Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

	Page
Consolidated Statements of Operations — Years Ended June 30, 2019, June 24, 2018, and June 25, 2017	51
Consolidated Statements of Comprehensive Income — Years Ended June 30, 2019, June 24, 2018, and June 25, 2017	52
Consolidated Balance Sheets — June 30, 2019, and June 24, 2018	53
Consolidated Statements of Cash Flows — Years Ended June 30, 2019, June 24, 2018, and June 25, 2017	54
Consolidated Statements of Stockholders’ Equity — Years Ended June 30, 2019, June 24, 2018, and June 25, 2017	56
Notes to Consolidated Financial Statements	58
Reports of Independent Registered Public Accounting Firm	95

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Lam Research Corporation 2019 10-K 50

LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
Revenue	$	9,653,559			$	11,076,998			$	8,013,620
Cost of goods sold	5,295,100				5,911,966				4,410,261
Gross margin	4,358,459				5,165,032				3,603,359
Research and development	1,191,320				1,189,514				1,033,742
Selling, general, and administrative	702,407				762,219				667,485
Total operating expenses	1,893,727				1,951,733				1,701,227
Operating income	2,464,732				3,213,299				1,902,132
Other expense, net	(18,161		)		(61,510		)		(90,459		)
Income before income taxes	2,446,571				3,151,789				1,811,673
Income tax expense	(255,141		)		(771,108		)		(113,910		)
Net income	$	2,191,430			$	2,380,681			$	1,697,763
Net income per share:
Basic	$	14.37			$	14.73			$	10.47
Diluted	$	13.70			$	13.17			$	9.24
Number of shares used in per share calculations:
Basic	152,478				161,643				162,222
Diluted	159,915				180,782				183,770

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2019 10-K 51

LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
Net income	$	2,191,430			$	2,380,681			$	1,697,763
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(6,648		)		9,649				(2,843		)
Cash flow hedges:
Net unrealized gains (losses) during the period	2,461				(6,960		)		5,841
Net (gains) losses reclassified into earnings	(2,749		)		3,729				8,971
	(288		)		(3,231		)		14,812
Available-for-sale investments:
Net unrealized gains (losses) during the period	3,535				(45,382		)		(3,789		)
Net (gains) losses reclassified into earnings	(199		)		43,086				(1		)
	3,336				(2,296		)		(3,790		)
Defined benefit plans, net change in unrealized component	(2,981		)		129				(546		)
Other comprehensive (loss) income, net of tax	(6,581		)		4,251				7,633
Comprehensive income	$	2,184,849			$	2,384,932			$	1,705,396

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2019 10-K 52

LAM RESEARCH CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	June 30, 2019				June 24, 2018
ASSETS:
Cash and cash equivalents	$	3,658,219			$	4,512,257
Investments	1,772,984				437,338
Accounts receivable, less allowance for doubtful accounts of $5,021 as of June 30, 2019 and $5,343 as of June 24, 2018	1,455,522				2,176,936
Inventories	1,540,140				1,876,162
Prepaid expenses and other current assets	133,544				147,218
Total current assets	8,560,409				9,149,911
Property and equipment, net	1,059,077				902,547
Restricted cash and investments	255,177				256,301
Goodwill	1,484,597				1,484,904
Intangible assets, net	216,950				317,836
Other assets	425,123				367,979
Total assets	$	12,001,333			$	12,479,478
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Trade accounts payable	$	376,561			$	510,983
Accrued expenses and other current liabilities	946,641				1,309,209
Deferred profit	381,317				720,086
Commercial paper and current portion of convertible notes and capital leases	667,131				610,030
Total current liabilities	2,371,650				3,150,308
Senior notes, convertible notes, and capital leases, less current portion	3,822,768				1,806,562
Income taxes payable	892,790				851,936
Other long-term liabilities	190,821				90,629
Total liabilities	7,278,029				5,899,435
Commitments and contingencies
Temporary equity, convertible notes	49,439				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 144,433 shares at June 30, 2019, and 156,892 shares at June 24, 2018	144				157
Additional paid-in capital	6,409,405				6,144,425
Treasury stock, at cost, 140,573 shares at June 30, 2019, and 119,679 shares at June 24, 2018	(11,602,573		)		(7,846,476		)
Accumulated other comprehensive loss	(64,030		)		(57,449		)
Retained earnings	9,930,919				8,261,194
Total stockholders’ equity	4,673,865				6,501,851
Total liabilities and stockholders’ equity	$	12,001,333			$	12,479,478

