported as:

Long-term debt	$	4,961,249				$	4,960,935

____________________________

(1) This amount represents a cumulative fair value gain for discontinued hedging relationships, net of an immaterial amount of amortization as of the periods presented.

Senior Notes

On May 5, 2020, the company completed a public offering of $750 million aggregate principal amount of the Company’s Senior Notes due June 15, 2030 (the “2030 Notes”), $750 million aggregate principal amount of the Company’s Senior Notes due June 15, 2050 (the “2050 Notes”), and $500 million aggregate principal amount of the Company’s Senior Notes due June 15, 2060 (the “2060 Notes”). The Company pays interest at an annual rate of 1.90%, 2.875%, and 3.125%, on the 2030, 2050, and 2060 Notes, respectively, on a semi-annual basis on June 15 and December 15 of each year.

On March 4, 2019, the company completed a public offering of $750 million aggregate principal amount of the Company’s Senior Notes due March 15, 2026 (the “2026 Notes”), $1.0 billion aggregate principal amount of the Company’s Senior Notes due March 15, 2029 (the “2029 Notes”), and $750 million aggregate principal amount of the Company’s Senior Notes due March 15, 2049 (the “2049 Notes”). The Company pays interest at an annual rate of 3.75%, 4.00%, and 4.875%, on the 2026, 2029, and 2049 Notes, respectively, on a semi-annual basis on March 15 and September 15 of each year.

On March 12, 2015, the Company completed a public offering of $500 million aggregate principal amount of the Company’s Senior Notes due March 15, 2025 (the “2025 Notes”). The Company pays interest at an annual rate of 3.80% on the 2025 Notes on a semi-annual basis on March 15 and September 15 of each year.

The Company may redeem the 2025, 2026, 2029, 2030, 2049, 2050, and 2060 Notes (collectively the “Senior Notes”) at a redemption price equal to 100% of the principal amount of such series (“par”), plus a “make whole” premium as described in the indenture in respect to the Senior Notes and accrued and unpaid interest before December 15, 2024 for the 2025 Notes, before January 15, 2026 for the 2026 Notes, before December 15, 2028 for the 2029 Notes, before March 15, 2030 for the 2030 Notes, before September 15, 2048 for the 2049 Notes, before December 15, 2049 for the 2050 Notes, and before December 15, 2059 for the 2060 Notes. The Company may redeem the Senior Notes at par, plus accrued and unpaid interest at any time on or after December 24, 2024 for the 2025 Notes, on or after January 15, 2026 for the 2026 Notes, on or after December 15, 2028 for the 2029 Notes, on or after March 15, 2030 for the 2030 Notes, on or after September 15, 2048 for the 2049 Notes, on or after December 15, 2049 for the 2050 Notes, and on or after December 15, 2059 for the 2060 Notes. In addition, upon the occurrence of certain events, as described in the indenture, the Company will be required to make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount of the respective note, plus accrued and unpaid interest.

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Selected additional information regarding the Senior Notes outstanding as of September 26, 2021, is as follows:


	Remaining Amortization period	Fair Value of Notes (Level 2)
	(years)	(in thousands)
2025 Notes	3.5	$	545,650
2026 Notes	4.5	$	833,085
2029 Notes	7.5	$	1,154,650
2030 Notes	8.7	$	753,600
2049 Notes	27.5	$	1,033,058
2050 Notes	28.7	$	772,118
2060 Notes	38.7	$	529,535

Revolving Credit Facility

On March 12, 2014, the Company established an unsecured Credit Agreement. This agreement was amended on November 10, 2015 (the “Amended and Restated Credit Agreement”), October 13, 2017 (the “2nd Amendment”), February 25, 2019 (the “3rd Amendment”), and June 17, 2021 (the “Second Amended and Restated Credit Agreement”). The Second Amended and Restated Credit Agreement provides for a $1.50 billion revolving credit facility with a syndicate of lenders, along with an expansion option that will allow the Company, subject to certain requirements, to request an increase in the facility of up to an additional $600.0 million, for a potential total commitment of $2.10 billion. The facility matures on June 17, 2026.

