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Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2019
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-12933 
___________________________________________________________
LAM RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________________________
Delaware
 
94-2634797
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
4650 Cushing Parkway,
Fremont,
California
 
94538
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (510) 572-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par Value $0.001 Per Share
LRCX
The Nasdaq Stock Market
 
 
(Nasdaq Global Select Market)
__________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of October 25, 2019, the Registrant had 145,078,888 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 29,
2019
 
September 23,
2018
Revenue
$
2,165,746

 
$
2,330,691

Cost of goods sold
1,184,036

 
1,272,493

Gross margin
981,710

 
1,058,198

Research and development
286,827

 
291,672

Selling, general, and administrative
157,428

 
174,775

Total operating expenses
444,255

 
466,447

Operating income
537,455

 
591,751

Other expense, net
(12,728
)
 
(377
)
Income before income taxes
524,727

 
591,374

Income tax expense
(58,938
)
 
(58,014
)
Net income
$
465,789

 
$
533,360

Net income per share:
 
 
 
Basic
$
3.22

 
$
3.43

Diluted
$
3.09

 
$
3.23

Number of shares used in per share calculations:
 
 
 
Basic
144,673

 
155,658

Diluted
150,682

 
165,327













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 29,
2019
 
September 23,
2018
Net income
$
465,789

 
$
533,360

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
(8,698
)
 
(6,261
)
Cash flow hedges:
 
 
 
Net unrealized (losses) gains during the period
(691
)
 
6,866

Net losses reclassified into earnings
1,350

 
1,148

 
659

 
8,014

Available-for-sale investments:
 
 
 
Net unrealized losses during the period
(1,000
)
 
(287
)
Net losses (gains) reclassified into earnings
390

 
(3
)
 
(610
)
 
(290
)
Defined benefit plans, net change in unrealized component
119

 
(1,743
)
Other comprehensive loss, net of tax
(8,530
)
 
(280
)
Comprehensive income
$
457,259

 
$
533,080


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 29,
2019
 
June 30,
2019
 
(unaudited)
 
(1)
ASSETS
 
 
 
Cash and cash equivalents
$
4,607,182

 
$
3,658,219

Investments
983,650

 
1,772,984

Accounts receivable, less allowance for doubtful accounts of $5,226 as of September 29, 2019, and $5,021 as of June 30, 2019
1,635,643

 
1,455,522

Inventories
1,483,385

 
1,540,140

Prepaid expenses and other current assets
124,755

 
133,544

Total current assets
8,834,615

 
8,560,409

Property and equipment, net
1,030,168

 
1,059,077

Restricted cash and investments
254,654

 
255,177

Goodwill
1,484,392

 
1,484,597

Intangible assets, net
206,256

 
216,950

Other assets
533,417

 
425,123

Total assets
$
12,343,502

 
$
12,001,333

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
415,808

 
$
376,561

Accrued expenses and other current liabilities
990,035

 
946,641

Deferred profit
406,681

 
381,317

Current portion of long-term debt and finance lease obligations
645,158

 
667,131

Total current liabilities
2,457,682

 
2,371,650

Long-term debt and finance lease obligations, less current portion
3,788,089

 
3,822,768

Income taxes payable
856,895

 
892,790

Other long-term liabilities
261,890

 
190,821

Total liabilities
7,364,556

 
7,278,029

Commitments and contingencies

 

Temporary equity, convertible notes
42,553

 
49,439

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

 

Common stock, at par value of $0.001 per share; authorized, 400,000 shares; issued and outstanding, 144,871 shares at September 29, 2019, and 144,433 shares at June 30, 2019
145

 
144

Additional paid-in capital
6,456,492

 
6,409,405

Treasury stock, at cost; 140,970 shares at September 29, 2019, and 140,573 shares at June 30, 2019
(11,680,689
)
 
(11,602,573
)
Accumulated other comprehensive loss
(72,560
)
 
(64,030
)
Retained earnings
10,233,005

 
9,930,919

Total stockholders’ equity
4,936,393

 
4,673,865

Total liabilities and stockholders’ equity
$
12,343,502

 
$
12,001,333

(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 29,
2019
 
September 23,
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
465,789

 
$
533,360

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
64,664

 
79,805

Deferred income taxes
(2,992
)
 
(83,501
)
Equity-based compensation expense
42,905

 
50,343

Amortization of note discounts and issuance costs
1,675

 
1,245

Other, net
4,026

 
2,191

Changes in operating assets and liabilities
(112,020
)
 
136,843

Net cash provided by operating activities
464,047

 
720,286

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures and intangible assets
(39,256
)
 
(56,098
)
Purchases of available-for-sale securities
(147,632
)
 