See Notes to Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,191,430			$	2,380,681			$	1,697,763
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	309,281				326,395				306,905
Deferred income taxes	(4,980		)		3,046				104,936
Equity-based compensation expense	187,234				172,216				149,975
Income tax benefit on equity-based compensation plans	—				—				38,747
Excess tax benefits on equity-based compensation plans	—				—				(38,635		)
Impairment of investments	—				42,456				—
(Gains) losses on extinguishment of debt, net	(118		)		(542		)		36,252
Amortization of note discounts and issuance costs	7,343				14,428				25,282
Gain on sale of assets	—				—				(163		)
Other, net	(5,701		)		34,260				19,052
Changes in operating asset and liability accounts:
Accounts receivable, net of allowance	732,138				(501,628		)		(411,287		)
Inventories	281,355				(701,008		)		(307,875		)
Prepaid expenses and other assets	(17,864		)		(14,391		)		(27,269		)
Trade accounts payable	(131,472		)		35,655				126,819
Deferred profit	(178,074		)		112,413				258,473
Accrued expenses and other liabilities	(194,559		)		751,766				50,307
Net cash provided by operating activities	3,176,013				2,655,747				2,029,282
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and intangible assets	(303,491		)		(273,469		)		(157,419		)
Business acquisition, net of cash acquired	—				(115,697		)		—
Purchases of available-for-sale securities	(2,930,049		)		(2,532,829		)		(4,581,851		)
Proceeds from maturities of available-for-sale securities	466,539				650,255				891,002
Proceeds from sales of available-for-sale securities	1,137,302				5,035,460				1,806,963
Proceeds from sale of assets	—				—				1,291
Other, net	(7,355		)		(15,184		)		(12,815		)
Net cash (used for) provided by investing activities	(1,637,054		)		2,748,536				(2,052,829		)

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Lam Research Corporation 2019 10-K 54

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations and payments for debt issuance costs	(117,653		)		(755,694		)		(1,688,313		)
Net proceeds from issuance of long-term debt	2,476,720				—				—
Net (repayment) proceeds from commercial paper	(361,754		)		359,604				—
Proceeds from borrowings on revolving credit facility	—				750,000				—
Repayment of borrowings on revolving credit facility	—				(750,000		)		—
Excess tax benefits on equity-based compensation plans	—				—				38,635
Treasury stock purchases	(3,780,611		)		(2,653,249		)		(811,672		)
Dividends paid	(678,348		)		(307,609		)		(243,495		)
Reissuances of treasury stock related to employee stock purchase plan	77,961				75,624				59,663
Proceeds from issuance of common stock	6,813				9,258				12,913
Other, net	(13,208		)		9				(125		)
Net cash used for financing activities	$	(2,390,080	)		$	(3,272,057	)		$	(2,632,394	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	$	(4,041	)		$	2,593			$	(63	)
Net (decrease) increase in cash, cash equivalents and restricted cash	(855,162		)		2,134,819				(2,656,004		)
Cash, cash equivalents and restricted cash at beginning of year	4,768,558				2,633,739				5,289,743
Cash, cash equivalents and restricted cash at end of year	$	3,913,396			$	4,768,558			$	2,633,739
Schedule of non-cash transactions
Accrued payables for stock repurchases	$	29			$	116			$	—
Accrued payables for capital expenditures	23,185				24,001				17,285
Dividends payable	158,868				174,372				72,738
Transfers of finished goods inventory to property and equipment, net	54,533				57,886				46,855
Supplemental disclosures:
Cash payments for interest	$	76,933			$	84,401			$	104,619
Cash payments for income taxes, net	300,268				142,800				28,104
Reconciliation of cash, cash equivalents, and restricted cash	June 30, 2019				June 24, 2018				June 25, 2017
Cash and cash equivalents	3,658,219				4,512,257				2,377,534
Restricted cash and investments	255,177				256,301				256,205
Total cash, cash equivalents, and restricted cash	3,913,396				4,768,558				2,633,739

