Our policy is to seek patents on inventions relating to new or enhanced products and processes developed as part of our ongoing research, engineering, manufacturing, and support activities. We currently hold a number of U.S. and foreign patents and applications covering various aspects of our products and processes. We believe that the duration of our patents generally exceeds the useful life of the technologies and processes disclosed and claimed in them. Our patents, which cover material aspects of our past and present core products, have current durations ranging from approximately one to twenty years. We believe that, although the patents we own and may obtain in the future will be of value, they alone will not determine our success. Our success depends principally upon our research and development, engineering, marketing, support, and delivery skills. However, in the absence of patent protection, we may be vulnerable to competitors who attempt to imitate our products, manufacturing techniques, and processes.processes and may be more limited in our ability to exclude competitors than would otherwise be the case. In addition, other companies and inventors may receive patents that contain claims applicable or similar to our products and processes. The sale of products covered by patents of others could require licenses that may not be available on terms acceptable to us, or at all. For further discussion of legal matters, see Item 3, “Legal Proceedings,” of this report.
Douglas R. Bettinger is our executive vice president, chief financial officer, and chief accounting officer with responsibility for finance, tax, treasury, information technology,Finance, Tax, Treasury, Information Technology, and investor relations.Investor Relations. Prior to joining the Company in 2013, Mr. Bettinger served as senior vice president and chief financial officer of Avago Technologies
from 2008 to 2013. From 2007 to 2008, he served as vice president of Finance and corporate controller at Xilinx, Inc., and from 2004 to 2007, he was chief financial officer at 24/7 Customer, a privately held company. Mr. Bettinger worked at Intel Corporation from 1993 to 2004, where he held several senior-level finance positions, including corporate planning and reporting controller and Malaysia site operations controller. Mr. Bettinger earned an M.B.A. degree in finance from the University of Michigan and a B.S. degree in economics from the University of Wisconsin in Madison.
Patrick J. Lord is our groupexecutive vice president of CSBG and Global Operations, a position he has held since September 2020. Dr. Lord was senior vice president and general manager of the Customer Support Business Group, a position he has held sinceCSBG from December 2016. Previously,2016 to September 2020. Prior to that , Dr. Lord held
the position of group vice president and deputy general manager of the Global Products Group from September 2013 to December 2016. He served as the head of the Direct Metals, GapFill, Surface Integrity Group, and Integrated Metals (“DGSI”) Business Units between June 2012 and September 2013. Prior to theour acquisition of Novellus in June 2012, Dr. Lord was senior vice president and general manager of the DGSI Business Units at Novellus. Additionally, Dr. Lord held the position of senior vice president of Business Development and Strategic Planning. He joined Novellus in 2001 and held a number of other positions, including executivesenior vice president and general manager of the CMP Business Unit, senior director of Business Development, senior director of Strategic Marketing, and acting vice president of Corporate Marketing. Before joining Novellus, Dr. Lord spent six years at KLA-Tencor Corporation (“KLA-Tencor”) in various product marketing and management roles. He earned his Ph.D., M.S., and B.S. degrees in mechanical engineering from the Massachusetts Institute of Technology.
and September 2013. Prior to joining us,our acquisition of Novellus in June 2012, Mr. Varadarajan was senior vice president and general manager of Novellus’ PECVD and Electrofill Business Units. He joined Novellus in 1999 as a process engineer with the Electrofill Business Unit and held various roles in that business unit before being appointed director of technology in 2004. Between 2006 and 2008, he worked in the PECVD Business Unit, initially as director of technology, until being promoted to product general manager. In 2009, he returned to the Electrofill Business Unit as vice president and general manager. In mid-2011, he was promoted to senior vice president and general manager, where he was also responsible for the PECVD Business Unit. Mr. Varadarajan earned an M.S. degree in manufacturing engineering and material science from Boston University and a B.S. degree in mechanical engineering from the University of Mysore.
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
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, 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 businesseconomic, political or economicbusiness conditions can cause material adverse changes to our results of operations and financial condition, including but not limited to:
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.
Our Quarterly Revenues and Operating Results Are Variable
Our revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in our control. We manage our expense levels based in part on our expectations of future revenues. Because our operating expenses are based in part on anticipated future revenues, and a certain amount of those expenses are relatively fixed, a change in the timing of recognition of revenue and/or the level of gross profit from a small number of transactions can unfavorably affect operating results in a particular quarter. Factors that may cause our financial results to fluctuate unpredictably include but are not limited to:
economic conditions in the electronics and semiconductor industries in general and specifically the semiconductor equipment industry;
the size and timing of orders from customers;
consolidation of the customer base, which may result in the investment decisions of one customer or market having a significant effect on demand for our products or services;
procurement shortages;
the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations;
manufacturing difficulties;
customer cancellations or delays in shipments, installations, and/or customer acceptances;
the extent that customers continue to purchase and use our products and services in their business;
our customers’ reuse of existing and installed products, to the extent that such reuse decreases their need to purchase new products or services;
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changes in average selling prices, customer mix, and product mix;
our ability to develop, introduce, and market new, enhanced, and competitive products in a timely manner;
our competitors’ introduction of new products;
legal or technical challenges to our products and technologies;
transportation, communication, demand, information technology, or supply disruptions based on factors outside our control, such as strikes, acts of God, wars, terrorist activities, and natural or man-made disasters;
legal, tax, accounting, or regulatory changes (including but not limited to change in import/export regulations) or changes in the interpretation or enforcement of existing requirements;
changes in our estimated effective tax rate;
foreign currency exchange rate fluctuations; and
the dilutive impact of our Convertible Notes (as defined below) and related warrants on our earnings per share.
We May Incur Impairments to Goodwill or Long-Lived Assets
We review our long-lived assets, including goodwill and other intangible assets, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Negative industry or economic trends, including reduced market prices of our Common Stock, reduced estimates of future cash flows, disruptions to our business, slower growth rates, or lack of growth in our relevant business units, could lead to impairment charges against our long-lived assets, including goodwill and other intangible assets. If, in any period, our stock price decreases to the point where our fair value, as determined by our market capitalization, is less than the book value of our assets, this could also indicate a potential impairment, and we may be required to record an impairment charge in that period, which could adversely affect our result of operations.
Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in a highly competitive environment and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis indicates potential impairment to goodwill in one or more of our business units, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.
Our Leverage and Debt Service Obligations and Potential Note Conversion or Related Hedging Activities May Adversely Affect Our Financial Condition, Results of Operations, and Earnings per Share
We have $2.9 billion in aggregate principal amount of senior unsecured notes and convertible note instruments outstanding. Additionally, we have $750 million available to us in revolving credit arrangements, with an option for us to request an increase in the facility of up to an additional $250 million, for a potential total commitment of $1.0 billion. We may, in the future, decide to borrow amounts under the revolving credit agreement, or to enter into additional debt arrangements.
In addition, we have entered, and in the future may enter, into derivative instrument arrangements to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. We could be exposed to losses in the event of nonperformance by the counterparties to our derivative instruments.
Our indebtedness could have adverse consequences, including:
risk associated with any inability to satisfy our obligations;
a portion of our cash flows that may have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions, or general corporate or other purposes; and
impairing our ability to obtain additional financing in the future.
Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory, and other factors. Furthermore, our operations may not generate sufficient cash flows, particularly in the United States, to enable us to meet our expenses and service our debt. As a result, we may need to enter into new financing arrangements to obtain the necessary funds. If we
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determine it is necessary to seek additional funding for any reason, we may not be able to obtain such funding or, if funding is available, obtain it on acceptable terms. If we fail to make a payment on our debt, we could be in default on such debt, and this default could cause us to be in default on our other outstanding indebtedness.
Conversion of our Convertible Notes and the exercise of the related warrants may cause dilution to our stockholders and to our earnings per share. The number of shares of our Common Stock into which the Convertible Notes are convertible and for which related warrants are exercisable for may be adjusted from time to time, including increases in such rates as a result of dividends that we pay to our stockholders. Upon conversion of any Convertible Notes, we will deliver cash in the amount of the principal amount of the Convertible Notes and, with respect to any excess conversion value greater than the principal amount of the Convertible Notes, shares of our Common Stock, which would result in dilution to our stockholders. This dilution may not be completely mitigated by the hedging transactions we entered into in connection with the sale of certain Convertible Notes or through share repurchases. Prior to the maturity of the Convertible Notes, if the price of our Common Stock exceeds the conversion price, U.S. generally accepted accounting principles require that we report an increase in diluted share count, which would result in lower reported earnings per share. The price of our Common Stock could also be affected by sales of our Common Stock by investors who view the Convertible Notes as a more attractive means of equity participation in our company and also by hedging activity that may develop involving our Common Stock by holders of the Convertible Notes.
Our Credit Agreements Contain Covenant Restrictions That May Limit Our Ability to Operate Our Business
We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, or obtain additional financing because our debt agreements contain, and any of our other future similar agreements may contain, covenant restrictions that limit our ability to, among other things:
incur additional debt, assume obligations in connection with letters of credit, or issue guarantees;
create liens;
enter into transactions with our affiliates;
sell certain assets; and
merge or consolidate with any person.
Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under the Senior Notes, the Convertible Notes, or our other debt, which could permit the holders to accelerate such debt. If any of our debt is accelerated, we may not have sufficient funds available to repay such debt, which could materially and negatively affect our financial condition and results of operation.
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 jointly developed 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.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 asin the event that we seek to 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 challenges for management, including those related to aligning business objectives,objectives; sharing confidential information, and intellectual property and data; sharing value with third parties,parties; and realizing synergies that might have been available in an acquisition but are not available through a joint development project. We must manage product transitions and joint development relationships successfully, as the introduction of new products could adversely affect our sales of existing products and certain jointly developed technologies may be subject to restrictions on our ability to share that technology with other customers, which could limit our market for products incorporating those technologies. Future technologies, processes, or product developments may render our current product offerings obsolete, leaving us with non-competitive products, obsolete inventory, or both. Moreover, customers may adopt new technologies or processes to address the complex challenges associated with next-generation devices. This shift may result in a reduction in the size of our addressable markets or could increase the relative size of markets in which we either do not compete or have relatively low market share.
We Are Subject to Risks Relating to Product Concentration and Lack of Product Revenue Diversification
We derive a substantial percentage of our revenues from a limited number of products. Our products are priced up to approximately $10 million per system. As a result, the inability to recognize revenue on even a few systems can cause a significantly adverse impact on our revenues for a given quarter, and, in the longer term, the continued market acceptance of these products is critical to our future success. Our business, operating results, financial condition, and cash flows could therefore be adversely affected by:
a decline in demand for even a limited number of our products,
a failure to achieve continued market acceptance of our key products,
export restrictions or other regulatory or legislative actions that could limit our ability to sell those products to key customers or customers within certain markets,
an improved version of products being offered by a competitor in the markets in which we participate,
increased pressure from competitors that offer broader product lines,
technological changes that we are unable to address with our products, or
a failure to release new or enhanced versions of our products on a timely basis.
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In addition, the fact that we offer limited product lines creates the risk that our customers may view us as less important to their business than our competitors that offer additional products and/or product capabilities. This may impact our ability to maintain or expand our business with certain customers. Such product concentration may also subject us to additional risks associated with technology changes. Our business is affected by our customers’ use of our products in certain steps in their wafer fabrication processes. Should technologies change so that the manufacture of semiconductors requires fewer steps using our products, this could have a larger impact on our business than it would on the business of our less concentrated competitors.
Strategic Alliances and Customer Consolidation May Have Negative Effects on Our Business
Increasingly, semiconductor manufacturing companies are entering into strategic alliances or consolidating with one another to expedite the development of processes and other manufacturing technologies and/or achieve economies of scale. The outcomes of such an alliance can be the definition of a particular tool set for a certain function and/or the standardization of a series of process steps that use a specific set of manufacturing equipment, while the outcomes of consolidation can lead to an overall reduction in the market for semiconductor manufacturing equipment as customers’ operations achieve economies of scale and/or increased purchasing power based on their higher volumes. In certain instances, this could work to our disadvantage if a competitor’s tools or equipment become the standard equipment for such functions or processes. Additional outcomes of such consolidation may include our customers re-evaluating their future supplier relationships to consider our competitors’ products and/or gaining additional influence over the pricing of products and the control of intellectual property.property or data.
Similarly, our customers may partner with, or follow the lead of, educational or research institutions that establish processes for accomplishing various tasks or manufacturing steps. If those institutions utilize a competitor’s equipment when they establish those processes, it is likely that customers will tend to use the same equipment in setting up their own manufacturing lines. Even if they select our equipment, the institutions and the customers that follow their lead could impose conditions on acceptance of that
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equipment, such as adherence to standards and requirements or limitations on how we license our proprietary rights, that increase our costs or require us to take on greater risk. These actions could adversely impact our market share and financial results.
We Depend on a Limited Number of Key Suppliers and Outsource Providers, and We Run the Risk That They Might Not Perform as We Expect
Outsource providers and component suppliers have played and will continue to play a key role in our manufacturing operations, field installation and support, and many of our transactional and administrative functions, such as information technology, facilities management, and certain elements of our finance organization. These providers and suppliers might suffer financial setbacks, be acquired by third parties, become subject to exclusivity arrangements that preclude further business with us, or be unable to meet our requirements or expectation due to their independent business decisions or force majeure events that could interrupt or impair their continued ability to perform as we expect.
Although we attempt to select reputable providers and suppliers and we attempt to secure their performance on terms documented in written contracts, it is possible that one or more of these providers or suppliers could fail to perform as we expect, or fail to secure or protect intellectual property rights, and such failure could have an adverse impact on our business. In some cases, the requirements of our business mandate that we obtain certain components and sub-assemblies included in our products from a single supplier or a limited group of suppliers. Where practical, we endeavor to establish alternative sources to mitigate the risk that the failure of any single provider or supplier will adversely affect our business, but this is not feasible in all circumstances. There is therefore a risk that a prolonged inability to obtain certain components or secure key services could impair our ability to manage operations, ship products, and generate revenues, which could adversely affect our operating results and damage our customer relationships.
We Face Risks Related to the Disruption of Our Primary Manufacturing Facilities
Our manufacturing facilities are concentrated in just a few locations. These locations are subject to disruption for a variety of reasons, such as natural or man-made disasters, terrorist activities, disruptions of our information technology resources, and utility interruptions. Such disruptions may cause delays in shipping our products,
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which could result in the loss of business or customer trust, adversely affecting our business and operating results.
Once a Semiconductor Manufacturer Commits to Purchase a Competitor’s Semiconductor Manufacturing Equipment, the Manufacturer Typically Continues to Purchase That Competitor’s Equipment, Making It More Difficult for Us to Sell Our Equipment to That Customer
Semiconductor manufacturers must make a substantial investment to qualify and integrate wafer processing equipment into a semiconductor production line. We believe that once a semiconductor manufacturer selects a particular supplier’s processing equipment, the manufacturer generally relies upon that equipment for that specific production line application for an extended period of time, especially for customers that are more focused on tool reuse. Accordingly, we expect it to be more difficult to sell our products to a given customer for a product line application if that customer initially selects a competitor’s equipment for the same product line application.
We Face a Challenging and Complex Competitive Environment
We face significant competition from multiple competitors, and with increased consolidation efforts in our industry, as well as the emergence and strengthening of new, regional competitors, we may face increasing competitive pressures. Other companies continue to develop systems and/or acquire businesses and products that are competitive to ours and may introduce new products and product capabilities that may affect our ability to sell and support our existing products. We face a greater risk if our competitors enter into strategic relationships with leading semiconductor manufacturers covering products similar to those we sell or may develop, as this could adversely affect our ability to sell products to those manufacturers.