(749,829
)
Maturities of available-for-sales securities
600,347

 
70,216

Sales of available-for-sale securities
337,763

 
67,030

Other, net
(540
)
 
(3,650
)
Net cash provided by (used for) investing activities
750,682

 
(672,331
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on debt
(28,965
)
 
(79,831
)
Net repayments of commercial paper

 
(86
)
Treasury stock purchases
(78,132
)
 
(1,735,895
)
Dividends paid
(158,868
)
 
(174,372
)
Proceeds from issuance of common stock
3,869

 

Other, net

 
(9
)
Net cash used for financing activities
(262,096
)
 
(1,990,193
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(4,193
)
 
(2,311
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
948,440

 
(1,944,549
)
Cash, cash equivalents, and restricted cash at beginning of period
3,913,396

 
4,768,558

Cash, cash equivalents, and restricted cash at end of period
$
4,861,836

 
$
2,824,009

Schedule of non-cash transactions:
 
 
 
Accrued payables for stock repurchases
13

 
162

Accrued payables for capital expenditures
30,333

 
36,613

Dividends payable
166,721

 
167,907

Transfers of inventory to property and equipment, net
13,997

 
25,613

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash
September 29,
2019
 
September 23,
2018
Cash and cash equivalents
$
4,607,182

 
$
2,568,085

Restricted cash and investments
254,654

 
255,924

Total cash, cash equivalents, and restricted cash
$
4,861,836

 
$
2,824,009


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 29, 2019

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

 
$
144

 
$
6,409,405

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

 
$
4,673,865

Sale of common stock
111

 

 
3,869

 

 

 

 
3,869

Purchase of treasury stock
(397
)
 

 

 
(78,116
)
 

 

 
(78,116
)
Equity-based compensation expense

 

 
42,905

 

 

 

 
42,905

Effect of conversion of convertible notes
724

 
1

 
(6,573
)
 

 

 

 
(6,572
)
Reclassification from temporary to permanent equity

 

 
6,886

 

 

 

 
6,886

Adoption of ASU 2016-02

 

 

 

 

 
3,018

 
3,018

Net income

 

 

 

 

 
465,789

 
465,789

Other comprehensive loss

 

 

 

 
(8,530
)
 

 
(8,530
)
Cash dividends declared ($1.15 per common share)

 

 

 

 

 
(166,721
)
 
(166,721
)
Balance at September 29, 2019
144,871

 
$
145

 
$
6,456,492

 
$
(11,680,689
)
 
$
(72,560
)
 
$
10,233,005

 
$
4,936,393

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 23, 2018

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

 
$
157

 
$
6,144,425

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

 
$
6,501,851

Sale of common stock
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

 

 

 

 

 
139,355

 
139,355

Adoption of ASU 2016-16

 

 

 

 

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

 

 

 

 
(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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


See Notes to Condensed Consolidated Financial Statements
7

Table of Contents


LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2019
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of Lam Research Corporation (“Lam Research” or the “Company”) for the fiscal year ended June 30, 2019, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended June 30, 2019 (the “2019 Form 10-K”). The Company’s reports on Form 10-K, Form 10-Q and Form 8-K are available online at the Securities and Exchange Commission website on the Internet. The address of that site is www.sec.gov. The Company also posts its reports on Form 10-K, Form 10-Q and Form 8-K on its corporate website at http://investor.lamresearch.com. The content on any website referred to in this Form 10-Q is not a part of or incorporated by reference in this Form 10-Q unless expressly noted.
The condensed consolidated financial statements include the accounts of Lam Research and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s reporting period is a 52/53-week fiscal year. The Company’s current fiscal year will end June 28, 2020 and includes 52 weeks. The quarters ended September 29, 2019 (the “September 2019 quarter”) and September 23, 2018 (the “September 2018 quarter”) included 13 weeks.
Reclassifications: Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases.” The amendment establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. In January 2018 and July 2018 the FASB issued ASU 2018-01 and ASU 2018-11 amending the effects of ASU 2016-02, which in combination with ASU 2016-02 were codified as Accounting Standard Codification topic 842 (“ASC 842”). The Company adopted ASC 842 on the first day of the current fiscal year, July 1, 2019, under the modified-retrospective approach, applying the amendments to prospective reporting periods. Results for reporting periods beginning on or after July 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under ASC 840. 
The Company elected the package of practical expedients that allowed the Company not to reassess (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct lease costs for existing leases. The Company did not elect to use hindsight in connection with the adoption of ASC 842. 
The Company adopted ASC 842 by recording operating right-of-use assets of $110.8 million, net of deferred rent liabilities of $3.0 million that were reclassified to operating right-of-use assets, and operating lease liabilities of $113.8 million.  The Company also recognized an adjustment of $3.0 million to retained earnings, net of tax; a reduction of $40.4 million to property and equipment, net; and a reduction of $43.8 million to finance leases ($42.3 million of which was previously recognized in long-term debt and finance lease obligations, less current portion and the remaining was previously recognized in current portion of long-term debt and finance lease obligations) related to its de-recognition of its previously recorded build-to-suit arrangements. The adoption of the standard did not materially impact the Company’s Condensed Consolidated Statement of Operations and had no impact on cash flows.  
Updates Not Yet Effective
In June 2016, the FASB released ASU 2016-13, “Financial Instruments Credit Losses.” The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year