See Notes to Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per common share data)

	Common Stock Shares			Common Stock				Additional Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Income(Loss)				Retained Earnings				Total
Balance at June 26, 2016	160,201			$	160			$	5,572,898			$	(4,429,317	)		$	(69,333	)		$	4,820,109			$	5,894,517
Sale of common stock	2,661			3				12,910				—				—				—				12,913
Purchase of treasury stock	(5,322	)		(5		)		—				(811,667		)		—				—				(811,672		)
Income tax benefits on equity-based compensation plans	—			—				38,747				—				—				—				38,747
Reissuance of treasury stock	825			1				34,865				24,797				—				—				59,663
Equity-based compensation expense	—			—				149,975				—				—				—				149,975
Effect of conversion of convertible notes	1,388			1				(1,596		)		—				—				—				(1,595		)
Exercise of warrants	1,970			2				(5		)		—				—				—				(3		)
Reclassification from temporary to permanent equity	—			—				37,691				—				—				—				37,691
Net income	—			—				—				—				—				1,697,763				1,697,763
Other comprehensive income	—			—				—				—				7,633				—				7,633
Cash dividends declared ($1.65 per common share)	—			—				—				—				—				(268,181		)		(268,181		)
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	1,934			2				9,256				—				—				—				9,258
Purchase of treasury stock	(14,786	)		(15		)		—				(2,653,350		)		—				—				(2,653,365		)
Reissuance of treasury stock	677			1				52,562				23,061				—				—				75,624
Equity-based compensation expense	—			—				172,216				—				—				—				172,216
Effect of conversion of convertible notes	10,199			10				(26,776		)		—				—				—				(26,766		)
Effect of bond hedge, cash in lieu of shares	(2,855	)		(3		)		13				—				—				—				10
Reclassification from temporary to permanent equity	—			—				91,669				—				—				—				91,669
Adoption of ASU 2016-09	—			—				—				—				—				40,065				40,065
Net income	—			—				—				—				—				2,380,681				2,380,681
Other comprehensive income	—			—				—				—				4,251				—				4,251
Cash dividends declared ($2.55 per common share)	—			—				—				—				—				(409,243		)		(409,243		)
Balance at June 24, 2018	156,892			157				6,144,425				(7,846,476		)		(57,449		)		8,261,194				6,501,851

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	Common Stock Shares			Common Stock				Additional Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Income(Loss)				Retained Earnings				Total
Sale of common stock	1,090			1				6,812				—				—				—				6,813
Purchase of treasury stock	(21,059	)		(21		)		—				(3,780,503		)		—				—				(3,780,524		)
Reissuance of treasury stock	622			—				53,555				24,406				—				—				77,961
Equity-based compensation expense	—			—				187,234				—				—				—				187,234
Effect of conversion of convertible notes	2,783			3				(11,361		)		—				—				—				(11,358		)
Exercise of warrants	4,105			4				(12		)		—				—				—				(8		)
Reclassification from temporary to permanent equity	—			—				28,752				—				—				—				28,752
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	—			—				—				—				—				2,191,430				2,191,430
Other comprehensive loss	—			—				—				—				(4,354		)		—				(4,354		)
Cash dividends declared ($4.40 per common share)	—			—				—				—				—				(662,844		)		(662,844		)
Balance at June 30, 2019	144,433			$	144			$	6,409,405			$	(11,602,573	)		$	(64,030	)		$	9,930,919			$	4,673,865

1. Refer to Note 3 - Recent Accounting Pronouncements for more information regarding these FASB Accounting Standard Updates.

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2019 10-K 57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

Note 1: Company and Industry Information

The Company designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. 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.

The Company sells its products and services primarily to companies involved in the production of semiconductors in the United States, China, Europe, Japan, Korea, Southeast Asia, and Taiwan.

