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false--06-30Q120192018-09-2310-Q0000707549155182806Large Accelerated FilerLAM RESEARCH CORPLRCX1000534300053510000.451.100.0010.0014000000004000000001568920001533840001568920001533840000.0303454303020200.0380.0280.02750.02625560000041000001500000000000.0010.0015000000500000000The Company generally invoices customers at shipment and for professional services either as provided or upon meeting certain milestones. Customer invoices are generally due within?30?to?90 days after issuance. The Company?s 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.P9MP2Y172.39172.39119679000127500000Refer to Note 2 - Recent Accounting Pronouncements for more information regarding these FASB Accounting Standard Updates. 0000707549 2018-06-25 2018-09-23 0000707549 2018-10-22 0000707549 2017-06-26 2017-09-24 0000707549 2018-09-23 0000707549 2018-06-24 0000707549 2017-09-24 0000707549 2017-06-25 0000707549 us-gaap:CommonStockMember 2018-06-25 2018-09-23 0000707549 us-gaap:TreasuryStockMember 2018-06-24 0000707549 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-06-24 0000707549 us-gaap:CommonStockMember 2018-09-23 0000707549 us-gaap:CommonStockMember 2017-06-26 2017-09-24 0000707549 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-06-25 2018-09-23 0000707549 us-gaap:TreasuryStockMember 2017-09-24 0000707549 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Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  ___________________________________________________________
FORM 10-Q
 ___________________________________________________________
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 23, 2018
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-12933 
___________________________________________________________
LAM RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________________________
Delaware
 
94-2634797
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
4650 Cushing Parkway
Fremont, California
 
94538
(Address of principal executive offices)
 
(Zip Code)
(510) 572-0200
(Registrant’s telephone number, including area code)
__________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 22, 2018, the Registrant had 155,182,806 shares of Common Stock outstanding.
 


Table of Contents



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



Table of Contents


PART I. FINANCIAL INFORMATION

ITEM 1.
Financial Statements

LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
September 23, 2018
 
September 24, 2017
Revenue
$
2,330,691

 
$
2,478,140

Cost of goods sold
1,272,493

 
1,328,797

Gross margin
1,058,198

 
1,149,343

Research and development
291,672

 
275,078

Selling, general, and administrative
174,775

 
181,043

Total operating expenses
466,447

 
456,121

Operating income
591,751

 
693,222

Other expense, net
(377
)
 
(5,502
)
Income before income taxes
591,374

 
687,720

Income tax expense
(58,014
)
 
(97,030
)
Net income
$
533,360

 
$
590,690

Net income per share:
 
 
 
Basic
$
3.43

 
$
3.64

Diluted
$
3.23

 
$
3.21

Number of shares used in per share calculations:
 
 
 
Basic
155,658

 
162,141

Diluted
165,327

 
183,880











See Notes to Condensed Consolidated Financial Statements


3



Table of Contents


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

 
 
Three Months Ended
 
September 23, 2018
 
September 24, 2017
Net income
$
533,360

 
$
590,690

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
(6,261
)
 
7,869

Cash flow hedges:
 
 
 
Net unrealized gains during the period
6,866

 
3,062

Net losses reclassified into earnings
1,148

 
2,188

 
8,014

 
5,250

Available-for-sale investments:
 
 
 
Net unrealized losses during the period
(287
)
 
(1,727
)
Net gains reclassified into earnings
(3
)
 
(123
)
 
(290
)
 
(1,850
)
Defined benefit plans, net change in unrealized component
(1,743
)
 
(2,356
)
Other comprehensive (loss) income, net of tax
(280
)
 
8,913

Comprehensive income
$
533,080

 
$
599,603


See Notes to Condensed Consolidated Financial Statements
4

Table of Contents


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
September 23,
2018
 
June 24,
2018
 
(unaudited)
 
(1)
ASSETS
 
 
 
Cash and cash equivalents
$
2,568,085

 
$
4,512,257

Investments
1,050,863

 
437,338

Accounts receivable, less allowance for doubtful accounts of $5,351 as of September 23, 2018, and $5,343 as of June 24, 2018
1,846,845