8



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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.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808).” The amendment clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606 when the counterparty is a customer for a good or service that is a distinct unit of account. The amendment also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. The standard should be applied retrospectively to the period when the Company initially adopted ASC 606. The Company is currently evaluating the impact of adoptions on its Condensed Consolidated Financial Statements.
In April 2019, the FASB issued ASU 2019-04,”Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, that clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective starting in the first quarter of fiscal year 2021. The amendments of ASU 2017-12 were effective in the first quarter of fiscal year 2020, and did not have a material impact on the Company’s Condensed Consolidated Financial Statements. The Company continues to evaluate the impact of ASU 2016-13 and will consider the amendments of ASU 2019-04 as part of that process.
NOTE 3 — REVENUE
Deferred Revenue
Revenue of $198.0 million included in deferred revenue at June 30, 2019 was recognized during the three months ended September 29, 2019.
The following table summarizes the transaction price for contracts that have not yet been recognized as revenue as of September 29, 2019 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
$
449,157

 
$
31,778

(1) 
$

 
$
480,935


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

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The following table presents the Company’s revenues disaggregated by geographic region:
 
Three Months Ended
September 29,
2019
 
September 23,
2018
 
(In thousands)
China
$
591,668

 
$
593,831

Korea
451,483

 
379,771

Taiwan
391,492

 
280,050

Japan
273,673

 
670,040

Southeast Asia
213,755

 
198,135

United States
183,659

 
120,105

Europe
60,016

 
88,759


$
2,165,746

 
$
2,330,691


The following table presents the percentages of system revenues to each of the primary markets we serve:
 
Three Months Ended
 
September 29,
2019
 
September 23,
2018
Memory
64
%
 
77
%
Foundry
25
%
 
17
%
Logic/integrated device manufacturing
11
%
 
6
%

NOTE 4 — EQUITY-BASED COMPENSATION PLANS
The Lam Research Corporation 2015 Stock Incentive Plan, as amended (the “2015 Plan”), provides for the grant of non-qualified equity-based awards of the Company’s Common Stock to eligible employees and non-employee directors, including stock options, restricted stock units (“RSUs”), and market-based performance RSUs (“market-based PRSUs”). An option is a right to purchase Common Stock at a set price. An RSU award is an agreement to issue a set number of shares of Common Stock at the time of vesting. The Company’s market-based PRSUs contain both a market condition and a service condition. The Company’s 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 29,
2019
 
September 23,
2018
 
(in thousands)
Equity-based compensation expense
$
42,905

 
$
50,343

Income tax benefit recognized related to equity-based compensation expense
$
9,818

 
$
8,104




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NOTE 5 — OTHER EXPENSE, NET
The significant components of other expense, net, are as follows:
 
Three Months Ended
 
September 29,
2019
 
September 23,
2018
 
(in thousands)
Interest income
$
31,784

 
$
18,933

Interest expense
(43,995
)
 
(21,788
)
(Losses) gains on deferred compensation plan-related assets, net
(436
)
 
5,213

Foreign exchange (losses) gains, net
(529
)
 
51

Other, net
448

 
(2,786
)
 
$
(12,728
)
 
$
(377
)

NOTE 6 — INCOME TAX EXPENSE
The Company recorded an income tax expense of $58.9 million for the three months ended September 29, 2019, which yielded an effective tax rate of approximately 11.2%.
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 29, 2019 is primarily due to income in lower tax jurisdictions and U.S. taxation on low-taxed foreign income.
The Internal Revenue Service (“IRS”) is examining the Company’s U.S. federal income tax return for the fiscal year ended June 24, 2018. As of September 29, 2019, no significant adjustments have been proposed by the IRS. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the IRS will occur.
The Company is in various stages of examinations in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of statute of limitations. The change in unrecognized tax benefits may range up to $9.0 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 29,
2019
 
September 23,
2018
 
(in thousands, except per share data)
Numerator:
 