Interest on amounts borrowed under the credit facility is, at the Company’s option, based on (1) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.5%, or (c) one-month LIBOR plus 1.0%, plus a spread of 0.00% to 0.30%, or (2) LIBOR multiplied by the statutory rate, plus a spread of 0.805% to 1.30%, in each case plus a facility fee, with such spread and facility fee determined based on the rating of the Company’s non-credit enhanced, senior unsecured long-term debt. Such spreads and such facility fees are further subject to sustainability adjustments as described in the Second Amended and Restated Credit Agreement, in each case based on the Company’s performance of certain energy savings and health and safety standards metrics. Principal and any accrued and unpaid interest is due and payable upon maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s credit rating. The Second Amended and Restated Credit Agreement incorporates provisions for the replacement of LIBOR or other reference rates with alternative reference rates under certain circumstances, including when, or if, such reference rates cease to be available. The Second Amended and Restated Credit Agreement contains affirmative covenants, negative covenants, financial covenants, and events of default. As of September 26, 2021, the Company had no borrowings outstanding under the credit facility and was in compliance with all financial covenants.

Commercial Paper Program

On November 13, 2017, the Company established a commercial paper program (“the CP Program”) under which the Company may issue unsecured commercial paper notes on a private placement basis up to a maximum aggregate principal amount of $1.25 billion. In July 2021, the Company amended the CP Program size to a maximum aggregate amount outstanding at any time of $1.50 billion. The net proceeds from the CP Program will be used for general corporate purposes, including repurchases of the Company’s Common Stock from time to time under the Company’s stock repurchase program. Amounts available under the CP Program may be re-borrowed. The CP Program is backstopped by the Company’s Revolving Credit Arrangement. As of September 26, 2021 and June 27, 2021, the Company had no outstanding borrowings under the CP Program.

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Interest Cost

The following table presents the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the debt discount, issuance costs, and effective portion of interest rate contracts with respect to the Senior Notes, convertible notes, and the revolving credit facility during the three months ended September 26, 2021 and September 27, 2020.


	Three Months Ended
		September 26, 2021		September 27, 2020
		(in thousands)
Contractual interest coupon		$	43,782	$	49,571
Amortization of interest discount		683		1,012
Amortization of issuance costs		335		411
Effect of interest rate contracts, net		605		506
Total interest cost recognized		$	45,405	$	51,500

NOTE 13 — LEASES

The Company leases certain office spaces, manufacturing and warehouse spaces, equipment, and vehicles. While the majority of the Company’s lease arrangements are operating leases, the Company has certain leases that qualify as finance leases.

Selected Leases and Related Guarantees

The Company leases the majority of its administrative, research and development and manufacturing facilities, regional sales/service offices, and certain equipment under non-cancelable leases. Certain of the Company’s facility leases for buildings located at its Fremont, California headquarters, Tualatin, Oregon campus, and certain other facility leases provide the Company with options to extend the leases for additional periods or to purchase the facilities. Certain of the Company’s facility leases provide for periodic rent increases based on the general rate of inflation.

The Company has finance leases for certain improved properties in Fremont and Livermore, California (the “California Facility Leases”). The Company is required to maintain cash collateral in an aggregate of approximately $250.0 million in separate interest-bearing accounts as security for the Company’s obligations. These amounts are recorded with other restricted cash and investments in the Company’s Condensed Consolidated Balance Sheet as of September 26, 2021.

During the seven-year term of the California Facility Leases and when the terms of the California Facility Leases expire, the property subject to the California Facility Leases may be re-marketed. The Company has guaranteed to the lessor that each property will have a certain minimum residual value. The aggregate maximum guarantee made by the Company under the California Facility Leases is $298.4 million.

NOTE 14 — COMMITMENTS AND CONTINGENCIES

Refer to Note 13 - Leases for details regarding guarantees surrounding selected leases.

Other Guarantees

The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into insurance contracts that are intended to limit its exposure to such indemnifications. As of September 26, 2021, the Company had not recorded any liability on its Condensed Consolidated Financial Statements in connection with these indemnifications, as it does not believe that it is probable that any material amounts will be paid under these guarantees.

Generally, the Company indemnifies, under pre-determined conditions and limitations, its customers for infringement of third-party intellectual property rights by the Company’s products or services. The Company seeks to limit its liability for such indemnity to an amount not to exceed the sales price of the products or services subject to its indemnification obligations. The Company does not believe that it is probable that any material amounts will be paid under these guarantees.

The Company provides guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of September 26, 2021, the maximum potential amount of future payments that the Company could be required to make under these arrangements and letters of credit was $74.1 million. The Company does not

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believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid.

In addition, the Company has entered into indemnification agreements with its directors, officers, and certain other employees, consistent with its Bylaws and Certificate of Incorporation; and under local law, the Company may be required to provide indemnification to its employees for actions within the scope of their employment. Although the Company maintains insurance contracts that cover some of the potential liability associated with these indemnification agreements, there is no guarantee that all such liabilities will be covered. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under such indemnification agreements or statutory obligations.