We believe that to remain competitive we must devote significant financial resources to offer products that meet our customers’ needs, to maintain customer service and support centers worldwide, and to invest in product and process R&D. Technological changes and developing technologies, have required, and are expected to continue to require, new and costly investments. Certain of our competitors, including those that are created and financially backed by foreign governments, have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer service and support resources than we do and therefore have the potential to offer customers a more comprehensive array of products and/or product capabilities and to therefore achieve additional relative success in the semiconductor equipment industry. These competitors may deeply discount or give away products similar to those that we sell, challenging or even exceeding our ability to make similar accommodations and threatening our ability to sell those products. We also face competition from our own customers, who in some instances have established affiliated entities that manufacture equipment similar to ours. In addition, we face competition from companies that exist in a more favorable legal or regulatory environment than we do, allowing the freedom of action in ways that we may be unable to match. In many cases speed to solution is necessary for customer satisfaction and our competitors may be better positioned to achieve these objectives. For these reasons, we may fail to continue to compete successfully worldwide.
In addition, our competitors may be able to develop products comparable or superior to those we offer or may adapt more quickly to new technologies or evolving customer requirements. In particular, while we continue to develop product enhancements that we believe will address future customer requirements, we may fail in a timely manner to complete the development or introduction of these additional product enhancements successfully, or these product enhancements may not achieve market acceptance or be competitive. Accordingly, competition may intensify, and we may be unable to continue to compete successfully in our markets, which could have a material adverse effect on our revenues, operating results, financial condition, and/or cash flows.
BUSINESS AND OPERATIONAL RISKS
The COVID-19 Outbreak Has Adversely Impacted, and May Continue to Adversely Impact, Our Business, Operations, and Financial Results
The COVID-19 outbreak and efforts by national, state and local governments worldwide to control its spread have resulted in widespread measures aimed at containing the disease such as quarantines, travel bans, shutdowns, and shelter in place or “stay at home” orders, which collectively have significantly restricted the movement of people and goods and the ability of businesses to operate. These restrictions and measures, incidents of confirmed or suspected infections within our workforce or those of our suppliers or other business partners, and our efforts to act in the best interests of our employees, customers, and suppliers, have affected and are affecting our business and operations by, among other things, causing facility closures, production delays and capacity limitations; disrupting production by our supply chain; disrupting the transport of goods from our supply chain to us and from us to our customers; requiring modifications to our business processes; requiring the implementation of business continuity plans; requiring the development and qualification of alternative sources of supply; requiring the implementation of social distancing measures that require changes to existing manufacturing processes; disrupting business travel; disrupting our ability to staff our on-site manufacturing and research and development facilities; delaying capital expansion projects; and necessitating teleworking by a large proportion of our workforce. These impacts have caused and are expected to continue to cause delays in product shipments and product development, increases in costs, and decreases in revenue, profitability and cash from operations, which have caused and are expected to cause an adverse effect on our results of operations that may be material. The potential duration and impact of the outbreak on the global economy and on our business are difficult to predict and cannot be estimated with any degree of certainty, but the outbreak has resulted in significant disruption of global financial markets, increases in levels of unemployment, and economic
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uncertainty, which has adversely impacted our business and may continue to do so, and may lead to significant negative impacts on customer spending, demand for our products, the ability of our customers to pay, our financial condition and the financial condition of our suppliers, and our access to external sources of financing to fund our operations and capital expenditures.
Our Revenues and Operating Results Are Variable
Our revenues and operating results may fluctuate significantly from quarter to quarter or year to year due to a number of factors, not all of which are in our control. We manage our expense levels based in part on our expectations of future revenues. Because our operating expenses are based in part on anticipated future revenues, and a certain amount of those expenses are relatively fixed, a change in the timing of recognition of revenue and/or the level of gross profit from a small number of transactions can unfavorably affect operating results in a particular quarter or year. Factors that may cause our financial results to fluctuate unpredictably include but are not limited to:
•economic conditions in the electronics and semiconductor industries in general and specifically the semiconductor equipment industry;
•the size and timing of orders from customers;
•changes in our deferred revenue balance, including as a result of factors such as volume purchase agreements, multi-year service contracts, back orders, and down payments toward purchases;
•consolidation of the customer base, which may result in the investment decisions of one customer or market having a significant effect on demand for our products or services;
•procurement shortages;
•the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations;
•manufacturing difficulties;
•customer cancellations or delays in shipments, installations, customer payments, and/or customer acceptances;
•the extent that customers continue to purchase and use our products and services in their business;
•our customers’ reuse of existing and installed products, to the extent that such reuse decreases their need to purchase new products or services;
•changes in average selling prices, customer mix, and product mix;
•our ability to develop, introduce, and market new, enhanced, and competitive products in a timely manner;
•our competitors’ introduction of new products;
•legal or technical challenges to our products and technologies;
•transportation, communication, demand, information technology, or supply disruptions based on factors outside our control, such as strikes, acts of God, wars, terrorist activities, widespread outbreak of illness, natural or man-made disasters, or climate change;
•legal, tax, accounting, or regulatory changes (including but not limited to changes in import/export regulations and tariffs) or changes in the interpretation or enforcement of existing requirements;
•changes in our estimated effective tax rate; and
•foreign currency exchange rate fluctuations.
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, 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.
Certain Critical Information Systems, That We Rely on for the Operation of Our Business and Products That We Sell, Are Susceptible to Cybersecurity and Other Threats or Incidents
We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include but are not limited to, telecommunications, the Internet, our corporate intranet, various computer hardware and software applications, (some of which may be integrated into the products that we sell or be required in order to provide the services that we offer), network communications, and email. These information systems may be owned and maintained by us, our outsourced providers, or third parties such as vendors, contractors, customers and Cloud providers. In addition, we make use of Software-as-a-Service (SaaS) products for certain important business functions that are provided by third parties and hosted on their own networks and servers, or third-party networks and servers, all of which rely on networks, email and/or the Internet for their function. All of these information systems are subject to disruption, breach or failure from various sources, including those using techniques that change frequently or may be disguised or difficult to detect, or designed to remain dormant until a triggering event, or that may continue undetected for an extended period of time. Those sources may include mistakes or unauthorized actions by our employees or contractors, phishing schemes and other third-party attacks, and degradation or loss of service or access to data due to viruses, malware, denial of service attacks, destructive or inadequate code, power failures, or physical damage to computers, hard drives, communication lines, or networking equipment.
We have experienced cybersecurity and other threats and incidents in the past. Although past threats and incidents have not resulted in a material adverse effect, we may incur material losses related to cybersecurity and other threats or incidents in the future. If we were subject to a cybersecurity and other incident, it could have a material adverse effect on our business. Such adverse effects might include:
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•loss of (or inability to access, e.g. through ransomware) confidential and/or sensitive information stored on these critical information systems or transmitted to or from those systems;
•the disruption of the proper function of our products, services and/or operations;
•the failure of our or our customers’ manufacturing processes;
•errors in the output of our work or our customers’ work;
•the loss or public exposure of the personal information of our employees, customers or other parties;
•the public release of customer orders, financial and business plans, and operational results;
•exposure to claims from third parties who are adversely impacted by such incidents;
•misappropriation or theft of our or a customer’s, supplier’s or other party's assets or resources, including technology data, intellectual property or other sensitive information and costs associated therewith;
•reputational damage;
•diminution in the value of our investment in research, development and engineering; or
•our failure to meet, or violation of, regulatory or other legal obligations, such as the timely publication or filing of financial statements, tax information and other required communications.
While we have implemented ISO 27001 compliant security procedures and virus protection software, intrusion prevention systems, identity and access control, and emergency recovery processes, and we carefully select our third-party providers of information systems, to mitigate risks to the information systems that we rely on, and to our technology, data, intellectual property and other sensitive information, those security procedures and mitigation and protection systems cannot be guaranteed to be fail-safe and we may still suffer cybersecurity and other incidents. It has been difficult and may continue to be difficult to hire and retain employees with substantial cybersecurity acumen. In addition, there have been and may continue to be instances of our policies and procedures not being effective in enabling us to identify risks, threats and incidents in a timely manner, or at all, or to respond expediently, appropriately and effectively when incidents occur and repair any damage caused by such incidents, and such occurrences could have a material adverse effect on our business.
We Are Subject to Risks Relating to Product Concentration and Lack of Product Revenue Diversification
We derive a substantial percentage of our revenues from a limited number of products. Our products are priced up to approximately $15 million per system. As a result, the inability to recognize revenue on even a few systems can cause a significantly adverse impact on our revenues for a given quarter, and, in the longer term, the continued market acceptance of these products is critical to our future success. Our business, operating results, financial condition, and cash flows could therefore be adversely affected by:
•a decline in demand for even a limited number of our products;
•a failure to achieve continued market acceptance of our key products;
•export restrictions or other regulatory or legislative actions that could limit our ability to sell those products to key customers or customers within certain markets;
•an improved version of products being offered by a competitor in the markets in which we participate;
•increased pressure from competitors that offer broader product lines;
•increased pressure from regional competitors;
•technological changes that we are unable to address with our products; or
•a failure to release new or enhanced versions of our products on a timely basis.
In addition, the fact that we offer limited product lines creates the risk that our customers may view us as less important to their business than our competitors that offer additional products and/or product capabilities, including new products that take advantage of “big data” or other new technologies such as machine learning and artificial intelligence. This may impact our ability to maintain or expand our business with certain customers. Such product concentration may also subject us to additional risks associated with technology changes. Our business is affected by our customers’ use of our products in certain steps in their wafer fabrication processes. Should technologies change so that the manufacture of semiconductors requires fewer steps using our products, this could have a larger impact on our business than it would on the business of our less concentrated competitors.
We Depend on a Limited Number of Key Suppliers and Outsource Providers, and We Run the Risk That They Might Not Perform as We Expect
Outsource providers and component suppliers have played and will continue to play a key role in our product development, manufacturing operations, field installation and support, and many of our transactional and administrative functions, such as information technology, facilities management, and certain elements of our finance organization. These providers and suppliers might suffer financial setbacks, be acquired by third parties, become subject to exclusivity arrangements that preclude further business with us, or be unable to meet our requirements or expectation due to their independent business decisions or force majeure events that could interrupt or impair their continued ability to perform as we expect.
Although we attempt to select reputable providers and suppliers and we attempt to secure their performance on terms documented in written contracts, it is possible that one or more of these providers or suppliers could fail to perform as we expect, or fail to secure or protect intellectual property rights, and such failure could have an adverse impact on our business. In some cases, the requirements of our business mandate that we obtain certain components and sub-assemblies included in our products from a single supplier or a limited group of suppliers. Where practical, we endeavor to establish alternative sources to mitigate the risk that the failure of any
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single provider or supplier will adversely affect our business, but this is not feasible in all circumstances. There is therefore a risk that a prolonged inability to obtain certain components or secure key services could impair our ability to manage operations, ship products, and generate revenues, which could adversely affect our operating results and damage our customer relationships. For example, the COVID-19 outbreak has impacted and could further impact our manufacturing operations, supply chain, and customer support due to production, sourcing, logistics and other challenges resulting from quarantines, stay at home orders, facility closures, workforce challenges, and travel and logistics restrictions in connection with the outbreak.
We Face Risks Related to the Disruption of Our Primary Manufacturing Facilities
While we maintain business continuity plans, our manufacturing facilities are concentrated in a limited number of locations. These locations are subject to disruption for a variety of reasons, such as natural or man-made disasters, widespread outbreaks of illness, terrorist activities, political or governmental unrest or instability, disruptions of our information technology resources, utility interruptions, the effects of climate change, or other events beyond our control. Such disruptions may cause delays in shipping our products, which could result in the loss of business or customer trust, adversely affecting our business and operating results. For example, the COVID-19 outbreak has impacted and could further impact our manufacturing operations, supply chain, and customer support due to production, sourcing, logistics and other challenges resulting from quarantines, “stay at home” orders, facility closures, workforce challenges, and travel and logistics restrictions in connection with the outbreak.
Our Future Success Depends Heavily on International Sales and the Management of Global Operations
Non-U.S. sales, as reflected in Part 1II Item 1. Business,7. Results of Operation of this 2021 Form 10-K, accounted for approximately 92%94%, 92%, and 83%92% of total revenue in fiscal years 2017, 2016,2021, 2020, and 2015,2019, respectively. We expect that international sales will continue to account for a substantial majority of our total revenue in future years.
We are subject to various challenges related to international sales and the management of global operations including, but not limited to:
•domestic and international trade regulations, policies, practices, relations, disputes and issues;
trade balance issues;
•domestic and international tariffs, export controls and other barriers;
•developing customers and/or suppliers, who may have limited access to capital resources;
•global or national economic and political conditions;
•changes in currency controls;
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•differences in the enforcement of intellectual property and contract rights in varying jurisdictions;
•our ability to respond to customer and foreign government demands for locally sourced systems, spare parts, and services and develop the necessary relationships with local suppliers;
•changes in and compliance with U.S. and international laws and regulations affecting foreign operations, including U.S. and international trade restrictions and sanctions, anti-bribery, anti-corruption, anti-boycott, environmental, tax, and labor laws;
•fluctuations in interest and foreign currency exchange rates;
our ability to repatriate cash in a tax-efficient manner;
•the need for technical support resources in different locations; and
•our ability to secure and retain qualified people, and effectively manage people, in all necessary
locations for the successful operation of our business.
Certain international sales depend onFor example, the COVID-19 outbreak has impacted and could further impact our abilitymanufacturing operations, supply chain, and customer support due to obtain export licensesproduction, sourcing, logistics and other challenges resulting from quarantines, stay at home orders, facility closures, workforce challenges, and travel and logistics restrictions in connection with the U.S. government. Our failure or inability to obtain such licenses would substantially limit our markets and severely restrict our revenues. Many of the challenges noted above are applicable in China, which is a fast developing market for the semiconductor equipment industry and therefore an area of potential significant growth for our business. As the business volume between China and the rest of the world grows, thereoutbreak.
There is inherent risk, based on the complex relationships among China, Japan, Korea, Taiwan, and the United States, that political, diplomatic and diplomaticnational security influences might lead to trade disruptions.disputes, impacts and/or disruptions, in particular those affecting the semiconductor industry. This would adversely affect our business with China, Japan, Korea, and/or Taiwan and perhaps the entire Asia Pacific region.region or global economy. A significant trade dispute, impact and/or disruption in these areasany area where we do business could have a materially adverse impact on our future revenue and profits.
Tariffs, export controls, additional taxes, trade barriers, sanctions, or the termination or modification of trade agreements, trade zones, and other duty mitigation initiatives, may increase our manufacturing costs, decrease margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary equipment and supplies, which could have a material adverse effect on our business, results of operations, or financial conditions. Certain of our international sales depend on our ability to obtain export licenses from the U.S. or foreign governments, and our inability to obtain such licenses, or an expansion of the number or kinds of sales for which export licenses are required, could potentially limit the market for our products and adversely impact our revenues. As is discussed below under the heading “Our Sales to Customers in China, a Region of Growing Significance to Us, Could be Materially and Adversely Affected by Export License Requirements and Other Regulatory Changes, or Other Governmental Actions in the Course of the Trade Relationship Between the U.S. and China,” the U.S. government has recently expanded export license requirements that impact trade with China. In addition, the U.S. government is in the process of assessing which “emerging and foundational” technologies may be subject to new or additional export controls under the 2018 Export Control Reform Act, and it is possible that such controls, if and when imposed, could adversely impact our ability to sell our products outside the U.S. Furthermore, there are risks that the Chinese governmentforeign governments may, among other things, insist on the use of local suppliers; compel
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companies that do business in China to partner with local companies to design and supply equipment on a local basis, requiring the transfer of intellectual property rights and/or local manufacturing; utilize their influence over their judicial systems to respond to intellectual property disputes or issues; and provide special incentives to government-backed local customers to buy from local competitors, even if their products are inferior to ours; all of which could adversely impact our revenues and margins.