 
2,176,936

Inventories
1,874,194

 
1,876,162

Prepaid expenses and other current assets
175,886

 
147,218

Total current assets
7,515,873

 
9,149,911

Property and equipment, net
951,376

 
902,547

Restricted cash and investments
255,924

 
256,301

Goodwill
1,484,873

 
1,484,904

Intangible assets, net
282,689

 
317,836

Other assets
466,842

 
367,979

Total assets
$
10,957,577

 
$
12,479,478

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
384,403

 
$
510,983

Accrued expenses and other current liabilities
1,347,872

 
1,309,209

Deferred profit
542,321

 
720,086

Current portion of convertible notes, capital leases, and commercial paper
550,369

 
610,030

Total current liabilities
2,824,965

 
3,150,308

Long-term debt and capital leases, less current portion
1,805,091

 
1,806,562

Income taxes payable
845,740

 
851,936

Other long-term liabilities
100,144

 
90,629

Total liabilities
5,575,940

 
5,899,435

Commitments and contingencies

 

Temporary equity, convertible notes
58,812

 
78,192

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

 

Common stock, at par value of $0.001 per share; authorized, 400,000 shares; issued and outstanding, 153,384 shares at September 23, 2018, and 156,892 shares at June 24, 2018
153

 
157

Additional paid-in capital
6,195,024

 
6,144,425

Treasury stock, at cost; 127,500 shares at September 23, 2018, and 119,679 shares at June 24, 2018
(9,582,409
)
 
(7,846,476
)
Accumulated other comprehensive loss
(57,729
)
 
(57,449
)
Retained earnings
8,767,786

 
8,261,194

Total stockholders’ equity
5,322,825

 
6,501,851

Total liabilities and stockholders’ equity
$
10,957,577

 
$
12,479,478

(1) Derived from audited financial statements


See Notes to Condensed Consolidated Financial Statements
5

Table of Contents


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
 
Three Months Ended
 
September 23, 2018
 
September 24, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
533,360

 
$
590,690

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
79,805

 
79,142

Deferred income taxes
(83,501
)
 
43,204

Equity-based compensation expense
50,343

 
41,783

Amortization of note discounts and issuance costs
1,245

 
4,588

Other, net
2,191

 
6,569

Changes in operating assets and liabilities
136,843

 
92,330

Net cash provided by operating activities
720,286

 
858,306

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures and intangible assets
(56,098
)
 
(60,064
)
Business acquisition, net of cash acquired

 
(115,613
)
Purchases of available-for-sale securities
(749,829
)
 
(1,425,407
)
Sales and maturities of available-for-sale securities
137,246

 
1,307,633

Other, net
(3,650
)
 
(10,600
)
Net cash used for investing activities
(672,331
)
 
(304,051
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on debt
(79,831
)
 
(301,727
)
Net repayments from issuance of commercial paper
(86
)
 

Treasury stock purchases
(1,735,895
)
 
(155,385
)
Dividends paid
(174,372
)
 
(72,738
)
Proceeds from issuance of common stock

 
1,042

Other, net
(9
)
 
4

Net cash used for financing activities
(1,990,193
)
 
(528,804
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(2,311
)
 
3,317

Net (decrease) increase in cash, cash equivalents, and restricted cash
(1,944,549
)
 
28,768

Cash, cash equivalents, and restricted cash at beginning of period
4,768,558

 
2,633,739

Cash, cash equivalents, and restricted cash at end of period
$
2,824,009

 
$
2,662,507

Schedule of non-cash transactions:
 
 
 