The semiconductor industry is cyclical in nature and has historically experienced periodic downturns and upturns. Today’s leading indicators of changes in customer investment patterns, such as electronics demand, memory pricing, and foundry utilization rates, may not be any more reliable than in prior years. Demand for the Company’s equipment can vary significantly from period to period as a result of various factors including, but not limited to economic conditions; supply, demand, and prices for semiconductors; customer capacity requirements; and the Company’s ability to develop and market competitive products. For these and other reasons, the Company’s results of operations for fiscal years 2019, 2018, and 2017 may not necessarily be indicative of future operating results.

Reclassification: Certain amounts for the fiscal years 2018 and 2017 Consolidated Statement of Cash Flows, and certain amounts within the 2017 footnotes have been reclassified to conform to the fiscal year 2019 presentation.

Note 2: Summary of Significant Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make 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. The Company bases its estimates and assumptions on historical experience and on various other assumptions it believes to be applicable and evaluates them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates.

Revenue Recognition: On June 25, 2018, the Company adopted FASB ASU No. 2014-09 (ASC 606) - Revenue From Contracts with Customers which provides guidance for revenue recognition that superseded the revenue recognition requirements in ASC 605, Revenue Recognition and most industry specific guidance.

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.

Identify the performance obligations in the contract. Performance obligations include sales of systems, spare parts, and services. In addition, customer contracts contain provisions for installation and training services 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

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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.

Inventory Valuation: Inventories are stated at the lower of cost or net realizable value using standard costs that approximate actual costs on a first-in, first-out basis. Finished goods are reported as inventories until the point of title transfer to the customer. Unless specified in the terms of sale, title generally transfers at the physical transfer of the products to the freight carriers. Transfer of title for shipments to Japanese customers occurs at the time of customer acceptance.

Management evaluates the need to record adjustments for impairment of inventory at least quarterly. The Company’s 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 market value if less than cost. Estimates of market value include but are not limited to management’s forecasts related to the Company’s 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 the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period in which the revision is made.

Warranty: Typically, the sale of semiconductor capital equipment includes providing parts and service warranties to customers as part of the overall price of the system. The Company provides standard warranties for its systems. The Company records a provision for estimated warranty expenses to cost of sales for each system when it recognizes revenue. The Company does not maintain general or unspecified reserves; all warranty reserves are related to specific systems. All actual or estimated parts and labor costs incurred in subsequent periods are charged to those established reserves on a system-by-system basis.

While the Company periodically monitors the performance and cost of warranty activities, if actual costs incurred are different than its estimates, the Company may recognize adjustments to provisions in the period in which those differences arise or are identified. In addition to the provision of standard warranties, the Company offers customer-paid extended warranty services. Revenues for extended maintenance and warranty services with a fixed payment amount are recognized on a straight-line basis over the term of the contract. Related costs are recorded as incurred.

Equity-based Compensation — Employee Stock Plans: The Company recognizes the fair value of equity-based compensation expense. The Company determines the fair value of its RSUs, excluding market-based performance RSUs, based upon the fair market value of Company’s Common Stock at the date of grant, discounted for dividends. The Company estimates the fair value of its market-based performance RSUs using a Monte Carlo simulation model at the date of the grant. The Company estimates the fair value of its stock options 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. The Company amortizes the fair value of equity-based awards over the vesting periods of the award, and the Company has elected to use the straight-line method of amortization.

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,

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as well as the tax effect of carryforwards. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Realization of its net deferred tax assets is dependent on future taxable income. The Company believes 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 the Company determines that it will not be able to realize all or part of its net deferred tax assets, an adjustment will be charged to earnings in the period such determination is made. Likewise, if the Company later determines that it is more likely than not that the deferred tax assets will be realized, then the previously provided valuation allowance will be reversed.

The Company recognizes the benefit from a tax position only if it is more likely than not that the position will be sustained upon audit based solely on the technical merits of the tax position. The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Goodwill and Intangible Assets: The valuation of intangible assets acquired in a business combination requires the use of management estimates including but not limited to estimating future expected cash flows from assets acquired and determining discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable, and as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available.