We are exposed to potentially adverse movements in foreign currency exchange rates. The majority of our sales and expenses are denominated in U.S. dollars. However, we are exposed to foreign currency exchange rate fluctuations primarily related to revenues denominated in Japanese yen and expenses denominated in euro, Korean won, Malaysian ringgit, and Korean won.Indian rupee. Currently, we hedge certain anticipated foreign currency cash flows, primarily anticipated revenues denominated in Japanese yen and expenses dominated in euro, Korean won, Malaysian ringgit, and Korean won.Indian rupee. In addition, we enter into foreign currency hedge contracts to minimize the short-term impact of the foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily third-party accounts receivables, accounts payables, and intercompany receivables and payables. We believe these are our primary exposures to currency rate fluctuation. We expect to continue to enter into hedging transactions, for the purposes outlined, for the foreseeable future. However, these hedging transactions may not achieve their desired effect because differences between the actual timing of the underlying exposures and our forecasts of those exposures may leave us either over or under hedged on any given transaction. Moreover, by hedging these foreign currency denominated revenues, expenses, monetary assets, and liabilities, we may miss favorable currency trends that would have been advantageous to us but for the hedges. Additionally, we are exposed to short-term foreign currency exchange rate fluctuations on non-U.S. dollar-denominated monetary assets and liabilities (other than those currency exposures previously discussed), and currently we do not enter into foreign currency hedge contracts against these exposures. Therefore, we are subject to potential unfavorable foreign currency exchange rate fluctuations to the extent that we transact business (including intercompany transactions) in these currencies.
The magnitude of our overseas business also affects where our cash is generated. Certain uses of cash, such as share repurchases, payment of dividends, or the repayment of our notes, can usually only be made with onshore cash balances. Since the majority of our cash is generated outside of the United States, this may impact certain business decisions and adversely affect business outcomes.
Our Ability to Attract, Retain, and Motivate Key Employees Is Critical to Our Success
Our ability to compete successfully depends in large part on our ability to attract, retain, and motivate key employees with the appropriate skills, experiences and competencies. This is an ongoing challenge due to intense competition for top talent, fluctuations in industry or business economic conditions, as well as increasing geographic expansion, thatand these factors in combination may requireresult in cycles of hiring activity and workforce reductions. Our success in hiring
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depends on a variety of factors, including the attractiveness of our compensation and benefit programs, global economic or political and industry conditions, our organizational structure, global competition for talent and the availability of qualified employees, the availability of career development opportunities, the ability to obtain necessary authorizations for workers to provide services outside their home countries, and our ability to offer a challenging and rewarding work environment. We periodically evaluate our overall compensation and benefit programs and make adjustments, as appropriate, to maintain or enhance their competitiveness. If we are not able to successfully attract, retain, and motivate key employees, we may be unable to capitalize on market opportunities and our operating results may be materially and adversely affected.
We Rely upon CertainMay Fail to Protect Our Critical Information Systems for the OperationProprietary Technology Rights, Which Could Affect Our Business
Our success depends in part on our proprietary technology and our ability to protect key components of Our Business That Are Susceptible to Cybersecuritythat technology through patents, copyrights, trade secrets and Other Threats or Incidents
We maintainother forms of protection. Protecting our key proprietary technology helps us achieve our goals of developing technological expertise and rely upon certain critical informationnew products and systems for the effective operationthat give us a competitive advantage; increasing market penetration and growth of our business. Theseinstalled base; and providing comprehensive support and service to our customers. As part of our strategy to protect our technology, we currently hold a number of U.S. and foreign patents and pending patent applications, and we keep certain information, processes, and techniques confidential and/or as trade secrets. However, other parties may challenge or attempt to invalidate or circumvent any patents the U.S. or foreign governments issue to us; these governments may fail to issue patents for pending applications; or we may lose trade secret protection over valuable information due to our or third parties’ intentional or unintentional actions or omissions or even those of our own employees. Additionally, intellectual property litigation can be expensive and time-consuming and even when patents are issued, or trade secret processes are followed, the legal systems include, but arein certain of the countries in which we do business might not limited to, telecommunications,enforce patents and other intellectual property rights as rigorously or effectively as the Internet,United States or may favor local entities in their intellectual property enforcement. The rights granted or anticipated under any of our corporate intranet, various computer hardware and softwarepatents, pending patent applications, network communications, and email. These information systemsor trade secrets may be owned and maintained by us, our outsourced providers,narrower than we expect or, third partiesin fact, provide no competitive advantages. Moreover, because we selectively file for patent protection in different jurisdictions, we may not have adequate protection in all jurisdictions based on such as vendors, contractors, and Cloud providers. Manyfiling decisions. Any of these information systems and outsourced service providers, including certain hosted software applications that we use for storage of confidential data and data processing (e.g., company-related, whether intellectual property or not; customer-related; supplier-related; and/or employee-related), employ Cloud technology for such storage and data processing (which refers to an information technology hosting and delivery system in which data is not stored or processed within the user’s physical infrastructure but instead is delivered to and consumed by the user as an Internet-based service). All of these information systems are subject to disruption, breach or failure from sources including but not limited to attacks, degradation, and failures resulting from potential sources, including viruses, malware, denial of service, destructive or inadequate code, power failures, and physical damage to computers, hard drives, communication lines, and networking equipment. Confidential and/or sensitive information stored on these information systems or transmitted to or from Cloud storagecircumstances could be intentionally or unintentionally compromised, lost, and/or stolen. While we have implemented ISO 27001 compliant security procedures and virus protection software, intrusion prevention systems, access control, and emergency recovery processes to mitigate the outlined risks with respect to information systems that are under our control, they cannot be guaranteed to be fail-safe and may be breached. Our inability to use or access these information systems at critical points in time, or unauthorized releases of proprietary or confidential information, could unfavorably impact the timely and efficient operation of our business, including our results of operations, and our reputation.
We have experienced cyber attacks. Although past attacks have not resulted in a material adverse effect, we may incur material losses related to cyber attacks in the future. The insurance we carry may not fully compensate us for the effects of potential losses arising from a cyber-related incident. Cyber-related incidents could result in:
disruptions to our operations;
misappropriation or theft of Company, customer, supplier, or other’s assets or resources, including intellectual property and confidential information, and costs associated therewith;
litigation with, or claims of damages arising from, our employees, customers, suppliers, or other third parties which whom we collaborate; or
adverse impact to our results of operations, as a result of associated remediation costs such as those related to responding to potential regulatory inquiries, to rebuild the effected information systems, and those associated with improving our security and internal control environment.
Our Financial Results May Be Adversely Impacted by Higher than Expected Tax Rates or Exposure to Additional Tax Liabilities
As a global company, our effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region. We are subject to income taxes in the United States and various foreign jurisdictions, and significant judgment is required to determine worldwide tax liabilities. Our effective tax rate could be adversely affected by changes in the split of earnings between countries with differing statutory tax rates, in the valuation allowance of deferred tax assets, in tax laws, by material audit assessments, or changes in or expirations of agreements with tax authorities. These factors could affect our profitability. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent
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on our ability to generate future taxable income in the United States. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability.
A Failure to Comply with Environmental Regulations May Adversely Affect Our Operating Results
We are subject to a variety of domestic and international governmental regulations related to the handling, discharge, and disposal of toxic, volatile, or otherwise hazardous chemicals. Failure to comply with present or future environmental regulations could result in fines being imposed on us, require us to suspend production, and/or cease operations, or cause our customers to not accept our products. These regulations could require us to alter our current operations, acquire significant additional equipment, incur substantial other expenses to comply with environmental regulations, or take other actions. Any failure to comply with regulations governing the use, handling, sale, transport, or disposal of hazardous substances could subject us to future liabilities that may adversely affect our operating results, financial condition, and ability to operate our business.
If We Choose to Acquire or Dispose of Businesses, Product Lines, and Technologies, We May Encounter Unforeseen Costs and Difficulties That Could Impair Our Financial Performance
An important element of our management strategy is to review acquisition prospects that would complement our existing products, augment our market coverage and distribution ability, or enhance our technological capabilities.capabilities, or accomplish other strategic objectives. As a result, we may seek to make acquisitions of complementary companies, products, or technologies, or we may reduce or dispose
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of certain product lines or technologies that no longer fit our long-term strategies. For regulatory or other reasons, we may not be successful in our attempts to acquire or dispose of businesses, products, or technologies, resulting in significant financial costs, reduced or lost opportunities, and diversion of management’s attention. Managing an acquired business, disposing of product technologies, or reducing personnel entails numerous operational and financial risks, including difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, diversion of management’s attention away from other business concerns, amortization of acquired intangible assets, adverse customer reaction to our decision to cease support for a product, and potential loss of key employees or customers of acquired or disposed operations. There can be no assurance that we will be able to achieve and manage successfully any such integration of potential acquisitions, disposition of product lines or technologies, or reduction in personnel, or that our management, personnel, or systems will be adequate to support continued operations. Any such inabilities or inadequacies could have a material adverse effect on our business, operating results, financial condition, and/or cash flows.
In addition, any acquisition could result in changes such as potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the amortization of related intangible assets, and goodwill impairment charges, any of which could materially adversely affect our business, financial condition, results of operations, cash flows, and/or the price of our Common Stock.
LEGAL, REGULATORY AND TAX RISKS
Our Sales to Customers in China, a Region of Growing Significance to Us, Could be Materially and Adversely Affected by Export License Requirements and Other Regulatory Changes, or Other Governmental Actions in the Course of the Trade Relationship Between the U.S. and China.
China represents a large and fast-developing market for the semiconductor equipment industry and therefore is important to our business. Revenue in China, which includes global customers and domestic Chinese customers with manufacturing facilities in China, represented approximately 35%, 31%, and 22% of our total revenue for fiscal years 2021, 2020, and 2019, respectively. The MarketU.S. and China have historically had a complex relationship that has included actions that have impacted trade between the two countries. Recently, these actions have included an expansion of export license requirements imposed by the U.S. government, which have limited the market for our products, adversely impacted our revenues, and increased our exposure to foreign competition, and could potentially do so to an even greater extent in the future. For example, over the course of calendar year 2020, the U.S. Department of Commerce enacted a new rule that expanded export license requirements for U.S. companies to sell certain items to companies and other end-users in China that are designated as military end-users or have operations that could support military end uses, added additional Chinese companies to its restricted entity list (including Semiconductor Manufacturing International Corporation, or SMIC, and related entities), and expanded an existing rule (referred to as the foreign direct product rule) in a manner that could cause foreign-made wafers, chipsets, and certain related items produced with many of our products to be subject to U.S. licensing requirements if Huawei Technologies Co. Ltd (“Huawei”) or its affiliates are parties to a transaction involving the items. These rules have required and may require us to apply for and obtain additional export licenses to supply certain of our products to specified customers in China, such as SMIC (where those products would not otherwise require an export license to China), and there is no assurance that we will be issued licenses that we apply for on a timely basis or at all. In addition, our customers (including but not limited to Chinese customers) may require U.S. export licenses for the use of our products in order to manufacture products, including semiconductor wafers and integrated circuits, for those of their customers (i.e. Huawei and its affiliates) that are subject to the expanded foreign direct product rule, which may adversely impact the demand for our products. The U.S. Department of Commerce could in the future add additional Chinese companies to its restricted entity list or take other actions that could expand licensing requirements or otherwise impact the market for our products and our revenue. The implementation, interpretation and impact on our business of these rules and other regulatory actions taken by the U.S. government is uncertain and evolving, and these rules, other regulatory actions or changes, and other actions taken by the governments of either the U.S. or China, or both, that have occurred and may occur in the future could materially and adversely affect our results of operations.
Our Common Stock Is Volatile, WhichFinancial Results May Be Adversely Impacted by Higher than Expected Tax Rates or Exposure to Additional Tax Liabilities
We are subject to income, transaction, and other taxes in the United States and various foreign jurisdictions, and significant judgment is required to determine worldwide tax liabilities. The amount of taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability. As a global company, our effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region. Our effective tax rate could be adversely affected by changes in the split of earnings between countries with differing statutory tax rates, in the valuation allowance of deferred tax assets, in tax laws, by material audit assessments, or by changes in or expirations of agreements with tax authorities. These factors could affect our profitability. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States.
Recommendations made by the Organization for Economic Co-operation and Development’s Base Erosion and Profit Shifting project have the potential to lead to changes in the tax laws in numerous countries. In addition, President Joseph Biden has made several corporate income tax proposals, including a significant increase to the U.S. corporate income tax rate and changes in the taxation of non-U.S. income. If enacted, such changes could have a material impact on our effective tax rate.
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We Are Exposed to Various Risks from Our Regulatory Environment
We are subject to various risks related to (1) new, different, inconsistent, or even conflicting laws, rules, and regulations that may be enacted by legislative or executive bodies and/or regulatory agencies in the countries that we operate; (2) disagreements or disputes related to international trade; and (3) the interpretation and application of laws, rules, and regulations. As a public company with global operations, we are subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, including those related to export controls, financial and other disclosures, corporate governance, privacy, anti-corruption, such as the Foreign Corrupt Practices Act and other local laws prohibiting corrupt payments to governmental officials, anti-boycott compliance, conflict minerals or other social responsibility legislation, immigration or travel regulations, antitrust regulations, and laws or regulations relating to carbon emissions, as well as other laws or regulations imposed in response to climate change concerns, among others. Each of these laws, rules, and regulations imposes costs on our business, including financial costs and potential diversion of our management’s attention associated with compliance, and may present risks to our business, including potential fines, restrictions on our actions, and reputational damage if we do not fully comply.
To maintain high standards of corporate governance and public disclosure, we intend to invest appropriate resources to comply with evolving standards. Changes in or ambiguous interpretations of laws, regulations, and standards may create uncertainty regarding compliance matters. Efforts to comply with new and changing regulations have resulted in, and are likely to continue to result in, reduced operating income, and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If we are found by a court or regulatory agency not to be in compliance with the laws and regulations, our business, financial condition, and/or results of operations could be adversely affected.
A Failure to Comply with Environmental Regulations May Adversely Affect Our Ability to Raise Capital or Make Acquisitions or May Subject Our Business to Additional CostsOperating Results
The market price for our Common Stock is volatile and has fluctuated significantly over the past years. The trading price of our Common Stock could continue to be highly volatile and fluctuate widely in responseWe are subject to a variety of factors, many of which are not within our control or influence. These factors include but are not limiteddomestic and international governmental regulations related to the following:
general market, semiconductor,handling, discharge, and disposal of toxic, volatile, or semiconductorotherwise hazardous chemicals. Failure to comply with present or future environmental regulations could result in fines being imposed on us, require us to undertake remediation activities, suspend production, and/or cease operations, or cause our customers to not accept our products. These regulations could require us to alter our current operations, acquire significant additional equipment, industry conditions;
economicincur substantial other expenses to comply with environmental regulations, or political events, trends, and unexpected developments occurring nationally, globally,take other actions. Any failure to comply with regulations governing the use, handling, sale, transport, or in anydisposal of hazardous substances could subject us to future liabilities that may adversely affect our key sales regions;
variations in our quarterly operating results, and financial condition, includingand ability to operate our liquidity;
variations in our revenues, earnings, or other business and financial metrics from forecasts by us or securities analysts or from those experienced by other companies in our industry;
announcements of restructurings, reductions in force, departure of key employees, and/or consolidations of operations;
government regulations;
developments in, or claims relating to, patent or other proprietary rights;
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technological innovations and the introduction of new products by us or our competitors;
commercial success or failure of our new and existing products;
disruptions of relationships with key customers or suppliers; or
dilutive impacts of our Convertible Notes and related warrants.
In addition, the stock market experiences significant price and volume fluctuations. Historically, we have witnessed significant volatility in the price of our Common Stock due in part to the price of and markets for semiconductors. These and other factors have and may again adversely affect the price of our Common Stock, regardless of our actual operating performance. In the past, following volatile periods in the price of their stock, many companies became the object of securities class action litigation. If we are sued in a securities class action, we could incur substantial costs, and it could divert management’s attention and resources and have an unfavorable impact on our financial performance and the price for our Common Stock.business.