Accrued payables for stock repurchases
162

 
4,350

Accrued payables for capital expenditures
36,613

 
34,531

Dividends payable
167,907

 
73,127

Transfers of inventory to property and equipment, net
25,613

 
11,852

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash
September 23, 2018
 
September 24, 2017
Cash and cash equivalents
$
2,568,085

 
$
2,406,462

Restricted cash and investments
255,924

 
256,045

Total Cash, cash equivalents, and restricted cash
$
2,824,009

 
$
2,662,507


See Notes to Condensed Consolidated Financial Statements
6

Table of Contents


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
Three Months Ended
 
September 23, 2018

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

 
$
157

 
$
6,144,425

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

 
$
6,501,851

Sale of common stock
32

 

 

 

 

 

 

Purchase of treasury stock
(7,808
)
 
(8
)
 

 
(1,735,933
)
 

 

 
(1,735,941
)
Equity-based compensation expense

 

 
50,343

 

 

 

 
50,343

Effect of conversion of convertible notes
1,962

 
2

 
(19,114
)
 

 

 

 
(19,112
)
Exercise of warrants
2,306

 
2

 
(10
)
 

 

 

 
(8
)
Reclassification from temporary to permanent equity

 

 
19,380

 

 

 

 
19,380

Adoption of ASU 2014-09(1)

 

 

 

 

 
139,355

 
139,355

Adoption of ASU 2016-16(1)

 

 

 

 

 
(443
)
 
(443
)
Adoption of ASU 2018-02(1)

 

 

 

 
(2,227
)
 
2,227

 

Net income

 

 

 

 

 
533,360

 
533,360

Other comprehensive income

 

 

 

 
1,947

 

 
1,947

Cash dividends declared ($1.10 per common share)

 

 

 

 

 
(167,907
)
 
(167,907
)
Balance at September 23, 2018
153,384

 
$
153

 
$
6,195,024

 
$
(9,582,409
)
 
$
(57,729
)
 
$
8,767,786

 
$
5,322,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Refer to Note 2 - Recent Accounting Pronouncements for more information regarding these FASB Accounting Standard Updates.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 24, 2017

Common Stock Shares
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total
Balance at June 25, 2017
161,723

 
$
162

 
$
5,845,485

 
$
(5,216,187
)
 
$
(61,700
)
 
$
6,249,691

 
$
6,817,451

Sale of common stock
68

 

 
1,042

 

 

 

 
1,042

Purchase of treasury stock
(1,790
)
 
(2
)
 

 
(159,733
)
 

 

 
(159,735
)
Equity-based compensation expense

 

 
41,783

 

 

 

 
41,783

Effect of conversion of convertible notes
4,236

 
4

 
(29,632
)
 

 

 

 
(29,628
)
Effect of bond hedge, cash in lieu of shares
(2,093
)
 
(2
)
 
6

 

 

 

 
4

Reclassification from temporary to permanent equity

 

 
32,865

 

 

 

 
32,865

Adoption of ASU 2016-09

 

 

 

 

 
40,920

 
40,920

Net income

 

 

 

 

 
590,690

 
590,690

Other comprehensive income

 

 

 

 
8,913

 

 
8,913

Cash dividends declared ($0.45 per common share)

 

 

 

 

 
(73,127
)
 
(73,127
)
Balance at September 24, 2017
162,144

 
$
162

 
$
5,891,549

 
$
(5,375,920
)
 
$
(52,787
)
 