Goodwill represents the amount by which the purchase price in each business combination exceeds the fair value of the net tangible and identifiable intangible assets acquired. Each component of the Company for which discrete financial information is available and for which management regularly reviews the results of operations is considered a reporting unit. All goodwill acquired in a business combination is assigned to one or more reporting units as of the acquisition date. Goodwill is assigned to the Company’s reporting units that are expected to benefit from the synergies of the combination. The goodwill assigned to a reporting unit is the difference between the acquisition consideration assigned to the reporting unit on a relative fair value basis and the fair value of acquired assets and liabilities that can be specifically attributed to the reporting unit. The Company tests goodwill and identifiable intangible assets with indefinite useful lives for impairment at least annually. The Company amortizes intangible assets with estimable useful lives over their respective estimated useful lives, and the Company reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable and the carrying amount exceeds its fair value.

The Company reviews goodwill at least annually for impairment. If certain events or indicators of impairment occur between annual impairment tests, the Company would perform an impairment test at that date. In testing for a potential impairment of goodwill, the Company (1) allocates goodwill to its reporting units to which the acquired goodwill relates, (2) estimates the fair value of its reporting units, and (3) determines the carrying value (book value) of those reporting units. Furthermore, if the estimated fair value of a reporting unit is less than the carrying value, the Company must estimate the fair value of all identifiable assets and liabilities of 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 the Company’s goodwill impairment process, it first assesses qualitative factors to determine whether it is necessary to perform a quantitative analysis. The Company does not calculate the fair value of a reporting unit unless the Company determines, based on a qualitative assessment, that it is more-likely-than-not that its fair value is less than its carrying amount. The Company performs an annual goodwill impairment analysis as of the first day of its fourth fiscal quarter. The Company did not record impairments of goodwill during the years ended June 30, 2019, June 24, 2018, or June 25, 2017.

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. The Company determines the fair value of its reporting units by using an income approach. Under the income approach, the Company determines fair value based on estimated future cash flows of each reporting unit, 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, the Company makes estimates and judgments about the future cash flows of its reporting units, including estimated growth rates and assumptions about the economic environment. Although the Company’s cash flow forecasts are based on assumptions that are consistent with the plans and estimates it is using to manage the underlying businesses, there is significant judgment involved in

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determining the cash flows attributable to a reporting unit. In addition, the Company makes certain judgments about allocating shared assets to the estimated balance sheets of its 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 impairment of a material amount of the Company’s goodwill balance in future periods, including but not limited to: (1) weakening of the global economy, weakness in the semiconductor equipment industry, or failure of the Company to reach its internal forecasts, which could impact the Company’s ability to achieve its forecasted levels of cash flows and reduce the estimated discounted cash flow value of its reporting units and (2) a decline in the Company’s stock price and resulting market capitalization and to the extent the Company determines that the decline is sustained and indicates a reduction in the fair value of the Company’s 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, the Company may be required to record an impairment charge to write down the asset to its realizable value.

Impairment of Long-lived Assets (Excluding Goodwill): The Company routinely considers whether indicators of impairment of long-lived assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets is less than their carrying value. If the sum is less, the Company recognizes 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. The Company recognizes an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The fair value of the asset then becomes the asset’s new carrying value, which the Company depreciates 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. For the periods presented, there was no impairment of long-lived assets.

Fiscal Year: The Company follows a 52/53-week fiscal reporting calendar, and its fiscal year ends on the last Sunday of June each year. The Company’s most recent fiscal year ended on June 30, 2019 included 53 weeks, and the fiscal years ended June 24, 2018, and June 25, 2017, each included 52 weeks.