Intellectual Property, Indemnity, and Other Claims Against Us Can Be Costly and We Could Lose Significant Rights That Are Necessary to Our Continued Business and Profitability
Third parties may assert infringement, misappropriation, unfair competition, product liability, breach of contract, or other claims against us. From time to time, other persons send us notices alleging that our products infringe or misappropriate their patent or other intellectual property rights. In addition, law enforcement authorities may seek criminal charges relating to intellectual property or other issues. We also face risks of claims arising from commercial and other relationships. In addition, our bylaws and other indemnity obligations provide that we will indemnify officers and members of our Board of Directors against losses that they may incur in legal proceedings resulting from their service to us. From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including customers and suppliers, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that our products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. In such cases, it is our policy either to defend the claims or to negotiate licenses or other settlements on commercially reasonable terms. However, we may be unable in the future to negotiate necessary licenses or reach agreement on other settlements on commercially reasonable terms, or at all, and any litigation resulting from these claims by other parties may materially and adversely affect our business and financial results, and we may be subject to substantial damage awards and penalties. Moreover, although we have insurance to protect us from certain claims and cover certain losses to our property, such insurance may not cover us for the full amount of any losses, or at all, and may be subject to substantial exclusions and deductibles.
Our Bylaws Designate the Court of Chancery of the State of Delaware as the Sole and Exclusive Judicial Forum for Certain Legal Actions Between the Company and its Stockholders, Which May Discourage Lawsuits with Respect to Such Claims.
Our bylaws provide that, unless we consent otherwise, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for lawsuits asserting certain stockholder claims (including claims asserted derivatively for our benefit), such as claims against directors and officers for breach of a fiduciary duty, claims arising under any provision of the General Corporation Law of Delaware or our certificate of incorporation or our bylaws, or claims governed by the internal affairs doctrine. This is a general summary of the bylaw provision; you should refer to the language of the bylaws for details. While the forum provision does not generally apply to direct claims arising under the Securities Exchange Act of 1934 or the Securities Act of 1933, derivative lawsuits that assert legal claims arising under these statutes could fall within the provision, as recent court decisions have held.
As a Delaware corporation, Delaware law controls issues of our internal affairs, including duties that our directors, officers, employees, and others owe to the Company and its stockholders. We believe that our exclusive forum provision benefits us, and our stockholders, by permitting relatively prompt resolution of lawsuits concerning our internal affairs, promoting consistent application of Delaware law in these lawsuits, and reducing the possibility of duplicative, costly, multi-jurisdictional litigation with the potential for
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inconsistent outcomes. However, the forum provision limits a stockholder’s ability to bring a claim in a judicial forum that it believes may be more favorable than Delaware, and this could discourage the filing of such lawsuits.
FINANCIAL, ACCOUNTING AND CAPITAL MARKETS RISKS
The Market for Our Common Stock Is Volatile, Which May Affect Our Ability to Raise Capital or Make Acquisitions or May Subject Our Business to Additional Costs
The market price for our Common Stock is volatile and has fluctuated significantly over the past years. The trading price of our Common Stock could continue to be highly volatile and fluctuate widely in response to a variety of factors, many of which are not within our control or influence. These factors include but are not limited to the following:
•general market, semiconductor, or semiconductor equipment industry conditions;
•economic or political events, trends, and unexpected developments occurring nationally, globally, or in any of our key sales regions;
•variations in our quarterly operating results and financial condition, including our liquidity;
•variations in our revenues, earnings, or other business and financial metrics from forecasts by us or securities analysts or from those experienced by other companies in our industry;
•announcements of restructurings, reductions in force, departure of key employees, and/or consolidations of operations;
•margin trading, short sales, hedging and derivative transactions involving our Common Stock;
•government regulations;
•developments in, or claims relating to, patent or other proprietary rights;
•technological innovations and the introduction of new products by us or our competitors;
•commercial success or failure of our new and existing products; or
•disruptions of relationships with key customers or suppliers.
In addition, the stock market experiences significant price and volume fluctuations. Historically, we have witnessed significant volatility in the price of our Common Stock due in part to the price of and markets for semiconductors. These and other factors have adversely affected and may again adversely affect the price of our Common Stock, regardless of our actual operating performance. In the past, following volatile periods in the price of their stock, many companies became the object of securities class action litigation. If we are sued in a securities class action, we could incur substantial costs, and it could divert management’s attention and resources and have an unfavorable impact on our financial performance and the price for our Common Stock.
We May FailIncur Impairments to Protect Goodwill or Long-lived Assets
We review our goodwill identified in business combinations for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may exceed the fair value. We review all other long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstance indicate that these assets may not be recoverable. The process of evaluating the potential impairment of goodwill and other long-lived assets requires significant judgement. Negative industry or economic trends, including reduced market prices of our Common Stock, reduced estimates of future cash flows, disruptions to our business, slower growth rates, or lack of growth in our relevant business units, could lead to impairment charges against our long-lived assets, including goodwill and other intangible assets.
When evaluating goodwill, if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative impairment test is performed and we may be required to record an impairment charge in that period, which could adversely affect our result of operations.
When evaluating other long-lived assets, if we conclude that the estimated undiscounted cash flows attributable to the assets are less than their carrying value, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values, which could adversely affect our results of operations.
Our Critical Proprietary Technology Rights, Which Couldvaluation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in a highly competitive environment and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis indicates potential impairment, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.
Our Leverage and Debt Service Obligations May Adversely Affect Our Financial Condition, Results of Operations, and Earnings per Share
We have $5.0 billion in aggregate principal amount of senior unsecured notes outstanding. Additionally, we have funding available to us under our $1.5 billion commercial paper program and our $1.5 billion revolving credit facility, which serves as a backstop to our commercial paper program. Our revolving credit facility also includes an option to increase the amount up to an additional $600.0 million, for a potential total commitment of $2.1 billion. We may, in the future, decide to enter into additional debt arrangements.
Lam Research Corporation 2021 10-K 22
In addition, we have entered, and in the future may enter, into derivative instrument arrangements to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. We could be exposed to losses in the event of nonperformance by the counterparties to our derivative instruments.
Our indebtedness could have adverse consequences, including:
•risk associated with the alternative reference rate reform (e.g. LIBOR transition);
•risk associated with any inability to satisfy our obligations;
•a portion of our cash flows that may have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions, or general corporate or other purposes; and
•impairment of our ability to obtain additional financing in the future.
Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory, and other factors. Furthermore, our operations may not generate sufficient cash flows, to enable us to meet our expenses and service our debt. As a result, we may need to enter into new financing arrangements to obtain the necessary funds. If we determine it is necessary to seek additional funding for any reason, we may not be able to obtain such funding or, if funding is available, obtain it on acceptable terms. If we fail to make a payment on our debt, we could be in default on such debt, and this default could cause us to be in default on our other outstanding indebtedness.
Our Credit Agreements Contain Covenant Restrictions That May Limit Our Ability to Operate Our Business
Our success dependsWe may be unable to respond to changes in part onbusiness and economic conditions, engage in transactions that might otherwise be beneficial to us, or obtain additional financing because our proprietary technologydebt agreements contain, and any of our other future similar agreements may contain, covenant restrictions that limit our ability to, protect key componentsamong other things:
•incur additional debt, assume obligations in connection with letters of that technology through patents, copyrights,credit, or issue guarantees;
•create liens;
•enter into transactions with our affiliates;
•sell certain assets; and trade secret protection. Protecting
•merge or consolidate with any person.
Our ability to comply with these covenants is dependent on our key proprietary technology helps usfuture performance, which will be subject to achievemany factors, some of which are beyond our goals of developing technological expertise and new products and systems that give uscontrol, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a competitive advantage; increasing market penetration and growth ofdefault under the Senior Notes, the Convertible Notes, or our installed base; and providing comprehensive support and serviceother debt, which could permit the holders to our customers. As part of our strategy to protect our technology, we currently hold a number of U.S. and foreign patents and pending patent applications, and we keep certain information, processes, and techniques as trade secrets. However, other parties may challenge or attempt to invalidate or circumvent any patents the U.S. or foreign governments issue to us; these governments may fail to issue patents for pending applications; or we may lose trade secret protection over valuable information due to the intentional or unintentional actions or omissions of third parties, of ours, or even of our own employees. Additionally, intellectual property litigation can be expensive and time-consuming and even when patents are issued or trade secret processes are followed, the legal systems in certain of the countries in which we do business do not enforce patents and other intellectual property rights as rigorously as the United States. The rights granted or anticipated underaccelerate such debt. If any of our patents, pending patent applications, or trade secrets may be narrower than we expect or, in fact, provide no competitive advantages. Moreover, because we determine the jurisdictions in which to file patents at the time of filing,debt is accelerated, we may not have adequate protection in the future based onsufficient funds available to repay such previous decisions. Any of these circumstancesdebt, which could have a material adverse impact onmaterially and negatively affect our business.
Continues on next pageLam Research Corporation 2017 10-K 24
We Are Exposed to Various Risks from Our Regulatory Environment
We are subject to various risks related to (1) new, different, inconsistent, or even conflicting laws, rules, and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countries that we operate; (2) disagreements or disputes between national or regional regulatory agencies related to international trade; and (3) the interpretation and application of laws, rules, and regulations. As a public company with global operations, we are subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, including those related to financial and other disclosures, corporate governance, privacy, anti-corruption, such as the Foreign Corrupt Practices Act and other local laws prohibiting corrupt payments to governmental officials, conflict minerals or other social responsibility legislation, immigration or travel regulations, and antitrust regulations, among others. Each of these laws, rules, and regulations imposes costs on our business, including financial costs and potential diversion of our management’s attention associated with compliance, and may present risks to our business, including potential fines, restrictions on our actions, and reputational damage if we are unable to fully comply.
To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with all evolving standards. Changes in or ambiguous interpretations of laws, regulations, and standards may create uncertainty regarding compliance matters. Efforts to comply with new and changing regulations have resulted in, and are likely to continue to result in, increased selling, general, and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If we are found by a court or regulatory agency not to be in compliance with the laws and regulations, our business, financial condition and/orand results of operations could be adversely affected.operation.
There Can Be No Assurance That We Will Continue to Declare Cash Dividends or Repurchase Our Shares at All or in Any Particular Amounts
Our Board of Directors has declared quarterly dividends since April 2014. Our intent to continue to pay quarterly dividends and to repurchase our shares is subject to capital availability and in the case of dividends, periodic determinations by our Board of Directors that cash dividends and share repurchases are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends or the repurchasing of shares by us. Future dividends and share repurchases may also be affected by, among other factors, our views on potential future capital requirements for investments in acquisitions and the funding of our research and development; legal risks; changes in federal, state, and state incomeinternational tax laws or corporate laws; contractual restrictions, such as financial or operating covenants in our debt arrangements; availability of onshore cash flow; and changes to our business model. Our dividend payments and share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares at all or in any particular amounts. A reduction or suspension in our dividend payments or share repurchases could have a negative effect on the price of our Common Stock.
| |
Item 1B. | Unresolved Staff Comments |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our executive offices and principal operating and R&D facilities are located in Fremont and Livermore, California; Tualatin, Oregon; and Villach, Austria. The majority of the Fremont and Livermore facilities are held under operatingfinance leases expiring in 2020 and 2021.September 2027. The Villach facilities are held under capitalfinance leases expiring in calendar year 2021. Our Fremont, Livermore, and Villach leases include options to renew or purchase the facilities. In addition, we lease or own properties for our service, technical support, and sales personnel throughout the United States, China, Europe, India, Japan, Korea, Southeast Asia, and Taiwan and lease or own manufacturing facilities located in California, Ohio, Oregon, Austria, Korea and Korea.Taiwan. In 2020, we announced the establishment of a new owned advanced technology production facility in Malaysia and the facility began production in July 2021. The Company owns
Lam Research Corporation 2021 10-K 23
two properties in Fremont, as well as the majority of the Tualatin facilities. Our facilities lease obligations are subject to periodic increases. We believe that our existing facilities are well-maintained and in good operating condition.
Continues on next pageLam Research Corporation 2017 10-K 25
While we are not currently partyItem 3. Legal Proceedings
Please refer to any legal proceedings that we believe are material, we are 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. We accrue for a liability when it is both probable that a liability has been incurredsubsection entities “Legal Proceedings” within Note 17: Commitments 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. These accruals are reviewed at least quarterly and adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, we believe that the amount of any such additional loss would be immaterialContingencies to our business, financial condition, and resultsConsolidated Financial Statements included in Part II, Item 8 of operations.this 2021 Form 10-K. | |
Item 4. | Mine Safety Disclosures |
Item 4. Mine Safety Disclosures
Not applicable.
Continues on next pageLam Research Corporation 20172021 10-K 26 24
PART II
| |
Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Information
Our Common Stock is traded on the Nasdaq Global Select MarketSM under the symbol “LRCX.” As of August 10, 2017,12, 2021, we had 440476 stockholders of record. In
Dividends
Our Board of Directors has declared quarterly dividends since April 2014. Our intent to continue to pay quarterly dividends is subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the second fiscal quarterbest interest of 2017 we increased our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. During fiscal year 2021, our quarterly dividend to $0.45declared was $1.30 per share; previous to that quarter of fiscal year 2017 and throughout fiscal year 2016, quarterly dividends of $0.30 per share were paid. The table below sets forth the high and low prices of our Common Stock as reported by the Nasdaq Stock Market, for the period indicated:share.
|
| | | | | | | |
| | 2017 |
| High | | Low |
| First quarter | $ | 95.77 |
| | $ | 79.15 |
|
| Second quarter | $ | 108.60 |
| | $ | 90.56 |
|
| Third quarter | $ | 129.35 |
| | $ | 105.30 |
|
| Fourth quarter | $ | 167.05 |
| | $ | 124.91 |
|
| | 2016 |
| High | | Low |
| First quarter | $ | 84.13 |
| | $ | 61.20 |
|
| Second quarter | $ | 80.85 |
| | $ | 61.65 |
|
| Third quarter | $ | 81.29 |
| | $ | 63.10 |
|
| Fourth quarter | $ | 87.19 |
| | $ | 72.00 |
|
RepurchaseRepurchases of Company Shares
In November 2016,2020, the Board of Directors authorized usmanagement to repurchase up to $1.0an additional $5.0 billion of our Common Stock, which includedStock; this authorization supplements the remaining value available under ourbalance from any prior authorization. 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. Repurchases may be funded using our onshore cash and onshore cash generation, or our available debt instruments. This repurchase program has no termination date and may be suspended or discontinued at any time. As part of our share repurchase program, we may from time to time enter into structured share repurchase arrangements with financial institutions using general corporate funds.
Accelerated Share Repurchase Agreements
On April 19, 2017,February 11, 2021, we entered into two separatean accelerated share repurchase agreements (collectively, the “ASR”agreement (the "February 2021 ASR") with twoa financial institutionsinstitution to repurchase a total of $500 million of our Common Stock. We took an initial delivery of approximately 2,570,000655 thousand shares, which represented 70%75% of the prepayment amount divided by our closing stock price on April 19, 2017.February 11, 2021. The total number of shares to be received under the February 2021 ASR iswas based upon the average daily volume weighted average price of our Common Stock during the repurchase period, less an agreed upon discount. Following our fiscal year end,Final settlement of the counterparties designated June 30, 2017, asFebruary 2021 ASR occurred during May 2021, resulting in the termination date, atreceipt of approximately 213 thousand additional shares, which time we settled the ASR. Approximately 780,000 shares were received at final settlement, which representedyielded a weighted-average share price of approximately $149.16$575.74 for the transaction period.