Warranties

The Company provides standard warranties on its systems. The liability amount is based on actual historical warranty spending activity by type of system, customer, and geographic region, modified for any known differences such as the impact of system reliability improvements. As of September 26, 2021, warranty reserves totaling $15.6 million were recognized in other long-term liabilities, the remainder were included in accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets.

Changes in the Company’s product warranty reserves were as follows:


	Three Months Ended
		September 26, 2021		September 27, 2020
		(in thousands)
Balance at beginning of period		$	191,758	$	129,197
Warranties issued during the period		70,672		46,044
Settlements made during the period		(60,292)		(36,131)
Changes in liability for pre-existing warranties		12,106		(2,250)
Balance at end of period		$	214,244	$	136,860

Legal Proceedings

While the Company is not currently a party to any legal proceedings that it believes material, the Company is either a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business, including intellectual property claims. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. Based on current information, the Company does not believe that a material loss from known matters is probable and therefore has not recorded an accrual of any material amount for litigation or other contingencies related to existing legal proceedings.

NOTE 15 — STOCK REPURCHASE PROGRAM

In November 2020, the Board of Directors authorized the Company to repurchase up to an additional $5.0 billion of Common Stock; this authorization supplements the remaining balances from any prior authorizations. These repurchases can be conducted on the open market or as private purchases and may include the use of derivative contracts with large financial institutions, in all cases subject to compliance with applicable law. This repurchase program has no termination date and may be suspended or discontinued at any time.

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Repurchases under the repurchase program were as follows during the periods indicated:


Period	Total Number of Shares Repurchased	Total Cost of Repurchase		Average Price Paid Per Share (1)		Amount Available Under Repurchase Program
	(in thousands, except per share data)
Available balance as of June 27, 2021						$	4,222,220
Quarter ended September 26, 2021	1,725	$	1,209,744	$	608.98	$	3,012,476

(1) Average price paid per share excludes the effect of accelerated share repurchase activities. See additional disclosure below regarding the Company’s accelerated share repurchase activity during the three months ended September 26, 2021.

In addition to the shares repurchased under the Board-authorized repurchase program shown above, during the three months ended September 26, 2021, the Company acquired 12 thousand shares at a total cost of $7.1 million, which the Company withheld through net settlements to cover minimum tax withholding obligations upon the vesting of restricted stock unit awards granted under the Company’s equity compensation plans. The shares retained by the Company through these net share settlements are not a part of the Board-authorized repurchase program but instead are authorized under the Company’s equity compensation plan.

Accelerated Share Repurchase Agreements

On August 31, 2021, the Company entered into an accelerated share repurchase agreement (the “September 2021 ASR") with two financial institutions to repurchase a total of $650 million of Common Stock. The Company took an initial delivery of approximately 806 thousand shares, which represented 75% of the prepayment amount divided by the Company’s closing stock price on August 31, 2021. The total number of shares received under the September 2021 ASR will be based upon the average daily volume weighted average price of the Company’s Common Stock during the repurchase period, less an agreed upon discount. Final settlement of the September 2021 ASR will occur no later than January 6, 2022.

NOTE 16 — ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss, net of tax at September 26, 2021, as well as the activity for the three months ending September 26, 2021, were as follows:


	Accumulated Foreign Currency Translation Adjustment		Accumulated Unrealized Gain or Loss on Cash flow hedges		Accumulated Unrealized Holding Gain or Loss on Available-For-Sale Investments		Accumulated Unrealized Components of Defined Benefit Plans		Total
	(in thousands)
Balance at June 27, 2021	$	(31,413)	$	(14,125)	$	1,611	$	(20,201)	$	(64,128)
Other comprehensive (loss) income before reclassifications	(4,032)		(9,005)		(2,405)		199		(15,243)
(Gains) losses reclassified from accumulated other comprehensive loss to net income (1)	—		(3,542)		1,145		—		(2,397)
Net current-period other comprehensive (loss) income	(4,032)		(12,547)		(1,260)		199		(17,640)
Balance at September 26, 2021	$	(35,445)	$	(26,672)	$	351	$	(20,002)	$	(81,768)

(1) Amount of after-tax gains reclassified from AOCI into net income is not material in the aggregate, or to any individual location in our Condensed Consolidated Statements of Operations.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