$
6,808,174

 
$
7,271,178



See Notes to Condensed Consolidated Financial Statements
7

Table of Contents


LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 23, 2018
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of Lam Research Corporation (“Lam Research” or the “Company”) for the fiscal year ended June 24, 2018, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended June 24, 2018 (the “2018 Form 10-K”). The Company’s reports on Form 10-K, Form 10-Q and Form 8-K are available online at the Securities and Exchange Commission website on the Internet. The address of that site is www.sec.gov. The Company also posts its reports on Form 10-K, Form 10-Q and Form 8-K on its corporate website at http://investor.lamresearch.com. The content on any website referred to in this Form 10-Q is not a part of or incorporated by reference in this Form 10-Q unless expressly noted.
The condensed consolidated financial statements include the accounts of Lam Research and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s reporting period is a 52/53-week fiscal year. The Company’s current fiscal year will end June 30, 2019 and includes 53 weeks. The quarters ended September 23, 2018 (the “September 2018 quarter”) and September 24, 2017 (the “September 2017 quarter”) included 13 weeks.
NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted
In May 2014, the FASB released ASU 2014-09, “Revenue from Contracts with Customers,” to supersede nearly all existing revenue recognition guidance under GAAP. The FASB issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016 within ASU 2015–14, ASU 2016–08, ASU 2016–10, ASU 2016–12 and ASU 2016–20, respectively; all of which in combination with ASU 2014-09 were codified as Accounting Standard Codification Topic 606 (“ASC 606”). The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company adopted ASC 606 on the first day of the current fiscal year, June 25, 2018, under the modified retrospective approach, applying the amendments to prospective reporting periods. Results for reporting periods beginning on or after June 25, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under ASC 605. In conjunction with the adoption of ASC 606, the Company’s revenue recognition policy has been amended, refer to Note 3 - Revenue for a description of the amendments.
The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet as of June 25, 2018 for the adoption of ASC 606 to all contracts with customers that were not completed as of June 24, 2018 was recorded as an adjustment to retained earnings as of the adoption date as follows:
 
June 24, 2018
 
 
 
June 25, 2018
 
As reported
 
Adjustments
 
As Adjusted
 
(In thousands)
Total assets
$
12,479,478

 
$
12,955

 
$
12,492,433

Deferred profit
$
720,086

 
$
(160,695
)
 
$
559,391

Total liabilities
$
5,899,435

 
$
(126,400
)
 
$
5,773,035

Stockholders' equity
$
6,501,851

 
$
139,355

 
$
6,641,206



8



Table of Contents


Upon adoption, the Company recorded a cumulative effect adjustment of $139.4 million, net of tax adjustment of $21.0 million, which increased the June 25, 2018 opening retained earnings balance on the Condensed Consolidated Balance Sheet, primarily as a result of changes in the timing of recognition of system sales. Under ASC 606, the Company recognizes revenue from sales of systems when the Company determines that control has passed to the customer which is generally (1) for products that have been demonstrated to meet product specifications prior to shipment upon shipment or delivery; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized upon completion of installation and receipt of customer acceptance; (3) for transactions where legal title does not pass upon shipment or delivery and the Company does not have a right to payment, revenue is recognized when legal title passes to the customer and the Company has a right to payment, which is generally at customer acceptance.

The impact of adoption of ASC 606 on the Company's Condensed Consolidated Statement of Operations and Condensed Consolidated Balance Sheet was as follows:
 
Three months ended
 
September 23, 2018
 
As Reported
 
Without adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
(In thousands)
Revenue
$
2,330,691

 
$
2,082,397

 
$
248,294

Cost of goods sold
$
1,272,493

 
$
1,166,858

 
$
105,635

 
 
 
 
 
 
 
September 23, 2018
 
As Reported
 
Without adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
(In thousands)
Deferred profit
$
542,321