Continues on next pageLam Research Corporation 2017 10-K 27
Share repurchases, including those under the repurchase program, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of Shares Repurchased (1) | | Average Price Paid per Share(2) | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Amount
Available
Under
Repurchase
Program |
| | (in thousands, except per share data) |
| Available balance as of June 28, 2020 | | | | | | | $ | 1,773,427 | |
| Quarter ended September 27, 2020 | 1,359 | | | $ | 343.71 | | | 1,344 | | | 1,311,429 | |
| Quarter ended December 27, 2020 | 1,797 | | | $ | 405.00 | | | 1,789 | | | 5,586,944 | |
| Quarter ended March 28, 2021 | 1,731 | | | $ | 536.75 | | | 1,474 | | | 4,661,845 | |
| March 29, 2021 - April 25, 2021 | 3 | | | $ | 637.73 | | | — | | | 4,661,845 | |
| April 26, 2021 - May 23, 2021 | 552 | | | $ | 598.19 | | | 547 | | | 4,461,850 | |
| May 24, 2021 - June 27, 2021 | 377 | | | $ | 639.02 | | | 375 | | | 4,222,220 | |
Total (3) | 5,819 | | | $ | 619.80 | | | 5,529 | | | $ | 4,222,220 | |
| | | | | | | |
(1)During the fiscal year ended June 27, 2021, we acquired 290 thousand shares at a total cost of $166.4 million which we withheld through net share settlements to cover minimum tax withholding obligations upon the vesting of restricted stock unit awards granted under our equity compensation plans. The shares retained by us through these net share settlements are not a part of the Board-authorized repurchase program but instead are authorized under our equity compensation plan.
(2)Average price paid per share excludes the effect of accelerated share repurchases. See additional disclosure above regarding our accelerated share repurchase activity during the fiscal year.
(3)Average price paid per share presented is for the quarter ended June 27, 2021.
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Repurchased (1) | | Average Price Paid per Share(2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Amount Available Under Repurchase Program |
| | (in thousands, except per share data) |
| Available balance as of June 26, 2016 | | | | | | | $ | 229,094 |
|
| Quarter ended September 25, 2016 | 20 |
| | $ | 90.53 |
| | — |
| | 229,094 |
|
| Board-approved increase (November 2016) | | | | | | | 1,000,000 |
|
| Quarter ended December 25, 2016 | 735 |
| | $ | 103.43 |
| | 619 |
| | 934,986 |
|
| Quarter ended March 26, 2017 | 1,826 |
| | $ | 115.12 |
| | 1,223 |
| | 795,226 |
|
| March 27, 2017 - April 23, 2017 | 2,682 |
| | $ | 128.27 |
| | 2,672 |
| | 282,141 |
|
| April 24, 2017 - May 21, 2017 | 5 |
| | $ | 150.58 |
| | — |
| | 282,141 |
|
| May 22, 2017 - June 25, 2017 | 55 |
| | $ | 154.92 |
| | — |
| | 282,141 |
|
| Total | 5,323 |
| | $ | 137.39 |
| | 4,514 |
| | $ | 282,141 |
|
__________________________________
| |
(1) | In addition to shares repurchased under the Board-authorized repurchase program, the Company acquired 809,427 shares at a total cost of $93.8 million which we withheld through net share settlements to cover minimum tax withholding obligations upon the vesting of restricted stock unit awards granted under our equity compensation plans. The shares retained through these net share settlements are not a part of the Board-authorized repurchase program, but instead are authorized under our equity compensation plans. |
| |
(2) | Average price paid per share excludes effect of accelerated share repurchases, see additional disclosure above regarding our accelerated share repurchase activity during the fiscal year. |
Continues on next pageLam Research Corporation 20172021 10-K 28 25
Cumulative Five-Year Return
The graph below compares Lam Research Corporation’s cumulative five-year total shareholder return on Common Stock with the cumulative total returns of the Philadelphia Semiconductor Sector Total Return Index, the Nasdaq Composite Total Return index, and the Standard & Poor’s (“S&P”) 500 index, and the Philadelphia Semiconductor Sector Index.(TR) index. The graph tracks the performance of a $100 investment in our Common Stock and in each of the indices (with the reinvestment of all dividends) fromfor the five years ended June 30, 2012, to June 30, 2017.
|
| | | | | | | | | | |
| COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* |
| Among Lam Research Corporation, the Philadelphia Semiconductor Sector Total Return Index, the Nasdaq Composite Total Return Index, and the S&P 500 Index, and the Philadelphia Semiconductor Index(TR) Index. | |
*$100 invested on 6/30/2012June 26, 2016 in stock or June 30, 2016 in index, including reinvestment of dividends. Fiscal years ending June 30.
Indexes calculated on month-end basis.
Copyright© 20172021 Standard & Poor’s, a division of S&P Global. All rights reserved.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2016 | | June 25, 2017 | | June 24, 2018 | | June 30, 2019 | | June 28, 2020 | | June 27, 2021 |
| Lam Research Corporation | $ | 100.00 | | | $ | 187.10 | | | $ | 218.21 | | | $ | 240.87 | | | $ | 394.96 | | | $ | 831.99 | |
| Philadelphia Semiconductor Sector Total Return Index | $ | 100.00 | | | $ | 152.21 | | | $ | 196.53 | | | $ | 222.68 | | | $ | 310.27 | | | $ | 526.91 | |
| Nasdaq Composite Total Return Index | $ | 100.00 | | | $ | 128.30 | | | $ | 158.57 | | | $ | 170.91 | | | $ | 216.96 | | | $ | 315.10 | |
| S&P 500 (TR) Index | $ | 100.00 | | | $ | 117.90 | | | $ | 134.84 | | | $ | 148.89 | | | $ | 160.06 | | | $ | 225.36 | |
Continues on next page
Lam Research Corporation 20172021 10-K 29 26
Item 6. [Reserved]
The Company has elected to early adopt the amendments to Items 301 and 302 of RegulationS-K contained in SEC Release No. 33-10890. As a result, the disclosure previously provided in Part II, Item 6 is no longer required. There were no retrospective changes to the Consolidated Statements of Operations for any quarters in the two most recent fiscal years that would require disclosure under Item 302, as amended.
|
| | | | | | | | | | | | | | | | | |
| | 6/12 | | 6/13 | | 6/14 | | 6/15 | | 6/16 | | 6/17 |
| Lam Research Corporation | 100.00 |
| | 117.49 |
| | 179.56 |
| | 218.44 |
| | 229.31 |
| | 391.30 |
|
| Nasdaq Composite Index | 100.00 |
| | 117.69 |
| | 155.50 |
| | 177.19 |
| | 173.36 |
| | 221.11 |
|
| S&P 500 Index | 100.00 |
| | 120.60 |
| | 150.27 |
| | 161.43 |
| | 167.87 |
| | 197.92 |
|
| Philadelphia Semiconductor Sector Index | 100.00 |
| | 116.96 |
| | 156.62 |
| | 161.36 |
| | 173.61 |
| | 241.00 |
|
| |
Item 6. | Selected Financial Data |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended | |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 | | June 29,
2014 | | June 30,
2013 | |
| | (in thousands, except per share data) | |
| OPERATIONS: | | | | | | | | | | |
| Revenue | $ | 8,013,620 |
| | $ | 5,885,893 |
| | $ | 5,259,312 |
| | $ | 4,607,309 |
| | $ | 3,598,916 |
| |
| Gross margin | 3,603,359 |
| | 2,618,922 |
| | 2,284,336 |
| | 2,007,481 |
| | 1,403,059 |
| |
Goodwill impairment (1) | — |
| | — |
| | 79,444 |
| | — |
| | — |
| |
| Restructuring charges, net | — |
| | — |
| | — |
| | — |
| | 1,813 |
| |
| Operating income | 1,902,132 |
| | 1,074,256 |
| | 788,039 |
| | 677,669 |
| | 118,071 |
| |
| Net income | 1,697,763 |
| | 914,049 |
| | 655,577 |
| | 632,289 |
| | 113,879 |
| |
| Net income per share: | | | | | | | | | | |
| Basic | $ | 10.47 |
| | $ | 5.75 |
| | $ | 4.11 |
| | $ | 3.84 |
| | $ | 0.67 |
| |
| Diluted | $ | 9.24 |
| | $ | 5.22 |
| | $ | 3.70 |
| | $ | 3.62 |
| | $ | 0.66 |
| |
| Cash dividends declared per common share | $ | 1.65 |
| | $ | 1.20 |
| | $ | 0.84 |
| | $ | 0.18 |
| | $ | — |
| |
| BALANCE SHEET: | | | | | | | | | | |
| Working capital | $ | 6,192,383 |
| | $ | 6,795,109 |
| | $ | 3,639,488 |
| | $ | 3,201,661 |
| | $ | 2,389,354 |
| |
| Total assets | 12,122,765 |
| | 12,264,315 |
| (2) | 9,358,904 |
| (2) | 7,986,998 |
| (2) | 7,241,645 |
| (2) |
| Long-term obligations, less current portion | 2,185,338 |
| | 3,744,205 |
| (2) | 1,386,536 |
| (2) | 1,191,913 |
| (2) | 1,161,378 |
| (2) |
| Current portion of long-term debt and capital leases | 908,439 |
| | 947,733 |
| (2) | 1,355,705 |
| (2) | 518,267 |
| | 514,655 |
| |
__________________________________
| |
(1) | Goodwill impairment analysis during fiscal year 2015 resulted in a non-cash impairment charge to our Single-Wafer Clean reporting unit, extinguishing the goodwill ascribed to the reporting unit. |
| |
(2) | Adjusted for effects of retrospective implementation of ASU 2015-3, see Notes 3 and 13 to the Consolidated Financial Statements contained in Part II, Item 8. |
Continues on next pageLam Research Corporation 2017 10-K 30
|
| | | | | | | | | | | | | | | |
| | Three Months Ended (1) |
June 25,
2017 | | March 26,
2017 | | December 25,
2016 | | September 25,
2016 |
| | unaudited (in thousands, except per share data) |
| QUARTERLY FISCAL YEAR 2017: | | | | | | | |
| Revenue | $ | 2,344,907 |
| | $ | 2,153,995 |
| | $ | 1,882,299 |
| | $ | 1,632,419 |
|
| Gross margin | 1,068,961 |
| | 971,404 |
| | 846,797 |
| | 716,197 |
|
| Operating income | 607,939 |
| | 538,418 |
| | 439,828 |
| | 315,947 |
|
| Net income | 526,424 |
| | 574,713 |
| | 332,791 |
| | 263,835 |
|
| Net income per share | | | | | | | |
| Basic | $ | 3.25 |
| | $ | 3.52 |
| | $ | 2.05 |
| | $ | 1.64 |
|
| Diluted | $ | 2.82 |
| | $ | 3.10 |
| | $ | 1.81 |
| | $ | 1.47 |
|
| Number of shares used in per share calculations: | | | | | | | |
| Basic | 162,213 |
| | 163,408 |
| | 162,659 |
| | 160,607 |
|
| Diluted | 186,427 |
| | 185,094 |
| | 183,543 |
| | 180,017 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended (1) |
June 26,
2016 | | March 27,
2016 | | December 27,
2015 | | September 27,
2015 |
| | unaudited (in thousands, except per share data) |
| QUARTERLY FISCAL YEAR 2016: | | | | | | | |
| Revenue | $ | 1,546,261 |
| | $ | 1,314,055 |
| | $ | 1,425,534 |
| | $ | 1,600,043 |
|
| Gross margin | 698,784 |
| | 571,265 |
| | 626,510 |
| | 722,363 |
|
| Operating income | 309,241 |
| | 190,753 |
| | 238,834 |
| | 335,428 |
|
| Net income | 258,939 |
| | 143,451 |
| | 222,980 |
| | 288,679 |
|
| Net income per share | | | | | | | |
| Basic | $ | 1.62 |
| | $ | 0.90 |
| | $ | 1.41 |
| | $ | 1.82 |
|
| Diluted | $ | 1.46 |
| | $ | 0.82 |
| | $ | 1.28 |
| | $ | 1.66 |
|
| Number of shares used in per share calculations: | | | | | | | |
| Basic | 159,862 |
| | 159,039 |
| | 158,424 |
| | 158,352 |
|
| Diluted | 177,649 |
| | 174,373 |
| | 174,242 |
| | 174,374 |
|
__________________________________
| |
(1) | Our reporting period is a 52/53-week fiscal year. The fiscal years ended June 25, 2017, and June 26, 2016, included 52 weeks. All quarters presented above included 13 weeks. |
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations contains forward-looking statements, which are subject to risks, uncertainties, and changes in condition, significance, value, and effect. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in “Risk Factors” and elsewhere in this 20172021 Form 10-K and other documents we file from time to time with the Securities and Exchange Commission. (See “Cautionary Statement Regarding Forward-Looking Statements” in Part I of this 20172021 Form 10-K.)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a description of our results of operations and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this 20172021 Form 10-K. MD&A consists of the following sections: Executive Summary provides a summary of the key highlights of our results of operations and our management’s assessment of material trends and uncertainties relevant to our business.
Results of Operations provides an analysis of operating results.
Continues on next pageLam Research Corporation 2017 10-K 31
Critical Accounting Policies and Estimates discusses accounting policies that reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.
Liquidity and Capital Resources provides an analysis of cash flows, contractual obligations, and financial position.
Executive Summary
Lam Research has been an innovativeCorporation is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry for more than 35 years.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 vision isproducts and services are designed to realize full value from natural technology extensionshelp our customers build smaller, faster, and better performing devices that are used in a variety of our company. electronic products, including mobile phones, personal computers, servers, wearables, automotive vehicles, and data storage devices.
Our customer base includes leading semiconductor memory, foundry, and IDMsintegrated device manufacturers that make products such as NVM, DRAM, memory, and logic devices. We aim to increase our strategic relevance with our customers by contributing more to their continued success. Our core technical competency is integrating hardware, process, materials, software, and process control enabling results on the wafer.
Our products and services are designed to help our customers build smaller, faster, and better performing devices that are used in a variety of electronic products, including mobile phones, personal computers, servers, wearables, automotive devices, storage devices, and networking equipment.
Semiconductor manufacturing, our customers’ business, involves the complete fabrication of multiple dies or integrated circuits on a wafer. This involves the repetition of a set of core processes and can require hundreds of individual steps. Fabricating these devices requires highly sophisticated process technologies to integrate an increasing array of new materials with precise control at the atomic scale. Along with meeting technical requirements, wafer processing equipment must deliver high productivity and be cost-effective.
Demand from the Cloud, IoT, 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 3D scaling strategies like 3D architectures as well as multiple patterning to enable shrinks.
We believe we are in ana strong position with our leadership and competency in deposition, etch, and single-wafer clean to facilitate some of the most significant innovations in semiconductor device manufacturing. We have a broad portfolio of products that provide complementary processing steps used throughout semiconductor manufacturing. Our Customer Support Business Group focuses attention on delivering solutions that meet our customers’ technical requirements and productivity needs during the equipment lifecycle. Several factors create opportunity for sustainable differentiation for us: (i) our focus on research and development, with a breadth ofseveral on-going programs acrossrelating 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; and(iii) our collaborative focus with ecosystem partners.partners; and (iv) our focus on delivering our multi-product solutions with a goal to enhance the value of Lam’s solutions to our customers.
DuringThroughout the most recent2021 fiscal year, there was an increase in wafer fabrication equipment spending by semiconductor manufacturers, driven by the robust secular demand for semiconductors in a number of markets including high-performance computing, personal computers, and 5G networks. Customer demand was strong, and we continued to increase our production output levels as we operated under COVID-19-related safety protocols. While we have seen improvements in both our own operations and those of our
Lam Research Corporation 2021 10-K 27
suppliers, we experienced higher costs of goods sold related to freight and logistics during the year. 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 improved as semiconductor device manufacturers, particularly non volatile memory and foundry customers, made capacityservices, and that technology investments. Technology inflections in our industry, including NVM,3D device scaling, multiple patterning, FinFETprocess flow, and advanced packaging have ledchip integration, will lead to an increase in ourthe served addressable market for our products and services in the deposition, etch, single-waferand clean and customer service business. We believe that demand for our products and services should increase faster than overall spending on wafer fabrication equipment, as the proportion of customers’ capital expenditures rises in these technology inflection areas, and we continue to gain market share.