With the exception of historical facts, the statements contained in this discussion are forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified as forward-looking, by use of phrases and words such as “believe,” “estimated,” “anticipate,” “expect,” “probable,” “intend,” “plan,” “aim,” “may,” “should,” “could,” “would,” “will,” “continue,” and other future-oriented terms. The identification of certain statements as “forward-looking” does not mean that other statements not specifically identified are not forward-looking. Forward-looking statements include but are not limited to statements that relate to: trends and opportunities in the global economic environment; trends and opportunities in the semiconductor industry, including in the end markets and applications for semiconductors, and in device complexity; growth or decline in the industry and the market for, and spending on, wafer fabrication equipment; the anticipated levels of, and rates of change in, margins, market share, served 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 the Securities and Exchange Commission (“SEC”), such as our annual report on Form 10-K for the year ended June 27, 2021 (our “2021 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.

In November 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, which modernizes and simplifies certain disclosure requirements of Regulation S-K. The final rule became effective on February 10, 2021 and must be applied in a registrant’s first fiscal year ending on or after August 9, 2021. Under the amendments to Item 303 of Regulation S-K contained in SEC Release No. 33-10890, we have the option, in discussing any material changes in our results of operations for the most recently completed quarter, of using as the basis for comparison either the corresponding quarter for the preceding fiscal year or, in the alternative, the immediately preceding sequential quarter. We have elected the latter alternative, as management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison. Additionally, in the first filing after the change in the basis of comparison, we are required to disclose a comparison of the results for the current quarter and the corresponding quarter of the preceding fiscal year. Accordingly, we have compared the results for the three months

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ended September 26, 2021 with the results for the three months ended June 27, 2021, and September 27, 2020, where applicable, throughout this Management's Discussion and Analysis.

Documents To Review In Connection With Management’s Discussion and Analysis Of Financial Condition and Results Of Operations

For a full understanding of our financial position and results of operations for the three months ended September 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.

EXECUTIVE SUMMARY

Lam Research Corporation is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. We have built a strong global presence with core competencies in areas like nanoscale applications enablement, chemistry, plasma and fluidics, advanced systems engineering and a broad range of operational disciplines. Our products and services are designed to help our customers build smaller and better performing devices that are used in a variety of electronic products, including mobile phones, personal computers, servers, wearables, automotive vehicles, and data storage devices.

Our customer base includes leading semiconductor memory, foundry, and integrated device manufacturers that make products such as non-volatile memory, dynamic random-access memory, and logic devices. Their continued success is part of our commitment to driving semiconductor breakthroughs that define the next generation. Our core technical competency is integrating hardware, process, materials, software, and process control, enabling results on the wafer.

Semiconductor manufacturing, our customers’ business, involves the complete fabrication of multiple dies or integrated circuits on a wafer. This involves the repetition of a set of core processes and can require hundreds of individual steps. Fabricating these devices requires highly sophisticated process technologies to integrate an increasing array of new materials with precise control at the atomic scale. Along with meeting technical requirements, wafer processing equipment must deliver high productivity and be cost-effective.

Demand from cloud computing, 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. Our Customer Support Business Group provides products and services to maximize installed equipment performance, predictability, and operational efficiency. Several factors create opportunity for sustainable differentiation for us: (i) our focus on research and development, with several on-going programs relating to sustaining engineering, product and process development, and concept and feasibility; (ii) our ability to effectively leverage cycles of learning from our broad installed base; (iii) our collaborative focus with semi-ecosystem partners; 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 continues to be higher investment 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-ended September 26, 2021, customer demand remained strong, and we continued to increase our production output levels with capacity additions and improvements in our operations. However, we have experienced, and expect continued near-term, supply chain constraints and increased materials, freight and logistics costs. 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.

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The following table summarizes certain key financial information for the periods indicated below:


	Three Months Ended
	September 26, 2021			June 27, 2021			September 27, 2020
	(in thousands, except per share data and percentages)
Revenue	$	4,304,465		$	4,145,179		$	3,177,080
Gross margin	$	1,976,754		$	1,915,201		$	1,506,179
Gross margin as a percent of total revenue	45.9		%	46.2		%	47.4		%
Total operating expenses	$	604,521		$	599,274		$	545,115
Net income	$	1,179,744		$	1,144,657		$	823,451
Diluted net income per share	$	8.27		$	7.98		$	5.59

In the September 2021 quarter, revenue increased 4% compared to the June 2021 quarter, driven primarily by an increase in systems revenue, reflective of a strong wafer fabrication equipment environment. The decrease in gross margin as a percentage of revenue in the September 2021 quarter compared to the June 2021 quarter was primarily driven by higher levels of manufacturing-related spending as well as unfavorable changes in customer and product mix, partially offset by decreases in deferred compensation plan-related costs. The increase in operating expenses in the September 2021 quarter compared to the June 2021 quarter was mainly driven by increases in spending for supplies and outside services, partially offset by decreases in deferred compensation plan-related costs.