 
$
824,737

 
$
(282,416
)
Retained earnings
$
8,767,786

 
$
8,485,370

 
$
282,416


Except as disclosed above, the adoption of ASC 606 did not have a significant impact on the Company’s Condensed Consolidated Statement of Operations for the three months ended September 23, 2018.
In January 2016, the FASB released ASU 2016-01, “Financial Instruments Overall Recognition and Measurement of Financial Assets and Financial Liabilities.” The FASB issued a subsequent amendment to the initial guidance in February 2018 within ASU 2018-03. These amendments change the accounting for and financial statement presentation of equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation of the investee. The amendments provide clarity on the measurement methodology to be used for the required disclosure of fair value of financial instruments measured at amortized cost on the balance sheet and clarifies that an entity should evaluate the need for a valuation allowance on deferred tax assets related to available-for-sale securities in combination with the entity’s other deferred tax assets, among other changes. The Company’s adoption of this standard in the first quarter of fiscal year 2019 did not have a material impact on its Condensed Consolidated Financial Statements.
In August 2016, the FASB released ASU 2016-15, “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments.” The amendment provides and clarifies guidance on the classification of certain cash receipts and cash payments in the statement of cash flows to eliminate diversity in practice. The Company adopted this standard update in the first quarter of fiscal year 2019 using a retrospective transition method. The Company’s adoption of this standard did not have a material impact on its Condensed Consolidated Financial Statements.
In October 2016, the FASB released ASU 2016-16, “Income Tax Intra-Entity Transfers of Assets Other than Inventory.” This standard update improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The Company adopted this standard in the first quarter of fiscal year 2019 using a modified-retrospective approach through a cumulative-effect adjustment directly to retained earnings. The Company’s adoption of this standard resulted in a $0.4 million decrease to retained earnings and a corresponding $0.4 million increase to other assets on its Condensed Consolidated Financial Statements.
In November 2016, the FASB released ASU 2016-18, “Statement of Cash Flows Restricted Cash.” This standard update requires that restricted cash and restricted cash equivalents be included in cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. The Company adopted this standard

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in the first quarter of fiscal year 2019, using a retrospective transition method to each period presented. The adoption of this standard did not have a material impact on its Condensed Consolidated Financial Statements.
In February 2018, the FASB released ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard update addresses a specific consequence of the Tax Cuts and Jobs Act (“U.S Tax Reform”) and allows a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from U.S. tax reform. Consequently, the update eliminates the stranded tax effects that were created as a result of the historical U.S. federal corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The Company adopted this standard in the first quarter of fiscal year 2019 using a modified-retrospective approach through a cumulative-effect adjustment directly to retained earnings. The adoption of this standard resulted in a $2.2 million increase to retained earnings, with a corresponding $2.2 million decrease to other comprehensive income.
In August 2018, the Securities and Exchange Commission (“SEC”) adopted amendments to eliminate, integrate, update or modify certain of its disclosure requirements. The amendments are part of the SEC’s efforts to improve disclosure effectiveness and were focused on eliminating disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded. The Company adopted these amendments in the first quarter of fiscal Year 2019 and as a result the Company has included a Condensed Consolidated Statement of Stockholders’ Equity to this quarterly report on Form 10-Q. The Company expects that the Company’s 2019 annual report on Form 10-K will omit a number of disclosures previously required in Part II. Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, as well as other minor changes.
Updates Not Yet Effective
In January 2016, the FASB released ASU 2016-02, “Leases.” The FASB issued a subsequent amendment to the initial guidance in January 2018 within ASU 2018-01. The core principle of the standard requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The amendment offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The Company is required to adopt these standards starting in the first quarter of fiscal year 2020 using a modified-retrospective approach on the earliest period presented. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements”, which provides companies an optional adoption method to ASU 2016-02 whereby a company does not have to adjust comparative period financial statements for the new standard. The Company currently believes the most significant impact upon adoption will be the recognition of right-of-use assets and lease liabilities on the Company's Condensed Consolidated Balance Sheets for those leases currently classified as operating leases. As part of the Company’s assessment and implementation plan, the Company is evaluating and implementing changes to its procedures and controls.
In June 2016, the FASB released ASU 2016-13, “Financial Instruments Credit Losses.” The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021 using a modified-retrospective approach. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Condensed Consolidated Financial Statements.
NOTE 3 — REVENUE
Revenue Recognition
The Company recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects 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, and (5) recognize revenue when or as the Company satisfies a performance obligation, as further described below.
Identify the contract with a customer. The Company generally considers 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.