In October 2015, we entered into an Agreement and Plan of Merger and Reorganization with KLA-Tencor. On October 5, 2016, we announced that the parties mutually agreed to terminate that agreement.
Continues on next pageLam Research Corporation 2017 10-K 32
businesses.
The following table summarizes certain key financial information for the periods indicated below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | Change |
June 27,
2021 | | June 28,
2020 | | June 30,
2019 | | FY21 vs. FY20 | | FY20 vs. FY19 |
| | | | | | | | | | | | | |
| | (in thousands, except per share data and percentages) |
| Revenue | $ | 14,626,150 | | | $ | 10,044,736 | | | $ | 9,653,559 | | | $ | 4,581,414 | | | 45.6 | % | | $ | 391,177 | | | 4.1 | % |
| Gross margin | $ | 6,805,306 | | | $ | 4,608,693 | | | $ | 4,358,459 | | | $ | 2,196,613 | | | 47.7 | % | | $ | 250,234 | | | 5.7 | % |
| Gross margin as a percent of total revenue | 46.5 | % | | 45.9 | % | | 45.1 | % | | 0.6% | | 0.8% |
| Total operating expenses | $ | 2,323,283 | | | $ | 1,934,891 | | | $ | 1,893,727 | | | $ | 388,392 | | | 20.1 | % | | $ | 41,164 | | | 2.2 | % |
| Net income | $ | 3,908,458 | | | $ | 2,251,753 | | | $ | 2,191,430 | | | $ | 1,656,705 | | | 73.6 | % | | $ | 60,323 | | | 2.8 | % |
| Net income per diluted share | $ | 26.90 | | | $ | 15.10 | | | $ | 13.70 | | | $ | 11.80 | | | 78.1 | % | | $ | 1.40 | | | 10.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 | | FY17 vs. FY16 | | FY16 vs. FY15 |
| | (in thousands, except per share data and percentages) |
| Revenue | $ | 8,013,620 |
| | $ | 5,885,893 |
| | $ | 5,259,312 |
| | $ | 2,127,727 |
| | 36.1 | % | | $ | 626,581 |
| | 11.9 | % |
| Gross margin | $ | 3,603,359 |
| | $ | 2,618,922 |
| | $ | 2,284,336 |
| | $ | 984,437 |
| | 37.6 | % | | $ | 334,586 |
| | 14.6 | % |
| Gross margin as a percent of total revenue | 45.0 | % | | 44.5 | % | | 43.4 | % | | 0.5 | % | | | | 1.1 | % | | |
| Total operating expenses | $ | 1,701,227 |
| | $ | 1,544,666 |
| | $ | 1,496,297 |
| | $ | 156,561 |
| | 10.1 | % | | $ | 48,369 |
| | 3.2 | % |
| Net income | $ | 1,697,763 |
| | $ | 914,049 |
| | $ | 655,577 |
| | $ | 783,714 |
| | 85.7 | % | | $ | 258,472 |
| | 39.4 | % |
| Net income per diluted share | $ | 9.24 |
| | $ | 5.22 |
| | $ | 3.70 |
| | $ | 4.02 |
| | 77.0 | % | | $ | 1.52 |
| | 41.1 | % |
Revenues in fiscalFiscal year 20172021 revenue increased 36%46% compared to fiscal year 2016, and revenues in fiscal year 2016 increased 12% compared to fiscal year 2015,2020, reflecting a continuous increase in technology and capacity investments by our customers.
The increase in grossstronger customer demand for semiconductor equipment. Gross margin as a percentage of revenue increased primarily due to customer and product mix, partially offset by higher costs incurred in freight and logistics as well as start-up expenses for our new Malaysia manufacturing facility. The increase in operating expenses in fiscal year 20172021 compared to fiscal year 20162020 was primarily due tomainly driven by higher revenueemployee-related costs as a result of increased headcount, outsourcing services, deferred compensation plan-related costs, and improved factory utilization resulting from higher production volume.supplies, partially offset by lower travel expenses and miscellaneous costs.
Fiscal year 2016 gross2020 revenue increased 4% compared to fiscal year 2019, reflecting stronger customer demand for semiconductor equipment. Gross margin as a percentage of revenue increased primarily due to customer and product mix as well as lower amortization expense related to intangibles acquired through business combinations, partially offset by lower factory and field utilization. The increase in operating expenses in fiscal year 2020 compared to fiscal year 2015 improved primarily due to a more favorable customer and product mix.
Operating expenses in fiscal year 2017 increased as compared to fiscal year 2016 primarily2019 was mainly driven by higher employee-related costs as a result of continued investments in researchincreased headcount and development including the effect of increased employee headcount,outsourcing services, partially offset by a decrease in acquisition-relatedlower travel expense, miscellaneous costs associated with the terminated agreement with KLA-Tencor.
Operating expenses in fiscal year 2016 increased as compared to fiscal year 2015 primarily as a result of continued investments in research and development and increased employee headcount. Fiscal year 2016 also included $51 million of acquisition-related costs associated with the terminated agreement with KLA-Tencor.restructuring charges.
Our cash and cash equivalents, investments, and restricted cash and investments balances totaled approximately $6.3$6.0 billion as of June 25, 2017,27, 2021, compared to $7.1$7.0 billion as of June 26, 2016.28, 2020. Cash flow provided from operating activities was $2.0$3.6 billion for fiscal year 20172021 compared to $1.4$2.1 billion for fiscal year 2016.2020. Cash flow provided from operating activities in fiscal 2017year 2021 was primarily used for $1.7$2.7 billion in treasury stock purchases, including net share settlement on employee stock-based compensation; $862 million of principal payments on debt instruments, $812 million in treasury stock purchases, $243instruments; $727 million in dividends paid to our stockholders,stockholders; and $157$349 million of capital expenditures and areexpenditures. These cash outflows were partially offset by $73$122 million of treasury stock reissuance and Common Stock issuance resulting from our employee equity-based compensation programs.
Results of Operations
Shipments and BacklogRevenue
Shipments for | | | | | | | | | | | | | | | | | |
| | Year Ended |
June 27,
2021 | | June 28,
2020 | | June 30,
2019 |
| Revenue (in millions) | $ | 14,626 | | | $ | 10,045 | | | $ | 9,654 | |
| China | 35 | % | | 31 | % | | 22 | % |
| Korea | 27 | % | | 24 | % | | 23 | % |
| Taiwan | 14 | % | | 19 | % | | 17 | % |
| Japan | 9 | % | | 9 | % | | 20 | % |
| United States | 6 | % | | 8 | % | | 8 | % |
| Southeast Asia | 6 | % | | 6 | % | | 6 | % |
| Europe | 3 | % | | 3 | % | | 4 | % |
Revenue increased in fiscal year 2017 were approximately $8.6 billion, an increase of 46%2021 compared to fiscal year 2016. Shipments for fiscal year 2016 were approximately $5.9 billion, an increase of 8% compared to fiscal year 2015. The increase in shipments during the fiscal year 2017 as comparedyears 2020 and 2019, primarily due to the last two fiscal years is related to continued strengthening of customer demand for semiconductor equipment.
Continues on next pageLam Research Corporation 2017 10-K 33
|
| | | | | | | | | | | |
| | Year Ended |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 |
| Shipments (in millions) | $ | 8,586 |
| | $ | 5,901 |
| | $ | 5,472 |
|
| Korea | 32 | % | | 17 | % | | 26 | % |
| Taiwan | 24 | % | | 25 | % | | 22 | % |
| Japan | 15 | % | | 16 | % | | 14 | % |
| China | 13 | % | | 20 | % | | 12 | % |
| United States | 8 | % | | 8 | % | | 15 | % |
| Southeast Asia | 4 | % | | 11 | % | | 5 | % |
| Europe | 4 | % | | 3 | % | | 6 | % |
The percentage of total Lam semiconductor processing system shipments to each of the markets we serve were as follows for fiscal years 2017, 2016, and 2015.
|
| | | | | | | | |
| | Year Ended |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 |
| Memory | 67 | % | | 68 | % | | 58 | % |
| Foundry | 27 | % | | 23 | % | | 30 | % |
| Logic/integrated device manufacturing | 6 | % | | 9 | % | | 12 | % |
Our shipments to memory customers during fiscal year 2017 was largely unchanged compared to fiscal year 2016. Foundry spending increased due to higher investments at leading-edge process nodes.
Unshipped orders in backlog as of June 25, 2017, were approximately $2.1 billion, an increase from approximately $1.4 billion as of June 26, 2016. Our unshipped orders backlog includes orders for systems, spares, and services. Please refer to “Backlog” in Part I Item 1, “Business” of this report for a description of our policies for adding to and adjusting backlog.
Revenue
|
| | | | | | | | | | | |
| | Year Ended |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 |
| Revenue (in millions) | $ | 8,014 |
| | $ | 5,886 |
| | $ | 5,259 |
|
| Korea | 31 | % | | 18 | % | | 27 | % |
| Taiwan | 26 | % | | 25 | % | | 21 | % |
| Japan | 13 | % | | 17 | % | | 12 | % |
| China | 13 | % | | 18 | % | | 12 | % |
| United States | 8 | % | | 8 | % | | 17 | % |
| Southeast Asia | 5 | % | | 10 | % | | 5 | % |
| Europe | 4 | % | | 4 | % | | 6 | % |
The revenue increases in fiscal year 2017 compared to the last two fiscal years and in fiscal year 2016 compared to fiscal year 2015, reflect an increase in technology and capacity investmentsinvestment by our customers. Ourcustomers in semiconductor capital equipment as well as higher revenue levels are generally correlated to the amount of shipmentsfrom our Customer Support Business Group for spares, services, upgrades and our installation and acceptance timelines.mature node equipment. The overall Asia region continuescontinued to account for a majority of our revenues as a substantial amount of the worldwide capacity additionsinvestments for semiconductor manufacturing continuescontinued to occur in this region. Our
Lam Research Corporation 2021 10-K 28
The deferred revenue balance was $966$1.1 billion as of June 27, 2021 compared to $537 million as of June 25, 2017, compared28, 2020, driven by increases in volume purchases for our systems, customer down payments for future tool deliveries, and additional deferrals related to $566 milliontools pending full delivery and future servicing of our existing installed base.
The following table presents our revenue disaggregated between system and customer support-related revenue:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| June 27,
2021 | | June 28,
2020 | | June 30,
2019 |
| (in thousands) |
| Systems Revenue | $ | 9,764,845 | | | $ | 6,625,130 | | | $ | 6,451,104 | |
| Customer support-related revenue and other | 4,861,305 | | | 3,419,606 | | | 3,202,455 | |
| $ | 14,626,150 | | | $ | 10,044,736 | | | $ | 9,653,559 | |
| | | | | |
Please refer to Note 4: Revenue of our Consolidated Financial Statements in Part II, Item 8 of this 2021 Form 10-K for additional information regarding the composition of the two categories into which revenue has been disaggregated. The percentage of leading- and non-leading-edge equipment and upgrade revenue to each of the markets we serve was as of June 26, 2016. Our deferred revenue balance does not include shipments to Japanese customers, to whom title does not transfer until customer acceptance. Shipments to Japanese customers are classified as inventory at cost until the time of customer acceptance. The anticipated future revenue value from shipments to Japanese customers was approximately $397 million as of June 25, 2017, compared to $132 million as of June 26, 2016.follows:
Continues on next pageLam Research Corporation 2017 10-K 34
| | | | | | | | | | | | | | | | | |
| | Year Ended |
June 27,
2021 | | June 28,
2020 | | June 30,
2019 |
| Memory | 61 | % | | 58 | % | | 70 | % |
| Foundry | 32 | % | | 31 | % | | 20 | % |
| Logic/integrated device manufacturing | 7 | % | | 11 | % | | 10 | % |
Gross Margin
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | | | |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 | FY17 vs. FY16 | | FY16 vs. FY15 |
| | (in thousands, except percentages) |
| Gross margin | $ | 3,603,359 |
| | $ | 2,618,922 |
| | $ | 2,284,336 |
| | $ | 984,437 |
| | 37.6 | % | | $ | 334,586 |
| | 14.6 | % |
| Percent of total revenue | 45.0 | % | | 44.5 | % | | 43.4 | % | | 0.5 | % | | | | 1.1 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | Change |
June 27,
2021 | | June 28,
2020 | | June 30,
2019 | FY21 vs. FY20 | | FY20 vs. FY19 |
| | | | | | | | | | | | | |
| | (in thousands, except percentages) |
| Gross margin | $ | 6,805,306 | | | $ | 4,608,693 | | | $ | 4,358,459 | | | $ | 2,196,613 | | | 47.7 | % | | $ | 250,234 | | | 5.7 | % |
| Percent of revenue | 46.5 | % | | 45.9 | % | | 45.1 | % | | 0.6% | | 0.8% |
The increase in gross margin as a percentage of revenue for fiscal year 20172021 compared to fiscal year 20162020 was primarily related to customer and product mix, partially offset by increased spending on freight and logistics due in significant part to higher revenueCOVID-19 disruptions, start-up expenses for our Malaysia manufacturing facility, and improved factory utilization resulting from higher production volume.deferred compensation plan-related costs.
The increase in gross margin as a percentage of revenue for fiscal year 20162020 compared to fiscal year 20152019 was primarily due to a more favorable customer mix and product mix. Additionally, there was a $10 million impairment charge of a long-lived asset in fiscal year 2015.mix as well as lower amortization expense related to intangibles acquired through business combinations, partially offset by lower factory and field utilization.
Research and Development
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | | | |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 | FY17 vs. FY16 | | FY16 vs. FY15 |
| | (in thousands, except percentages) |
| Research & development | $ | 1,033,742 |
| | $ | 913,712 |
| | $ | 825,242 |
| | $ | 120,030 |
| | 13.1 | % | | $ | 88,470 |
| | 10.7 | % |
| Percent of total revenue | 12.9 | % | | 15.5 | % | | 15.7 | % | | (2.6 | )% | | | | (0.2 | )% | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | Change |
June 27,
2021 | | June 28,
2020 | | June 30,
2019 | FY21 vs. FY20 | | FY20 vs. FY19 |
| | | | | | | | | | | | | |
| | (in thousands, except percentages) |
| Research & development | $ | 1,493,408 | | | $ | 1,252,412 | | | $ | 1,191,320 | | | $ | 240,996 | | | 19.2 | % | | $ | 61,092 | | | 5.1 | % |
| Percent of revenue | 10.2 | % | | 12.5 | % | | 12.3 | % | | (2.3)% | | 0.2% |
We continued to make significant R&D investments focused on leading-edge deposition, plasma etch, single wafer clean, and other semiconductor manufacturing requirements.processes. The increase in R&D expense during fiscal year 20172021 compared to fiscal year 20162020 was primarilymainly driven by an increase of $137 million in employee-related costs due to an $80 million increase in employee compensation and benefits relatedpart to increased headcount, a $20$49 million increase in depreciation and lab maintenance, a $9 million increase in outside services,service costs, $32 million in deferred compensation plan-related costs, and a $7$27 million increase in spending for supplies.
The increase in R&D expense during fiscal year 20162020 compared to fiscal year 20152019 was primarilymainly driven by an increase of $50 million in employee-related costs due to a $36 million increase in employee compensation and benefits related to increased headcount, $19 million in outsourcing service costs, and $10 million in spending for supplies, partially offset by a $14decrease of $7 million increase in facilitytravel expense and information technology related spending, a $14$5 million increase in supplies, a $12 million increase in depreciation and lab maintenance, and an $8 million increase in costs associated with campus consolidation.restructuring charges.