Our cash and cash equivalents, investments, and restricted cash and investments balances decreased to $4.9 billion at the end of the September 2021 quarter compared to $6.0 billion at the end of the June 2021 quarter. This decrease was primarily the result of $1.2 billion of share repurchases, including net share settlement on employee stock-based compensation; $185.4 million of dividends paid to stockholders; and $136.4 million of capital expenditures, partially offset by $457.5 million of cash generated from operating activities. Employee headcount as of September 26, 2021 was approximately 15,400.

RESULTS OF OPERATIONS

Revenue


	Three Months Ended
	September 26, 2021			June 27, 2021			September 27, 2020
Revenue (in millions)	$	4,304		$	4,145		$	3,177
China	37		%	37		%	37		%
Korea	21		%	30		%	24		%
Taiwan	15		%	13		%	14		%
Japan	11		%	9		%	12		%
Southeast Asia	8		%	3		%	7		%
United States	6		%	5		%	4		%
Europe	2		%	3		%	2		%

Revenue for the September 2021 quarter increased 4% from the June 2021 quarter, reflecting increased customer spending on capital equipment.

The following table presents our revenue disaggregated between system and customer support-related revenue:


	Three Months Ended
	September 26, 2021		June 27, 2021		September 27, 2020
	(In thousands)
System revenue	$	2,924,883	$	2,763,877	$	2,148,241
Customer support-related revenue and other	1,379,582		1,381,302		1,028,839
	$	4,304,465	$	4,145,179	$	3,177,080

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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 26, 2021		June 27, 2021		September 27, 2020
Memory	64	%	59	%	58	%
Foundry	25	%	35	%	36	%
Logic/integrated device manufacturing	11	%	6	%	6	%

Gross Margin


	Three Months Ended
	September 26, 2021			June 27, 2021			September 27, 2020
	(in thousands, except percentages)
Gross margin	$	1,976,754		$	1,915,201		$	1,506,179
Percent of revenue	45.9		%	46.2		%	47.4		%

Gross margin as a percentage of revenue was lower in the September 2021 quarter compared to the June 2021 quarter primarily as a result of higher levels of manufacturing-related spending as well as unfavorable changes in customer and product mix, partially offset by decreases in deferred compensation plan-related costs.

The decrease in gross margin as a percentage of revenue in the September 2021 quarter compared to the same period in the prior year was primarily driven by increased manufacturing-related spending as a result of COVID-19 disruptions and by unfavorable changes in customer and product mix.

Research and Development


	Three Months Ended
	September 26, 2021			June 27, 2021			September 27, 2020
	(in thousands, except percentages)
Research & development (“R&D”)	$	382,327		$	381,749		$	355,367
Percent of revenue	8.9		%	9.2		%	11.2		%

We continued to make significant R&D investments in the September 2021 quarter focused on leading-edge deposition, etch, clean and other semiconductor manufacturing processes. The increase in R&D expense in the September 2021 quarter compared to the June 2021 quarter was primarily driven by an increase in spending for supplies, mostly offset by decreases in employee-related expenses and deferred compensation plan-related costs.

The increase in R&D expense in the September 2021 quarter compared to the same period in the prior year was primarily driven by an increase of $28 million in employee-related expenses as a result of increased headcount, slightly offset by decreases in deferred compensation plan-related costs.

Selling, General, and Administrative


	Three Months Ended
	September 26, 2021			June 27, 2021			September 27, 2020
	(in thousands, except percentages)
Selling, general, and administrative (“SG&A”)	$	222,194		$	217,525		$	189,748
Percent of revenue	5.2		%	5.2		%	6.0		%

SG&A expense during the September 2021 quarter increased in comparison to the June 2021 quarter, primarily driven by an increase in spending for outside services, partially offset by a decrease in deferred compensation plan-related costs.

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SG&A expense during the September 2021 quarter increased compared to the same period in the prior year, primarily driven by an increase of $13 million in employee-related expenses from increased headcount and $19 million in spending for outside services.