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Identify the performance obligations in the contract. Performance obligations include sales of systems, spare parts, and services; as well as, installation and training services included in customer contracts, both of which have been deemed immaterial in the context of the contract.
Determine the transaction price. The transaction price for the Company’s contracts with its customers consists of both fixed and variable consideration provided it is probable that a significant reversal of revenue will not occur when the uncertainty related to variable consideration is resolved. Fixed consideration includes amounts to be contractually billed to the customer while variable consideration includes estimates for discounts and credits for future usage which are based on contractual terms outlined in volume purchase agreements and other factors known at the time. The Company generally invoices customers at shipment and for professional services either as provided or upon meeting certain milestones. Customer invoices are generally due within 30 to 90 days after issuance. The Company’s 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, the Company allocates the transaction price to the performance obligations on a relative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to historical discounting trends for products and services and pricing practices in different geographies.
Recognize revenue when or as the Company satisfies a performance obligation. Revenue for systems and spares are recognized at a point in time, which is generally upon shipment or delivery. Revenue from services is recognized over time as services are completed or ratably over the contractual period of generally one year or less.
Deferred Revenue
Revenue of $261.0 million included in deferred revenue at June 25, 2018 was recognized during the three months ended September 23, 2018.
The following table summarizes the transaction price for contracts that have not yet been recognized as revenue as of September 23, 2018 and when the Company expects to recognize the amounts as revenue:
 
Less than 1 Year
 
1-3 Years
 
More than 3 Years
 
Total
 
(In thousands)
Deferred revenue
$
555,351

 
$
70,964

(1) 
$

 
$
626,315


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

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The following table presents the Company’s revenues disaggregated by geographic region:
 
Three Months Ended
September 23,
2018
 
September 24,
2017
 
(In thousands)
Japan
$
670,040

 
$
494,423

China
593,831

 
337,589

Korea
379,771

 
941,020

Taiwan
280,050

 
338,730

Southeast Asia
198,135

 
119,762

United States
120,105

 
157,224

Europe
88,759

 
89,392


$
2,330,691

 
$
2,478,140

 
 
 
 
The following table presents the percentages of system revenues to each of the primary markets we serve:
 
Three Months Ended
 
September 23, 2018
Memory
77
%
Foundry
17
%
Logic/integrated device manufacturing
6
%

NOTE 4 — EQUITY-BASED COMPENSATION PLANS
The Lam Research Corporation 2015 Stock Incentive Plan, as amended (the “2015 Plan”), provides for the grant of non-qualified equity-based awards of the Company’s Common Stock to eligible employees and non-employee directors, including stock options, restricted stock units (“RSUs”), and market-based performance RSUs (“market-based PRSUs”). An option is a right to purchase Common Stock at a set price. An RSU award is an agreement to issue a set number of shares of Common Stock at the time of vesting. The Company’s market-based PRSUs contain both a market condition and a service condition. The Company’s options, RSU, and market-based PRSU awards typically vest over a period of three years. The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions.
The Company recognized the following equity-based compensation expense (including expense related to the employee stock purchase plan) and related income tax benefit in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
 
(in thousands)
Equity-based compensation expense
$
50,343

 
$
41,783

Income tax benefit recognized related to equity-based compensation expense
$
8,104

 
$
13,387



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NOTE 5 — OTHER EXPENSE, NET
The significant components of other expense, net, are as follows:
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
 
(in thousands)
Interest income
$
18,933

 
$
20,209

Interest expense
(21,788
)
 
(23,905
)
Gains on deferred compensation plan related assets, net
5,213

 
3,453

Loss on extinguishment of debt
83

 

Foreign exchange gains (losses), net
51

 
(3,000
)
Other, net
(2,869
)
 
(2,259
)
 
$
(377
)
 
$
(5,502
)