Principles of Consolidation: The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Cash Equivalents and Investments: Investments purchased with an original maturity of three months or less are considered cash equivalents. The Company also invests in certain mutual funds, which include equity and fixed- income securities, related to its obligations under its deferred compensation plan, and such investments are classified as trading securities on the consolidated balance sheets. All of the Company’s other investments are classified as available-for-sale at the respective balance sheet dates. The Company accounts for its investment portfolio at fair value. 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 Consolidated Statement of Operations. The investments classified as available-for-sale are recorded at fair value based upon quoted market prices, and difference between the cost and fair value of available-for-sale securities is presented as a component of accumulated other comprehensive income (loss). Unrealized losses on available-for-sale securities are charged against other income (expense) when a decline in fair value is determined to be other than temporary. The Company considers several factors to determine whether a loss is other than temporary. These factors include but are not limited to (1) the extent to which the fair value is less than cost basis, (2) the financial condition and near-term prospects of the issuer, (3) the length of time a security is in an unrealized loss position, and (4) the Company’s ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The Company’s ongoing consideration of these factors could result in additional impairment charges in the future, which could adversely affect its results of operation. An other-than-temporary impairment is triggered when there is an intent to sell the security, it is more-likely-than-not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost basis of the security. Other-than-temporary impairments attributed to credit losses are recognized in the income statement. The specific identification method is used to determine the realized gains and losses on investments. The Company recorded a $42.5 million other-than-temporary impairment charge during the year ended June 24, 2018. No other-than-temporary impairment charges were recognized during the years ended June 30, 2019 or June 25, 2017.

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Allowance for Doubtful Accounts: The Company evaluates its allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed uncollectible, the Company provides a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount it reasonably believes will be collected. The Company also provides allowances based on its write-off history. Bad debt expense was not material for fiscal years ended June 30, 2019, June 24, 2018, and June 25, 2017.

Property and Equipment: Property and equipment is stated at cost. Equipment is depreciated by the straight-line method over the estimated useful lives of the assets, generally three to five years. Furniture and fixtures are depreciated by the straight-line method over the estimated useful lives of the assets, generally five years. Software is amortized by the straight-line method over the estimated useful lives of the assets, generally three to five years. Buildings are depreciated by the straight-line method over the estimated useful lives of the assets, generally twenty-five years. Leasehold improvements are generally amortized by the straight-line method over the shorter of the life of the related asset or the term of the underlying lease. Amortization of capital leases is included with depreciation expense.

Derivative Financial Instruments: In the normal course of business, the Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations. The Company’s policy is to mitigate the effect of these exchange rate fluctuations on certain foreign currency denominated business exposures. The Company has a policy that allows the use of derivative financial instruments to hedge foreign currency exchange rate fluctuations on forecasted revenue and expenses and net monetary assets or liabilities denominated in various foreign currencies. The Company carries derivative financial instruments (derivatives) on the balance sheet at their fair values. The Company does not use derivatives for trading or speculative purposes. The Company does not believe that it is exposed to more than a nominal amount of credit risk in its interest rate and foreign currency hedges, as counterparties are large, global and well-capitalized financial institutions. The Company’s exposures are in liquid currencies (Japanese yen, Swiss francs, euros, Taiwanese dollars, Chinese renminbi, Singapore dollars, and Korean won), so there is minimal risk that appropriate derivatives to maintain the Company’s hedging program would not be available in the future.

To hedge foreign currency risks, the Company uses foreign currency exchange forward and option contracts, where possible and prudent. These hedge contracts are valued using standard valuation formulas with assumptions about future foreign currency exchange rates derived from existing exchange rates, interest rates, and other market factors.

The Company considers its most current forecast in determining the level of foreign currency denominated revenue and expenses to hedge as cash flow hedges. The Company combines these forecasts with historical trends to establish the portion of its expected volume to be hedged. The revenue and expenses are hedged and designated as cash flow hedges to protect the Company from exposures to fluctuations in foreign currency exchange rates. If the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge are reclassified from accumulated other comprehensive income (loss) to other income (expense), net on the Consolidated Statement of Operations at that time.

Guarantees: The Company has certain operating leases that contain provisions whereby the properties subject to the operating leases may be remarketed at lease expiration. The Company has guaranteed to the lessor an amount approximating the lessor’s investment in the property. Also, the Company’s guarantees generally include certain indemnifications to its lessors under operating lease agreements for environmental matters, potential overdraft protection obligations to financial institutions related to one of the Company’s subsidiaries, indemnifications to the Company’s customers for certain infringement of third-party intellectual property rights by its products and services, indemnifications for its officers and directors, and the Company’s warranty obligations under sales of its products.