Other Expense, Net

Other expense, net consisted of the following:


	Three Months Ended
	September 26, 2021		June 27, 2021		September 27, 2020
	(in thousands)
Interest income	$	4,678	$	3,723	$	6,959
Interest expense	(45,056)		(51,695)		(52,115)
Gains on deferred compensation plan-related assets, net	7,437		17,184		12,927


Foreign exchange losses, net	(17)		(2,365)		(1,375)
Other, net	4,101		25,987		(5,188)
	$	(28,857)	$	(7,166)	$	(38,792)

Interest income increased in the September 2021 quarter compared to the June 2021 quarter as a result of realized investment gains. The decrease in interest income in the September 2021 quarter compared to the same period in the prior year was as a result of lower interest rates and lower cash balances.

Interest expense decreased in the September 2021 quarter compared to the June 2021 and September 2020 quarters due to the payoff of the 2021 Senior Notes.

The gains on deferred compensation plan-related assets in the September 2021, June 2021, and September 2020 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.

The gains in other, net for the September 2021 and June 2021 quarters compared to losses in the September 2020 quarter were primarily driven by improvements in the fair market value of private equity investments; the June 2021 quarter included an individually significant gain on one such equity investment.

Income Tax Expense

Our provision for income taxes and effective tax rate for the periods indicated were as follows:


	Three Months Ended
	September 26, 2021			June 27, 2021			September 27, 2020
	(in thousands, except percentages)
Income tax expense	$	163,632		$	164,104		$	98,821
Effective tax rate	12.2		%	12.5		%	10.7		%

The effective tax rate for the September 2021 quarter compared to the June 2021 quarter remained consistent.

The increase in the effective tax rate for the September 2021 quarter 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 from Switzerland to Malaysia, effective from fiscal year 2022. Through fiscal year 2036, we expect to operate under various tax incentives in Malaysia 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 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 2021 Form 10-K for additional information.

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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

There are no new accounting pronouncements not yet adopted or effective that are expected to have a material impact on our Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Total gross cash, cash equivalents, investments, and restricted cash and investments balances were $4.9 billion at September 26, 2021 compared to $6.0 billion as of June 27, 2021. This decrease was primarily driven by $1.2 billion of share repurchases, including net share settlement on employee stock-based compensation, $185.4 million in dividends paid, and $136.4 million of capital expenditures, partially offset by $457.5 million of cash generated from operating activities.

Cash Flow from Operating Activities

Net cash provided by operating activities of $457.5 million during the three months ended September 26, 2021, consisted of (in thousands):


Net income	$	1,179,744
Non-cash charges:
Depreciation and amortization	79,874
Equity-based compensation expense	58,099

Deferred income taxes	(13,023)


Changes in operating asset and liability accounts	(838,480)
Other	(8,690)
	$	457,524

Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in accounts receivable of $370.7 million, inventory of $198.4 million, and prepaid expense and other assets of $55.3 million, along with decreases in accrued expenses and other liabilities of $180.9 million and deferred profit of $35.9 million. The uses of cash are offset by the following source of cash: increases in trade accounts payable of $2.7 million.

Cash Flow from Investing Activities

Net cash provided by investing activities during the three months ended September 26, 2021, was $596.7 million, primarily consisting of net proceeds from sales of available-for-sale securities of $738.0 million, partially offset by capital expenditures of $136.4 million.

Cash Flow from Financing Activities

Net cash used for financing activities during the three months ended September 26, 2021, was $1.4 billion, primarily consisting of $1.2 billion in treasury stock repurchases, including net share settlement on employee stock-based compensation, $185.4 million in dividends paid, and $6.3 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 of September 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.

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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 since June 27, 2021. All of the potential changes noted below are based on sensitivity analysis performed on our financial position as of September 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 of September 26, 2021, were as follows:


	Valuation of Securities Given an Interest Rate Decrease of X Basis Points						Fair Value as of September 26, 2021		Valuation of Securities Given an Interest Rate 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	$	1,855	$	1,855	$	1,855	$	1,849	$	1,835	$	1,821	$	1,807


Foreign government bonds	15,169		15,169		15,169		15,133		15,079		15,025		14,971
Corporate notes and bonds	538,813		538,771		538,501		536,383		533,707		531,031		528,355

Mortgage backed securities - commercial	16,289		16,287		16,228		16,107		15,985		15,863		15,741
Total	$	572,126	$	572,082	$	571,753	$	569,472	$	566,606	$	563,740	$	560,874

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.