NOTE 6 — INCOME TAX EXPENSE
On December 22, 2017, the “Tax Cuts & Jobs Act” (hereafter referred to as “U.S. tax reform”) was signed into law and was effective for the Company starting in the quarter ended December 24, 2017. U.S. tax reform reduces the U.S. federal statutory tax rate from 35% to 21%, mandates payment of a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. The impact on income taxes due to change in legislation is required under the authoritative guidance of Accounting Standards Codification (“ASC”) 740, Income Taxes, to be recognized in the period in which the law is enacted. In conjunction, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which allows for the recording of provisional amounts related to U.S. tax reform and subsequent adjustments related to U.S. tax reform during an up to one-year measurement period that is similar to the measurement period used when accounting for business combinations. The Company has recorded what it believes to be reasonable estimates and the provisional activity is subject to further adjustments under SAB 118. Such adjustments were made during the September 2018 quarter as outlined below, incorporating new information into the estimates; the Company may make further adjustments as new information is made available. In addition, for significant items for which the Company could not make a reasonable estimate, no provisional activity was recorded. The Company will continue to refine the provisional balances and adjustments may be made under SAB 118 during the measurement period as a result of future changes in interpretation, information available, assumptions made by the Company and/or issuance of additional guidance; these adjustments could be material.
The Company recorded an income tax expense of $58.0 million for the three months ended September 23, 2018, which yielded an effective tax rate of approximately 9.8%.
The difference between the U.S. federal statutory tax rate of 21% and the Company’s effective tax rate for the three months ended September 23, 2018 is primarily due to the impact of U.S. tax reform, outlined below, and income in lower tax jurisdictions.
The computation of the one-time transition tax on accumulated unrepatriated foreign earnings was recorded on a provisional basis in the fiscal year ended June 24, 2018 and is therefore subject to potential measurement period adjustments under SAB 118. Such an adjustment was recorded in the Company’s Condensed Consolidated Financial Statements as of the period ended September 23, 2018, incorporating new information into the estimate; the Company may make further adjustments as new information is made available. The adjustment recorded was $36.5 million; revised total estimate is now $919.5 million. The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that was previously deferred from U.S. income taxes. The Company had previously accrued deferred taxes on a portion of this E&P. The Company has not yet completed the calculation of total post-1986 E&P and related income tax pools for its foreign subsidiaries. The Company elected to pay the one-time transition tax over a period of eight years.
Beginning in fiscal year 2019, the Company is subject to the impact of the “Global Intangible Low-Taxed Income” (“GILTI”) provision of U.S. tax reform. The GILTI provision imposes taxes on foreign earnings in excess of a deemed return on tangible assets. The Company has calculated the impact of the GILTI provision on current year earnings and has included the impact in the effective tax rate. In addition, the Company evaluated whether deferred taxes should be recorded in relation to the GILTI provision or if the tax should be recorded in the period in which it occurs. Based on current interpretation, the Company could choose either method as an accounting policy election. The Company made an accounting policy election in the September 2018 quarter to record deferred taxes in relation to the GILTI provision. The Company recorded a provisional benefit for the accounting policy election of $48.0 million. Due to the complexity of the GILTI provision, the Company has not yet finalized

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its analysis of GILTI. Therefore, the provisional amount which was recorded related to the accounting policy election is subject to adjustment during the measurement period under SAB 118.
The Company is in various stages of examinations in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of statute of limitations. The change in unrecognized tax benefits may range up to $31.0 million.
NOTE 7 — NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, restricted stock units, convertible notes, and warrants. Dilutive shares outstanding include the effect of the convertible notes. Refer to Note 12 - Long-term Debt and Other Borrowings for additional information regarding the Company’s convertible notes. The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share. 
 
Three Months Ended
 
September 23, 2018
 
September 24, 2017
 
(in thousands, except per share data)
Numerator:
 
 
 
Net income
$
533,360

 
$
590,690

Denominator:
 
 
 
Basic average shares outstanding
155,658

 
162,141

Effect of potential dilutive securities:
 
 
 
Employee stock plans
1,539

 
2,514

Convertible notes
6,075

 
15,151

Warrants
2,055

 
4,074

Diluted average shares outstanding
165,327

 
183,880

Net income per share - basic
$
3.43

 
$
3.64

Net income per share - diluted
$
3.23

 
$
3.21



For purposes of computing diluted net income per share, weighted-average common shares do not include potentially dilutive securities that are anti-dilutive under the treasury stock method. The following potentially dilutive securities were excluded:
 