Foreign Currency Translation: The Company’s non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, primarily generate and expend cash in their local currency. Accordingly, all balance sheet accounts of these local functional currency subsidiaries are translated into U.S. dollars at the fiscal period-end exchange rate, and income and expense accounts are translated into U.S. dollars using average rates in effect for the period, except for costs related to those balance sheet items that are translated using historical exchange rates. The resulting translation adjustments are recorded as cumulative translation adjustments and are a component of accumulated other comprehensive

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income (loss). Translation adjustments are recorded in other income (expense), net, where the U.S. dollar is the functional currency.

Note 3: 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 connection with the adoption of ASC 606, the Company’s revenue recognition policy has been amended, refer to Note 2 - Summary of Significant Accounting Policies for a description of the policy.

The cumulative effect of the changes made to the Company’s 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
Stockholder’s equity	$	6,501,851			$	139,355			$	6,641,206

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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 Consolidated Statement of Operations and Consolidated Balance Sheet was as follows:

	Year Ended
June 30, 2019
	As Reported				Without adoption of ASC 606				Effect of Change Higher/(Lower)
	(in thousands)
Revenue	$	9,653,559			$	9,049,790			$	603,769
Cost of goods sold	$	5,295,100			$	5,016,679			$	278,421

	June 30, 2019
	As Reported				Without adoption of ASC 606				Effect of Change Higher/(Lower)
	(in thousands)
Deferred profit	$	381,317			$	846,422			$	(465,105	)
Retained earnings	$	9,930,919			$	9,465,814			$	465,105

Except as disclosed above, the adoption of ASC 606 did not have a significant impact on the Company’s Consolidated Statement of Operations for the year ended June 30, 2019.

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 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 the 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 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 offset to other assets on its Consolidated Financial Statements.

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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 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 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. The adoption of these amendments resulted in minor changes within its Consolidated Financial Statements.

Updates Not Yet Effective

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. The standard requires lessees to reflect the majority of leases on their balance sheets as assets and obligations. The Company is required to adopt this standard starting in the first quarter of fiscal year 2020 using a modified-retrospective approach.

The standard provides for certain practical expedients. Among the practical expedients is an optional transition method that allows companies to apply the guidance at the adoption date and recognize a cumulative-effect adjustment to retained earnings/(deficit) on the adoption date. The Company plans to elect this practical expedient upon adoption. The Company also plans to elect the package of practical expedients that will allow it to carry forward its determination of whether a lease exists, the classification of a lease, and whether initial direct lease costs exist for purposes of transition to the new standard. The Company does not expect to use the hindsight practical expedient. The Company also plans to elect the short-term lease exemption whereby we will not record an asset or liability for short-term leases.

The Company has completed its scoping reviews, identified its significant leases by geography and by asset type, and developed its accounting policies and expected policy elections, which will take effect upon adoption of the standard. The Company’s implementation of its identified accounting system, which will support the future state leasing process, is almost completed. The Company currently estimates that, upon adoption, it will have total lease assets and total lease liabilities consistent with its existing disclosures.

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 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

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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 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 for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next annual reporting period. As discussed above, the Company adopted ASU 2016-01 in the first quarter of fiscal year 2019 and does not expect the amendments of ASU 2019-04 will have a material impact on the its 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 4: Revenue

Deferred Revenue

Revenue of $593.7 million included in deferred profit at June 25, 2018 was recognized during fiscal year 2019.

The following table summarizes the transaction price for contracts that have not yet been recognized as revenue as of June 30, 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	$	404,544			$	42,309		(1)	$	2,452		(1)	$	449,305

(1)	This amount is reported in Deferred profit on the Company's 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. Refer to Note 19 - Segment, Geographic Information, and Major Customers; for additional information regarding the Company’s evaluation of reportable business segments and the disaggregation of revenue by the geographic regions the Company operates in.