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Disclosure Controls and Procedures

As required by Exchange Act Rule 13a-15(b), as of September 26, 2021, 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.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Please refer to the subsection entitled “Legal Proceedings” within Note 14 “Commitments and Contingencies,” to our Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q.

ITEM 1A. Risk Factors

In addition to the other information in this Form 10-Q, the following risk factors should be carefully considered in evaluating us and our business because such factors may significantly impact our business, operating results, and financial condition. Many of the following risk factors have been, and could be further, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. As a result of these risk factors, as well as other risks discussed in our other SEC filings, our actual results could differ materially from those projected in any forward-looking statements. No priority or significance is intended by, nor should be attached to, the order in which the risk factors appear.

INDUSTRY AND CUSTOMER RISKS

The Semiconductor Capital Equipment Industry Is Subject to Variability and Periods of Rapid Growth or Decline; We Therefore Face Risks Related to Our Strategic Resource Allocation Decisions

The semiconductor capital equipment industry has historically been characterized by rapid changes in demand. The industry environment has moved toward being more characterized by variability across segments and customers, accentuated by consolidation within the industry. Variability in our customers’ business plans may lead to changes in demand for our equipment and services, which could negatively impact our results. The variability in our customers’ investments during any particular period is dependent on several factors, including but not limited to electronics demand, economic conditions (both general and in the semiconductor and electronics industries), industry supply and demand, prices for semiconductors, and our customers’ ability to develop and manufacture increasingly complex and costly semiconductor devices. The changes in demand may require our management to adjust spending and other resources allocated to operating activities.

During periods of rapid growth or decline in demand for our products and services, we face significant challenges in maintaining adequate financial and business controls, management processes, information systems, and procedures for training, assimilating, and managing our workforce, and in appropriately sizing our supply chain infrastructure and facilities, work force, and other components of our business on a timely basis. If we do not adequately meet these challenges during periods of increasing or declining demand, our gross margins and earnings may be negatively impacted. For example, the COVID-19 outbreak has impacted and could further impact our ability to meet the demand for our products due to production, sourcing,

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logistics and other challenges resulting from quarantines, shelter in place or "stay at home" orders, facility closures, workforce challenges, and travel and logistics restrictions in connection with the outbreak.

We continuously reassess our strategic resource allocation choices in response to the changing business environment. If we do not adequately adapt to the changing business environment, we may lack the infrastructure and resources to scale up our business to meet customer expectations and compete successfully during a period of growth, or we may expand our capacity and resources too rapidly and/or beyond what is appropriate for the actual demand environment, resulting in excess fixed costs.

Especially during transitional periods, resource allocation decisions can have a significant impact on our future performance, particularly if we have not accurately anticipated industry changes. Our success will depend, to a significant extent, on the ability of our executive officers and other members of our senior management to identify and respond to these challenges effectively.

Future Declines in the Semiconductor Industry, and the Overall World Economic Conditions on Which It Is Significantly Dependent, Could Have a Material Adverse Impact on Our Results of Operations and Financial Condition

Our business depends on the capital equipment expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits. With the consolidation of customers within the industry, the semiconductor capital equipment market may experience rapid changes in demand driven both by changes in the market generally and the plans and requirements of particular customers. The economic, political, and business conditions occurring nationally, globally, or in any of our key sales regions, which are often unpredictable, have historically impacted customer demand for our products and normal commercial relationships with our customers, suppliers, and creditors. Additionally, in times of economic uncertainty, our customers’ budgets for our products, or their ability to access credit to purchase them, could be adversely affected. This would limit their ability to purchase our products and services. As a result, changing economic, political or business conditions can cause material adverse changes to our results of operations and financial condition, including but not limited to:

•a decline in demand for our products or services;

•an increase in reserves on accounts receivable due to our customers’ inability to pay us;

•an increase in reserves on inventory balances due to excess or obsolete inventory as a result of our inability to sell such inventory;

•valuation allowances on deferred tax assets;

•restructuring charges;

•asset impairments including the potential impairment of goodwill and other intangible assets;

•a decline in the value of our investments;

•exposure to claims from our suppliers for payment on inventory that is ordered in anticipation of customer purchases that do not come to fruition;

•a decline in the value of certain facilities we lease to less than our residual value guarantee with the lessor; and

•challenges maintaining reliable and uninterrupted sources of supply.