Lam Research Corporation 2021 10-K 29
Selling, General, and Administrative
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | | | |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 | FY17 vs. FY16 | | FY16 vs. FY15 |
| | (in thousands, except percentages) |
| Selling, general, and administrative | $ | 667,485 |
| | $ | 630,954 |
| | $ | 591,611 |
| | $ | 36,531 |
| | 5.8 | % | | $ | 39,343 |
| | 6.7 | % |
| Percent of total revenue | 8.3 | % | | 10.7 | % | | 11.2 | % | | (2.4 | )% | | | | (0.5 | )% | | |
The increase in selling, general, and administrative (“SG&A”) expense during fiscal year 2017 compared to fiscal year 2016 was primarily due to a $36 million increase in employee compensation and benefits from increased headcount, a $15 million gain from sale of assets in fiscal year 2016, and a $14 million increase in outside services, offset by a $41 million decrease in acquisition-related costs associated with the terminated agreement with KLA-Tencor.
Continues on next pageLam Research Corporation 2017 10-K 35
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | Change |
June 27,
2021 | | June 28,
2020 | | June 30,
2019 | FY21 vs. FY20 | | FY20 vs. FY19 |
| | | | | | | | | | | | | |
| | (in thousands, except percentages) |
| Selling, general, and administrative ("SG&A") | $ | 829,875 | | | $ | 682,479 | | | $ | 702,407 | | | $ | 147,396 | | | 21.6 | % | | $ | (19,928) | | | (2.8) | % |
| Percent of revenue | 5.7 | % | | 6.8 | % | | 7.3 | % | | (1.1)% | | (0.5)% |
The increase in SG&A expense during fiscal year 20162021 compared to fiscal year 20152020 was primarily due to $51 million of KLA-Tencor acquisition-related costs and a $3$97 million increase in restructuring charges. This increase wasemployee-related costs due in part to increased headcount, $37 million in outside service costs, and $21 million in deferred compensation plan-related costs, partially offset by a $15$9 million gain on sale of assets, net of associated exitdecrease in travel and entertainment costs.
Goodwill Impairment
Our annual goodwill impairment analysis forThe decrease in SG&A expense during fiscal year 2015 resulted in a non-cash impairment charge upon our Single-Wafer Clean reporting unit of $79 million, extinguishing the goodwill ascribed2020 compared to the reporting unit. Uncertainty surrounding future revenue growth in certain products resulted in the estimated discounted cash flow falling below the carrying value of the goodwill balance. There were no impairment charges in fiscal year 2017 or 2016.2019 was primarily due to a $17 million decrease in spending for customer-related sales costs, a $9 million decrease in spending for supplies, a $9 million decrease in restructuring charges, and a $6 million decrease in spending for travel and entertainment, partially offset by an increase of $25 million in spending for rent, repair and utilities.
Other Expense, Net
Other expense, net, consisted of the following:
| | | | | | | | | | | | | | | | | | Year Ended | | Change |
| | Year Ended | | | | | | | | | June 27,
2021 | | June 28,
2020 | | June 30,
2019 | FY21 vs. FY20 | | FY20 vs. FY19 |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 | | FY17 vs. FY16 | | FY16 vs. FY15 | | | | |
| | (in thousands) | | | | | | | | | | (in thousands, except percentages) |
| Interest income | $ | 57,858 |
| | $ | 29,512 |
| | $ | 19,268 |
| | $ | 28,346 |
| | 96.0 | % | | $ | 10,244 |
| | 53.2 | % | Interest income | $ | 19,687 | | | $ | 85,433 | | | $ | 98,771 | | | $ | (65,746) | | | (77.0) | % | | $ | (13,338) | | | (13.5) | % |
| Interest expense | (117,734 | ) | | (134,773 | ) | | (73,682 | ) | | $ | 17,039 |
| | (12.7 | )% | | $ | (61,091 | ) | | 82.9 | % | Interest expense | (208,597) | | | (177,440) | | | (117,263) | | | $ | (31,157) | | | 17.6 | % | | $ | (60,177) | | | 51.3 | % |
| Gains (losses) on deferred compensation plan related assets, net | 17,880 |
| | (3,995 | ) | | 9,071 |
| | $ | 21,875 |
| | (547.6 | )% | | $ | (13,066 | ) | | (144.0 | )% | |
| Loss on extinguishment of debt, net | (36,252 | ) | | — |
| | — |
| | $ | (36,252 | ) | | (100.0 | )% | | $ | — |
| | — | % | |
| Gains on deferred compensation plan related assets, net | | Gains on deferred compensation plan related assets, net | 61,838 | | | 5,999 | | | 10,464 | | | $ | 55,839 | | | 930.8 | % | | $ | (4,465) | | | (42.7) | % |
| | Foreign exchange (losses) gains, net | (569 | ) | | 308 |
| | 2,331 |
| | $ | (877 | ) | | (284.7 | )% | | $ | (2,023 | ) | | (86.8 | )% | Foreign exchange (losses) gains, net | (6,962) | | | (3,317) | | | 826 | | | $ | (3,645) | | | 109.9 | % | | $ | (4,143) | | | (501.6) | % |
| Other, net | (11,642 | ) | | (5,191 | ) | | (4,177 | ) | | $ | (6,451 | ) | | 125.7 | % | | $ | (1,014 | ) | | 24.3 | % | Other, net | 22,815 | | | (9,499) | | | (10,959) | | | $ | 32,314 | | | (340.2) | % | | $ | 1,460 | | | (13.3) | % |
| | $ | (90,459 | ) | | $ | (114,139 | ) | | $ | (47,189 | ) | | $ | 23,680 |
| | (20.7 | )% | | $ | (66,950 | ) | | 141.9 | % | | $ | (111,219) | | | $ | (98,824) | | | $ | (18,161) | | | $ | (12,395) | | | 12.5 | % | | $ | (80,663) | | | 444.2 | % |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | | | | | | | |
June 25,
2017 | | June 26,
2016 | | June 28,
2015 | | FY17 vs. FY16 | | FY16 vs. FY15 |
| | (in thousands, except percentages) | | | | | | | | |
| Income tax expense | $ | 113,910 |
| | $ | 46,068 |
| | $ | 85,273 |
| | $ | 67,842 |
| | 147.3 | % | | $ | (39,205 | ) | | (46.0 | )% |
| Effective tax rate | 6.3 | % | | 4.8 | % | | 11.5 | % | | | | 1.5 | % | | | | (6.7 | )% |
The increase in the effective tax rate in fiscal year 20172020 as compared to fiscal year 20162019 was primarily due to the change in the mix ofa cumulative income offset by the recognition of previously unrecognized tax benefits.
The decrease in the effective tax ratebenefit reversal due to a court ruling in fiscal year 20162020, as compared to fiscal year 2015 was primarily due to the tax benefit of the Altera court ruling (discussed in more detail below), higher income in lower tax jurisdictions, and an increased federal tax benefit due to a retroactive and permanent extension of federal research and development tax credit in fiscal year 2016.
outlined below.
In July 2015,November 2019, the U.S. Tax Court (the “Court”of Appeals for the Ninth Circuit (“Ninth Circuit”) issued an opinion favorable torejected the en banc appeal petitioned by Altera Corporation (“Altera”) with respect toin July 2019. In that quarter, we evaluated the impact of the decision and viewed the denial as an indication that Altera’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatmentposition of excluding stock-based compensation expense in an intercompany cost-sharing arrangement was unlikely to be sustained upon further litigation. As a result, we reversed $75 million of net tax assets associated with Altera’s foreign subsidiary. In its opinion,stock-based compensation benefits related to previous years in the Court accepted Altera’s position ofCondensed Consolidated Financial Statements in the three months ended December 29, 2019 and we no longer reflected a net tax benefit within our financial statements related to excluding stock-based compensation from itsour intercompany cost-sharing arrangement. However,In February 2020, Altera petitioned the U.S. DepartmentSupreme Court of the Treasury has not withdrawnUnited States ("SCOTUS") to hear their case. In June 2020, the requirement to include stock-based compensation from its regulations. We have evaluatedSCOTUS denied the opinion and as a result of such evaluation have recorded a tax benefit of $88 million related to reimbursement of cost share payments for the previously shared stock-based compensation costs. We have also recorded a tax benefit of $11 million related to stock-based compensation expense. In addition, we have recorded a tax liability of $74 million for the U.S. tax cost of potential repatriation of the associated contingent foreign earnings because at this time we cannot reasonably conclude that we have the ability and the intent to indefinitely reinvest these contingent earnings. We will continue to monitor this matter and related potential impacts to our consolidated financial statements.
petition.
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 at rates that are generally lower thanStates. International pre-tax income is taxable in the United States.States at a lower effective tax rate than the federal statutory tax rate. Please refer to Note 67 of our Consolidated Financial Statements.Statements in Part II, Item 8 of this 2021 Form 10-K.
Deferred Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Our gross deferred tax assets were $546$736 million and $465$575 million at the end of fiscal years 20172021 and 2016,2020, respectively. These gross deferred tax assets were offset by gross deferred tax liabilities of $585$152 million and $429$196 million and a valuation allowance of $277 million and $245 million at the end of fiscal years 20172021 and 2016, respectively, and a valuation allowance of $114 million and $102 million at the end of fiscal years 2017 and 2016,2020, respectively. The change in the gross deferred tax assets, gross deferred tax liabilities, and valuation allowance between fiscal year 20172021 and 20162020 is primarily due to an increase related toincreases in gross deferred tax assets for outside basis differences of foreign subsidiaries, allowances and reserves, and an increasetax credits, and decreases in gross deferred tax liabilities related to an accrual for future tax liabilities due to the expected repatriation of foreign earnings of certain foreign subsidiaries.convertible debt.
As of our fiscal year end ofended June 25, 2017,27, 2021, we continue to record a valuation allowance to offset the entire California deferred tax asset balance due to the single sales factor apportionment election resulting in lower taxable income in California. We also recorded a valuation allowance on certain state tax credits and continue to record valuation allowances on certain foreign entities’ net operating losses. The valuation allowances were $114$277 million and $102$245 million at the end of fiscal years 20172021 and 2016,2020, respectively.
We evaluate if the deferred tax assets are realizable on a quarterly basis and will continue to assess the need for changes in valuation allowances, if any.
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Uncertain Tax Positions
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, and effectively settled issues under audit. Such aaudit, 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
A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make certain judgments, estimates and assumptions that could affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on historical experience and on various other assumptions we believe to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates, which could have a material impact on our business, results of operations, and financial condition. Our critical accounting estimates include:
•the recognition and valuation of revenue from multiple-element arrangements with multiple performance obligations which impacts revenue;
•the valuation of inventory, which impacts gross margin;
•the valuation of warranty reserves, which impacts gross margin;
the valuation of equity-based compensation expense, including forfeiture estimates, which impacts both gross margin and operating expenses;
•the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions, which impact our provision for income tax expenses; and
•the valuation and recoverability of long-lived assets, which impacts gross margin and operating expenses when we record asset impairments or accelerate their depreciation or amortization.
We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements regarding the critical accounting estimates indicated above. See Note 2, “Summary of Significant Accounting Policies,” of our Consolidated Financial Statements in Part II, Item 8 of this 2021 Form 10-K for additional information regarding our accounting policies.
Lam Research Corporation 2021 10-K 31
Revenue Recognition: We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred and title has passedpromised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services by following a five-step process, (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when or as we satisfy a performance obligation, as further described below.
Identify the contract with a customer. We generally consider documentation of terms with an approved purchase order as a customer contract, provided that collection is considered probable, which is assessed based on the creditworthiness of the customer as determined by credit checks, payment histories, and/or other circumstances.
Identify the performance obligations in the contract. Performance obligations include sales of systems, spare parts, and services. In addition, our customer contracts contain provisions for installation and training services which have been rendered,deemed immaterial in the selling price is fixed or determinable, collectioncontext of the receivablecontract.
Determine the transaction price. The transaction price for our contracts with customers consists of both fixed and variable consideration provided it is reasonably assured,probable that a significant reversal of revenue will not occur when the uncertainty related to variable consideration is resolved. Fixed consideration includes amounts to be contractually billed to the customer while variable consideration includes estimates for discounts and we have received customer acceptancecredits for future usage which are based on contractual terms outlined in volume purchase agreements and other factors known at the time. We generally invoice customers at shipment and for professional services either as provided or upon meeting certain milestones. Customer invoices are otherwise released from our customer acceptance obligations. If terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. If the practices of a customer do not provide for a written acceptance or the terms of salegenerally due within 30 to 90 days after issuance. Our contracts with customers typically do not include significant financing components as the period between the transfer of performance obligations and timing of payment are generally within one year.
Allocate the transaction price to the performance obligations in the contract. For contracts that contain multiple performance obligations, we allocate the transaction price to the performance obligations in the contract on a lapsing acceptance provision, we recognizerelative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to historical discounting trends for products and services and pricing practices in different geographies.
Recognize revenue when it can be reliably demonstrated that the delivered system meets all of the agreed-to customer specifications. In situations with multiple deliverables,or as we recognize revenuesatisfy a performance obligation. Revenue for systems and spares are recognized at a point in time, which is generally upon the delivery of the separate elements to the customer and when we receive customer acceptanceshipment or delivery. Revenue from services is recognized over time as services are otherwise released from our customer acceptance obligations. We allocate revenue from multiple-element arrangements among the separate elements using their relative selling prices, based on our best estimate of selling price. Our sales arrangements do not include a general right of return. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items. We generally recognize revenue related to sales of spare parts and system upgrade kits upon shipment. We generally recognize revenue related to services upon completion of the services requested by a customer order. We recognize revenue for extended maintenance service contracts with a fixed payment amount on a straight-line basiscompleted or ratably over the termcontractual period of the contract. When goodsgenerally one year or services have been delivered to the customer, but all conditions for revenue recognition have not been met, deferred revenue and deferred costs are recorded in deferred profit on our Consolidated Balance Sheet.less.
Inventory Valuation: Our policy is to assess the valuation of all inventories including manufacturing raw materials, work-in-process, finished goods, and spare parts in each reporting period. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated marketnet realizable value if less than
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cost. Estimates of market value include but are not limited to management’s forecasts related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, general semiconductor market conditions, and possible alternative uses. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period in which we make the revision.revision is made.
Warranty: We record a provision for estimated warranty expenses to cost of sales for each system when we recognize revenue. We periodically monitor the performance and cost of warranty activities, if actual costs incurred are different than our estimates, we may recognize adjustments to provisions in the period in which those differences arise or are identified. We do not maintain general or unspecified reserves; all warranty reserves are related to specific systems.
Equity-based Compensation: Employee Stock Purchase Plan (“ESPP”) and Employee Stock Plans: We determine the fair value of our restricted stock units (“RSUs”), excluding market-based performance RSUs, based upon the fair market value of our Common Stock at the date of grant, discounted for dividends. We estimate the fair value of our market-based performance RSUs using a Monte Carlo simulation model at the date of the grant. We estimate the fair value of our stock options and ESPP awards using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award. We amortize the fair value of equity-based awards over the vesting periods of the award and we have elected to use the straight-line method of amortization. We estimate expected equity award forfeitures based on historical forfeiture rate activity and expected future employee turnover. We recognize the effect of adjustments made to the forfeiture rate, if any in the period that we change the forfeiture estimate.
Income Taxes: Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more likely than not that such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. In the event that we determine that we wouldwill not be able to realize all or part of our net deferred tax assets, an adjustment wouldwill be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the deferred tax assets wouldwill be realized, then the previously provided valuation allowance wouldwill be reversed.