Three Months Ended
 
September 23, 2018
 
September 24, 2017
 
(in thousands)
Options and RSUs
87

 
7


Diluted shares outstanding do not include any effect resulting from note hedges associated with the Company’s 2018 Notes as their impact would have been anti-dilutive.
NOTE 8 — FINANCIAL INSTRUMENTS
The Company maintains an investment portfolio of various holdings, types, and maturities. The Company’s mutual funds, which are related to the Company’s obligations under the deferred compensation plan, are classified as trading securities. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Differences between the cost and fair value of trading securities are recognized as other income (expense) in the Condensed Consolidated Statements of Operations. All of the Company’s other investments are classified as available-for-sale and consequently are recorded in the Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.

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Table of Contents


Fair Value
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.
A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. The level of an asset or liability in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities with sufficient volume and frequency of transactions.
Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or model-derived valuations techniques for which all significant inputs are observable in the market or can be corroborated by observable market data, for substantially the full term of the assets or liabilities.
Level 3: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities and based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data.
The Company’s primary financial instruments include its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and capital leases, and foreign currency related derivative instruments. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of capital lease obligations approximate their carrying value as the substantial majority of these obligations have interest rates that adjust to market rates on a periodic basis. Refer to Note 12 - Long-Term Debt and Other Borrowings for additional information regarding the fair value of the Company’s senior notes and convertible senior notes.
The following table sets forth the Company’s cash, cash equivalents, investments, restricted cash and investments, and other assets measured at fair value on a recurring basis as of September 23, 2018, and June 24, 2018:
 
September 23, 2018
 
 
 
 
 
 
 
 
(Reported Within)
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
(in thousands)
Cash
$
653,135

 
$

 
$

 
$
653,135

 
$
647,238

 
$

 
$
5,897

 
$

Time deposit
980,416

 

 

 
980,416

 
730,389

 

 
250,027

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1,091,683

 

 

 
1,091,683

 
1,091,683

 

 

 

U.S. Treasury and agencies
459,201

 
1

 
(211
)
 
458,991

 
32,929

 
426,062

 

 

Mutual funds
69,807

 
2,390

 
(83
)
 
72,114

 

 

 

 
72,114

Level 1 Total
1,620,691

 
2,391

 
(294
)
 
1,622,788

 
1,124,612

 
426,062

 

 
72,114

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal notes and bonds
152,337

 
2

 
(581
)
 
151,758

 

 
151,758

 

 

Government-sponsored enterprises
11,022

 

 
(204
)
 
10,818

 

 
10,818

 

 

Foreign government bonds
31,052

 

 
(8
)
 
31,044

 

 
31,044

 

 

Corporate notes and bonds
497,206

 
76

 
(999
)
 
496,283

 
65,846

 
430,437

 

 

Mortgage backed securities — residential
746

 

 
(2
)
 
744

 

 
744

 

 

Level 2 Total
692,363

 
78

 
(1,794
)
 
690,647

 
65,846

 
624,801

 

 

Total
$
3,946,605

 
$
2,469

 
$
(2,088
)
 
$
3,946,986

 
$
2,568,085

 
$
1,050,863

 
$
255,924

 
$
72,114

 

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Table of Contents


 
June 24, 2018
 
 
 
 
 
 
 
 
(Reported Within)
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
(in thousands)
Cash
$
708,364

 
$

 
$

 
$
708,364

 
$
702,090

 
$

 
$
6,274

 
$

Time deposit
999,666

 

 

 
999,666

 
749,639

 

 
250,027

 

Level 1:


 


 


 


 


 


 


 


Money market funds
2,341,807

 

 

 
2,341,807

 
2,341,807

 

 

 

U.S. Treasury and agencies
356,679

 

 
(170
)
 
356,509

 
333,721

 
22,788

 

 

Mutual funds
68,568

 
516

 
(142
)
 
68,942

 

 

 

 
68,942

Level 1 Total
2,767,054

 
516

 
(312
)
 
2,767,258

 
2,675,528

 
22,788

 

 
68,942

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal notes and bonds
152,378

 
37

 
(279
)