 
 
Net income
$
465,789

 
$
533,360

Denominator:
 
 
 
Basic average shares outstanding
144,673

 
155,658

Effect of potential dilutive securities:
 
 
 
Employee stock plans
1,190

 
1,539

Convertible notes
4,819

 
6,075

Warrants

 
2,055

Diluted average shares outstanding
150,682

 
165,327

Net income per share - basic
$
3.22

 
$
3.43

Net income per share - diluted
$
3.09

 
$
3.23



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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 29,
2019
 
September 23,
2018
 
(in thousands)
Options and RSUs
155

 
87


NOTE 8 — FINANCIAL INSTRUMENTS
The Company maintains an investment portfolio of various holdings, types, and maturities. The Company’s mutual funds, which are related to the Company’s obligations under the deferred compensation plan, are classified as trading securities. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Differences between the cost and fair value of trading securities are recognized as other income (expense) in the Condensed Consolidated Statements of Operations. All of the Company’s other investments are classified as available-for-sale and consequently are recorded in the Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.
Fair Value
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.
A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. The level of an asset or liability in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities with sufficient volume and frequency of transactions.
Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or model-derived valuations techniques for which all significant inputs are observable in the market or can be corroborated by observable market data, for substantially the full term of the assets or liabilities.
Level 3: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities and based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data.
The Company’s primary financial instruments include its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and leases, and foreign currency related derivative instruments. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of lease obligations approximate their carrying value as the substantial majority of these obligations have interest rates that adjust to market rates on a periodic basis. Refer to Note 12 - Long-Term Debt and Other Borrowings for additional information regarding the fair value of the Company’s senior notes and convertible senior notes.

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Table of Contents


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 29, 2019, and June 30, 2019:
 
September 29, 2019
 
 
 
 
 
 
 
 
 
(Reported Within)
 
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
 
(in thousands)
Cash
$
471,656

 
$

 
$

 
$
471,656

 
$
467,030

 
$

 
$
4,626

 
$

Time deposit
1,600,370

 

 

 
1,600,370

 
1,350,342

 

 
250,028

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1,948,349

 

 

 
1,948,349

 
1,948,349

 

 

 

U.S. Treasury and agencies
819,625

 
195

 
(20
)
 
819,800

 
682,212

 
137,588

 

 

Mutual funds
72,889

 
3,602

 
(289
)
 
76,202

 

 

 

 
76,202

Level 1 Total
2,840,863

 
3,797

 
(309
)
 
2,844,351

 
2,630,561

 
137,588

 

 
76,202

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
53,526

 
2

 
(23
)
 
53,505

 
37,496

 
16,009

 

 

Foreign government bonds
52,866

 
18

 
(2
)
 
52,882

 
26,554

 
26,328

 

 

Corporate notes and bonds
865,133

 
1,533

 
(45
)
 
866,621

 
95,199

 
771,422

 

 

Mortgage backed securities — residential
5,039

 
13

 

 
5,052

 

 
5,052

 

 

Mortgage backed securities — commercial
27,142

 
115

 
(6
)
 
27,251

 

 
27,251

 

 

Level 2 Total
1,003,706

 
1,681

 
(76
)
 
1,005,311

 
159,249

 
846,062

 

 

Total
$
5,916,595

 
$
5,478

 
$
(385
)
 
$
5,921,688

 
$
4,607,182

 
$
983,650

 
$
254,654

 
$
76,202

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

 
$

 
$

 
$
467,460

 
$
462,310

 
$

 
$
5,150

 
$

Time deposit
1,563,686

 

 

 
1,563,686

 
1,313,659

 

 
250,027

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1,644,659

 

 

 
1,644,659

 
1,644,659

 

 

 

U.S. Treasury and agencies
465,655

 
283

 
(24
)
 
465,914

 
86,981

 
378,933

 

 

Mutual funds
76,961

 
1,063

 
(283
)
 
77,741

 

 

 

 
77,741

Level 1 Total
2,187,275

 
1,346

 
(307
)
 
2,188,314

 
1,731,640

 
378,933

 

 
77,741

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
16,005

 
5

 
(41
)
 
15,969

 

 
15,969

 

 

Foreign government bonds
24,408

 
35

 

 
24,443

 

 
24,443

 

 

Corporate notes and bonds
1,466,167

 
2,310

 
(99
)
 
1,468,378

 
150,610

 
1,317,768

 

 

Mortgage backed securities — residential
6,148

 

 
(4
)
 
6,144

 

 
6,144

 

 

Mortgage backed securities — commercial
29,587

 
140

 

 
29,727

 

 
29,727

 

 

Level 2 Total
1,542,315