We recognize the benefit from a tax position only if it is more likely than not that the position wouldwill be sustained upon audit based solely on the technical merits of the tax position. Our policy is to include interest and penalties related to unrecognizeduncertain tax benefitspositions as a component of income tax expense.
Long-lived assets:Assets: We review goodwill at least annually for impairment. Ifimpairment during the fourth quarter of each fiscal year and if certain events or indicators of impairment occur between annual impairment tests, we will perform an impairment test at that date. In testing for atests. The process of evaluating the potential impairment of goodwill we: (1) allocaterequires significant judgment. When reviewing goodwill for impairment, we first perform a qualitative assessment to the reporting units to which the acquired goodwill relates; (2) estimate the fair value of our reporting units; and (3) determine whether it is more likely than not that the carrying value (book value) of those reporting units. Prior to this allocation of the assets to the reporting units, we assess long-lived assets for impairment. Furthermore, if the estimated fair value of a reporting unit is less than its carrying value. In performing a qualitative assessment, we consider business conditions and other factors including, but not limited to (i) adverse industry or economic trends, (ii) restructuring actions and lower projections that may impact future operating results, (iii) sustained decline in share price, and (iv) overall financial performance and other events affecting the carrying value,reporting units. If we must estimate the fair value of all identifiable assets and liabilities ofconclude that reporting unit, in a manner similar to a purchase price allocation for an acquired business. This can require independent valuations of certain internally generated and unrecognized intangible assets such as in-process R&D and developed technology. Only after this process is completed can the amount of goodwill impairment, if any, be determined. In our goodwill impairment process we first assess qualitative factors to determine whether it is necessary to perform a quantitative analysis. We domore likely
Lam Research Corporation 2021 10-K 32
than not calculatethat the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount.amount, then a quantitative impairment test is performed by estimating the fair value of the reporting unit and comparing it to its carrying value, including goodwill allocated to that reporting unit.
The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. We determine the fair value of our reporting units by using an income approach. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit,
Continues on next pageLam Research Corporation 2017 10-K 39
discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.
In estimating the fair value of a reporting unit, we make estimates and judgments about the future cash flows of our reporting units, including estimated growth rates and assumptions about the economic environment. Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses, there is significant judgment involved in determining the cash flows attributable to a reporting unit. In addition, we make certain judgments about allocating shared assets to the estimated balance sheets of our reporting units. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge.
As a result, several factors could result in an impairmentIf after completing the quantitative assessment the carrying value of a material amount of our goodwill balance in future periods, including but not limited to: (1) weakening of the global economy, weakness in the semiconductor equipment industry, or our failure to reach internal forecasts, which could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted cash flow value of our reporting units; and (2) a decline in our Common Stock price and resulting market capitalization, to the extent we determine that the decline is sustained and indicates a reduction in theunit exceeds its fair value, of our reporting units below their carrying value. Further, the value assigned to intangible assets, other than goodwill, is based on estimates and judgments regarding expectations such as the success and lifecycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, we may be required towould record an impairment charge equal to write down the assetexcess of the carrying value of the reporting unit over its fair value, up to its realizable value.
the amount of the goodwill assigned to the reporting unit.
For other long-lived assets, we routinely consider whether indicatorsreview them whenever events or changes in circumstances indicate the carrying value of impairment are present.an asset or asset group may not be recoverable. If such indicators are present, we determine whether the sum of the estimated undiscounted cash flows attributable to the assets is less than their carrying value. If the sum is less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. We recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset areis less than the asset’s carrying value. The fair value of the asset then becomes the asset’s new carrying value, which we depreciate over the remaining estimated useful life of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value. In addition, for fully amortized intangible assets, we de-recognize the gross cost and accumulated amortization in the period we determine the intangible asset no longer enhances future cash flows.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 3, “Recent Accounting Pronouncements,” of our Consolidated Financial Statements, included in Part II, Item 8 of this report.2021 Form 10-K. Liquidity and Capital Resources
Total gross cash, cash equivalents, investments, and restricted cash and investments balances were $6.3$6.0 billion at the end of fiscal year 20172021 compared to $7.1$7.0 billion at the end of fiscal year 2016.2020. This decrease was primarily due to the redemption ofCommon Stock repurchases in connection with our Senior Notes with contractual maturities in 2023stock repurchase program, dividends paid, and 2026. Approximately $4.8 billion and $3.1 billion of our totalprincipal payments on long-term debt, partially offset by cash and investments as June 25, 2017, and June 26, 2016, respectively, was held outside the United States in our foreign subsidiaries, the majority of which is held in U.S. dollars, and substantially all of which would be subject to tax at U.S. rates if it were to be repatriated. Refer to Note 6 of our Consolidated Financial Statements, included in Item 8 of this report, for information concerning the potential tax impact of repatriating earnings of certain non-U.S. subsidiaries that are permanently reinvested outside the United States.
Continues on next pageLam Research Corporation 2017 10-K 40
provided by operating activities.
Cash Flow from Operating Activities
Net cash provided by operating activities of $2.0$3.6 billion during fiscal year 20172021 consisted of (in millions)thousands):
|
| | | |
| Net income | $ | 1,698 |
|
| Non-cash charges: | |
| Depreciation and amortization | 307 |
|
| Equity-based compensation expense | 150 |
|
| Deferred income taxes | 105 |
|
| Loss on extinguishment of debt, net | 36 |
|
| Amortization of note discounts and issuance costs | 25 |
|
| Changes in operating asset and liability accounts | (311 | ) |
| Other | 19 |
|
| | $ | 2,029 |
|
| | | | | |
| Net income | $ | 3,908,458 | |
| Non-cash charges: | |
| Depreciation and amortization | 307,151 | |
| Deferred income taxes | (151,477) | |
| Equity-based compensation expense | 220,164 | |
| |
| |
| Changes in operating asset and liability accounts | (678,741) | |
| Other | (17,392) | |
| $ | 3,588,163 | |
| |
Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in accounts receivable of $411$929 million, inventories of $308$793 million, and prepaid expenses and other assets of $27 million,$59 million; partially offset by the following sources of cash: increases in accounts payable of $127 million, deferred profit of $258$508 million, and accrued expenses and other liabilities of $50$409 million, and accounts payable of $185 million.
Cash Flow from Investing Activities
Net cash used forprovided by investing activities during fiscal year 20172021 was $2.1 billion,$73 million, primarily consisting of net purchasessales/maturities of available-for-saleavailable for sale securities of $1.9 billion, and$465 million, partially offset by capital expenditures of $157$349 million.
Lam Research Corporation 2021 10-K 33
Cash Flow from Financing Activities
Net cash used byfor financing activities during fiscal year 20172021 was $2.6$4.2 billion, primarily consisting of $1.7$2.7 billion in Common Stock repurchases, including net share settlement on employee stock-based compensation; $862 million of cash paid forprincipal payments on debt extinguishment, $812 million in treasury stock repurchases,instruments; and $243$727 million of dividends paid,paid; partially offset by $73$122 million of stock issuance and treasury stock reissuances associated with our employee stock-based compensation plans.
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 June 25, 2017,27, 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 12twelve months. However, uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets, have in the past, and could in the future, impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors.
In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on demand for our products and services. While we have substantial cash balances, in
the United States and offshore, 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, given the possibility of changesongoing COVID-19 pandemic has in market conditions or other occurrences,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 certaintyassurance that such fundingwe will be available in needed quantitiesable to obtain such financing on commercially reasonable terms or on terms favorable to us.
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at all.
Off-Balance Sheet Arrangements and Contractual Obligations
We have certain obligations to make future payments under various contracts, some of which are recorded on our balance sheet and some of which are not. Obligations that are recorded on our balance sheet in accordance with GAAP include our long-term debt, operating leases and finance leases which isare outlined in the following table. Our off-balance sheet arrangements are presented as operating leases and purchase obligations in the table. Our contractual obligations and commitments as of June 25, 2017,27, 2021, relating to these agreements and our guarantees are included in the following table based on their contractual maturity date.
The amounts in the table below exclude $120$527 million of net liabilities related to uncertain tax benefitspositions as we are unable to reasonably estimate the ultimate amount or time of settlement. See Note 67 of our Consolidated Financial Statements in Part II, Item 8 of this 2021 Form 10-K for further discussion. The amounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Less than
1 Year | | 1-3 Years | | 3-5 Years | | More than
5 Years |
| | (in thousands) |
| Operating leases | $ | 173,150 | | | $ | 48,487 | | | $ | 55,530 | | | $ | 30,505 | | | $ | 38,628 | |
| Financing leases | 42,648 | | | 11,870 | | | 12,320 | | | 10,214 | | | 8,244 | |
| Purchase obligations | 818,186 | | | 660,201 | | | 114,046 | | | 40,724 | | | 3,215 | |
| Long-term debt and interest expense | 7,903,936 | | | 175,125 | | | 350,250 | | | 1,586,347 | | | 5,792,214 | |
| One-time transition tax on accumulated unrepatriated foreign earnings (1) | 659,954 | | | 69,469 | | | 199,723 | | | 390,762 | | | — | |
| Other long-term liabilities (2) | 280,342 | | | 11,704 | | | 42,079 | | | 9,453 | | | 217,106 | |
| Total | $ | 9,878,216 | | | $ | 976,856 | | | $ | 773,948 | | | $ | 2,068,005 | | | $ | 6,059,407 | |
| | | | | | | | | |
(1)We may choose to apply existing tax credits, thereby reducing the actual cash payment.
(2)Certain tax-related liabilities and post-retirement benefits classified as other non-current liabilities on the Consolidated Balance Sheet are included in the table below also exclude $19 million associated with funding commitments related“More than 5 Years” category due to non-marketable equity investments as we are unable to make a reasonable estimate regardingthe uncertainty in the timing and amount of capital calls.future payments. Additionally, the balance excludes contractual obligations recorded in our Consolidated Balance Sheet as current liabilities and the long-term portion of operating leases.
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 years |
| | (in thousands) |
| Operating leases | $ | 156,845 |
| | $ | 50,798 |
| | $ | 60,453 |
| | $ | 19,639 |
| | $ | 25,955 |
|
| Capital leases | 7,201 |
| | 744 |
| | 1,457 |
| | 5,000 |
| | — |
|
| Purchase obligations | 284,804 |
| | 274,574 |
| | 6,942 |
| | 3,061 |
| | 227 |
|
Long-term debt and interest expense (1) | 3,518,070 |
| | 523,401 |
| | 634,822 |
| | 888,114 |
| | 1,471,733 |
|
Other long-term liabilities (2) | 280,186 |
| | 3,487 |
| | 2,728 |
| | 10,246 |
| | 263,725 |
|
| Total | $ | 4,247,106 |
| | $ | 853,004 |
| | $ | 706,402 |
| | $ | 926,060 |
| | $ | 1,761,640 |
|
__________________________________
| |
(1) | The conversion period for the Convertible Notes was open as of June 25, 2017, and as such the net carrying value of the Convertible Notes is included within current liabilities on our Consolidated Balance Sheet. The principal balances of the Convertible Notes are reflected in the payment period in the table above based on the contractual maturity assuming no conversion. See Note 13 of our Consolidated Financial Statements for additional information concerning the Convertible Notes and associated conversion features. |
| |
(2) | Certain tax-related liabilities and post-retirement benefits classified as other non-current liabilities on the consolidated balance sheet are included in the “more than five years” category due to the uncertainty in the timing and amount of future payments. Additionally, the balance excludes contractual obligations recorded in our consolidated balance sheet as current liabilities. |
Operating Leases
We lease most of our administrative R&D, and manufacturing facilities; regional sales/service offices; andoffices as well as certain equipment under non-cancelable operating leases. Certain of our facility leases for buildings located in Fremont, and Livermore, California,California; Tualatin, Oregon; and certain other facility leases provide us with an option to extend the leases for additional periods or to purchase the facilities. Certain of our facility leases provide for periodic rent increases based on the general rate of inflation.
Lam Research Corporation 2021 10-K 34
Financing Leases
Financing leases reflect building and office equipment lease obligations. The amounts in the table above include the interest portion of payment obligations. Certain of our facility leases for buildings located in Fremont and Livermore, California provide us with an option to extend the leases for additional periods or to purchase the facilities. Certain of our facility leases provide for periodic rent increases based on the general rate of inflation. In addition to amounts included in the table above, we have guaranteed residual values for certain of our Fremont and Livermore facility leases of up to $250$298 million. See Note 15 to our Consolidated Financial Statements in Part II, Item 8 of this 2021 Form 10-K for further discussion. Capital Leases
Capital leases reflect building and office equipment lease obligations. The amounts in the table above include the interest portion of payment obligations.
Purchase Obligations
Purchase obligations consist of significant contractual obligations either on an annual basis or over multi-year periods related to our outsourcing activities or other material commitments, including vendor-consigned inventories. The contractual cash obligations and commitments table presented above contains our minimum obligations at June 25, 2017,27, 2021, under these arrangements and others. For obligations with cancellation provisions, the amounts included in the preceding table were limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee. Actual expenditures will vary based on the volume of transactions and length of contractual service provided. On April 1, 2021 we entered into a $1.4 billion five-year electrostatic chuck supply contract (the “Supplier Contract”), under which we are obligated, in certain circumstances, to a minimum purchase penalty obligation not to exceed $180 million. Due to the uncertainty in the timing and amount of future payments, the cash obligations and commitments table presented above excludes the minimum purchase obligation under the Supplier Contract.
Capital Expenditure Requirements
We are in the process of expanding our global production footprint, with expansion of our Ohio manufacturing facility as well as construction of a manufacturing facility in Malaysia and a technology center in Korea. Anticipated capital expenditures associated with these projects for buildings and equipment for fiscal year 2022 are expected to be approximately $201 million. These capital expenditures will be funded through existing cash and cash equivalents, investments, and cash generated from operations.
ContinuesIncome Taxes
During the December 2017 quarter, a one-time transition tax on
next page Lam Research Corporationaccumulated unrepatriated foreign earnings, estimated at $991 million, was recognized associated with the December 2017 10-K 42
Interest on amounts borrowed under the credit facility is, at our 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 London Interbank Offered Rate (“LIBOR”) plus 1.0%, plus a spread of 0.0%0.00% to 0.5%0.30%, or (2) a LIBOR multiplied by the statutory reserve rate plus a spread of 0.9%0.805% to 1.5%1.30%, in each case as the applicableplus a facility fee, with such spread isand facility fee determined based on the rating of our 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, we will pay the lenders a quarterly commitment fee that varies based on our 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 that are substantially similar to those in the Amended and Restated Term Loan Agreement.default. As of June 25, 2017,27, 2021, we had no borrowings outstanding under the credit facilitySecond Amended and Restated Credit Agreement and were in compliance with all financial covenants.
We have issued certain indemnifications to our lessors for taxes and general liability under some of our agreements. We have entered into certain insurance contracts that may limit our exposure to such indemnifications. As of June 25, 2017,27, 2021, we had not recorded any liability on our Consolidated Financial Statements in connection with these indemnifications, as we do not believe, based on information available, that it is probable that we will pay any material amounts under these guarantees.
Generally, we indemnify, under pre-determined conditions and limitations, our customers for infringement of third-party intellectual property rights by our products or services. We seek to limit our liability for such indemnity to an amount not to exceed the sales price of the products or services subject to our indemnification obligations. We do not believe, based on information available, that it is probable that we will pay any material amounts under these guarantees.
We provide guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of June 25, 2017,27, 2021, the maximum potential amount of future payments that we could be required to make under these arrangements and letters of credit was $16$74 million. We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid.
We maintain an investment portfolio of various holdings, types, and maturities. As of June 25, 2017,27, 2021, our mutual funds are classified as trading securities. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Any material differences between the cost and fair value of trading securities is recognized as “Other income (expense)”other expense, net in our Consolidated Statement of Operations. All of our other investments are classified as available-for-sale and consequently are recorded in the Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of tax.
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 conservativecapital preservation-focused 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.