Fluctuating levels of investment by semiconductor manufacturers may materially affect our aggregate shipments, revenues, operating results, and earnings. Where appropriate, we will attempt to respond to these fluctuations with cost management programs aimed at aligning our expenditures with anticipated revenue streams, which sometimes result in restructuring charges. Even during periods of reduced revenues, we must continue to invest in R&D and maintain extensive ongoing worldwide customer service and support capabilities to remain competitive, which may temporarily harm our profitability and other financial results.

We Have a Limited Number of Key Customers

Sales to a limited number of large customers constitute a significant portion of our overall revenue, shipments, cash flows, collections, and profitability. As a result, the actions of even one customer may subject us to variability in those areas that is difficult to predict. In addition, large customers may be able to negotiate requirements that result in decreased pricing, increased costs, and/or lower margins for us; compliance with specific environmental, social, and corporate governance standards; and limitations on our ability to share technology with others. Similarly, significant portions of our credit risk may, at any given time, be concentrated among a limited number of customers so that the failure of even one of these key customers to pay its obligations to us could significantly impact our financial results.

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We Depend on Creating New Products and Processes and Enhancing Existing Products and Processes for Our Success; Consequently, We Are Subject to Risks Associated with Rapid Technological Change

Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances that enable those processes. We believe that our future success depends in part upon our ability to develop and offer new products with improved capabilities and to continue to enhance our existing products. If new products or existing products have reliability, quality, design, or safety problems, our performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses. We may be unable to develop and manufacture products successfully, or products that we introduce may fail in the marketplace. For more than 25 years, the primary driver of technology advancement in the semiconductor industry has been to shrink the lithography that prints the circuit design on semiconductor chips. That driver could be approaching its technological limit, leading semiconductor manufacturers to investigate more complex changes in multiple technologies in an effort to continue technology development. In addition, the emergence of “big data” and new tools such as machine learning and artificial intelligence that capitalize on the availability of large data sets is leading semiconductor manufacturers and equipment manufacturers to pursue new products and approaches that exploit those tools to advance technology development. In the face of uncertainty on which technology solutions will become successful, we will need to focus our efforts on developing the technology changes that are ultimately successful in supporting our customer requirements. Our failure to develop and offer the correct technology solutions in a timely manner with productive and cost-effective products could adversely affect our business in a material way. Our failure to commercialize new products in a timely manner could result in loss of market share, unanticipated costs, and inventory obsolescence, which would adversely affect our financial results.

In order to develop new products and processes and enhance existing products and processes, we expect to continue to make significant investments in R&D, to investigate the acquisition of new products and technologies, to invest in or acquire such business or technologies, and to pursue joint development relationships with customers, suppliers, or other members of the industry. Our investments and acquisitions may not be as successful as we may expect, particularly in the event that we invest in or acquire product lines and technologies that are new to us. We may find that acquisitions are not available to us, for regulatory or other reasons, and that we must therefore limit ourselves to collaboration and joint venture development activities, which do not have the same benefits as acquisitions. Pursuing development through collaboration and/or joint development activities rather than through an acquisition poses substantial

Enhanced Investments, Inc.
329 South Oyster Bay Road #2085
Plainview, NY 11803
team@eninvs.com

Important disclosures

Performance results were prepared by Enhanced Investments, and have not been compiled, reviewed or audited by an independent accountant. Performance estimates are subject to future adjustment and revision. Investors should be aware that a loss of investment is possible. Account holdings are for illustrative purposes only and are not investment recommendations. Additional information, including (i) the calculation methodology; and (ii) a list showing the contribution of each holding to the portfolio’s performance during the time period will be provided upon request.
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Certain investments are not suitable for all investors. Before investing, consider your investment objectives and applicable fees. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested. Information provided by Enhanced Investments is for informational and general educational purposes only and is not investment or financial advice.

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Performance results were prepared by Enhanced Investments, and have not been compiled, reviewed or audited by an independent accountant. Performance estimates are subject to future adjustment and revision. Investors should be aware that a loss of investment is possible. Account holdings are for illustrative purposes only and are not investment recommendations. Additional information, including (i) the calculation methodology; and (ii) a list showing the contribution of each holding to the portfolio’s performance during the time period will be provided upon request.
All statements made via social media sites sponsored or maintained by Enhanced Investments and its affiliates are for informational purposes only and do not constitute a comprehensive description of Enhanced Investments' investment advisory services.
Certain investments are not suitable for all investors. Before investing, consider your investment objectives and applicable fees. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested. Information provided by Enhanced Investments is for informational and general educational purposes only and is not investment or financial advice.