Additionally, the Company serves three primary markets: memory, foundry, logic/integrated device manufacturing. The following table presents the percentages of system revenues to each of the primary markets we serve:

	Year Ended
	June 30, 2019
Memory	70	%
Foundry	20	%
Logic/integrated device manufacturing	10	%

Note 5: Equity-based Compensation Plans

The Company has stock plans that provide for grants of equity-based awards to eligible participants, including stock options and restricted stock units, of the Company’s Common Stock. An option is a right to purchase

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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 options and RSU awards typically vest over a period of three years or less. The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions.

The Lam Research Corporation 2007 Stock Incentive Plan, as amended and restated, 2011 Stock Incentive Plan, as amended and restated, and the 2015 Stock Incentive Plan (collectively the “Stock Plans”), provide for the grant of non-qualified equity-based awards to eligible employees, consultants and advisors, and non-employee directors of the Company and its subsidiaries. The 2015 Stock Incentive Plan was approved by shareholders authorizing up to 18,000,000 shares available for issuance under the plan. Additionally, 1,232,068 shares that remained available for grants under the Company’s 2007 Stock Incentive Plan were added to the shares available for issuance under the 2015 Stock Incentive Plan. As of June 30, 2019, there were a total of 9,379,904 shares available for future issuance under the Stock Plans. New shares are issued from the Company’s balance of authorized Common Stock from the 2015 Stock Incentive Plan to satisfy stock option exercises and vesting of awards.

The Company recognized the following equity-based compensation expense and benefits in the Consolidated Statements of Operations:

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
	(in thousands)
Equity-based compensation expense	$	187,234			$	172,216			$	149,975
Income tax benefit recognized related to equity-based compensation	$	47,396			$	87,505			$	38,381
Income tax benefit realized from the exercise and vesting of options and RSUs	$	49,242			$	90,297			$	92,749

The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting terms on a straight-line basis.

Stock Options

The following table summarizes stock option activity:

	Options Outstanding
Number of Shares			Weighted-Average Exercise Price
June 26, 2016	907,411			$	47.41
Granted	90,128			$	119.67
Exercised	(389,460	)		$	33.92
Forfeited or expired	(14,020	)		$	69.81
June 25, 2017	594,059			$	66.69
Granted	63,980			$	190.07
Exercised	(166,481	)		$	55.62
Forfeited or expired	(8,630	)		$	84.44
June 24, 2018	482,928			$	86.53
Granted	181,450			$	164.54
Exercised	(110,427	)		$	61.69
Forfeited or expired	(59,068	)		$	126.05
June 30, 2019	494,883			$	115.96

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Outstanding and exercisable options presented by price range at June 30, 2019, were as follows:

Range of Exercise Prices	Options Outstanding									Options Exercisable
Number of Options Outstanding			Weighted-Average Remaining Life (Years)		Weighted-Average Exercise Price				Number of Options Exercisable			Weighted-Average Remaining Life (Years)		Weighted-Average Exercise Price
$11.09-$23.55	4,810			0.91		$	21.88			4,810			0.91		$	21.88
$29.34-$35.68	39,060			1.61		$	31.29			39,060			1.61		$	31.29
$42.61-$51.76	60,769			1.11		$	48.43			60,769			1.11		$	48.43
$75.57-$190.07	390,244			5.18		$	136.11			159,602			3.55		$	95.61
$11.09-$190.07	494,883			4.36		$	115.96			264,241			2.65		$	73.91

The fair value of the Company’s stock options granted during fiscal years 2019, 2018, and 2017 was estimated 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:

	Year Ended
June 30, 2019			June 24, 2018			June 25, 2017
Expected volatility	32.23	%		34.66	%		28.85	%
Risk-free interest rate	2.62	%		2.53	%		1.92	%
Expected term (years)	4.70			4.74			4.75
Dividend yield	2.70	%		1.05	%		1.50	%

The year-end intrinsic value relating to stock options for fiscal years 2019, 2018, and 2017 is presented below:

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
	(in thousands)
Intrinsic value - options outstanding	$	35,674			$	43,563			$	50,551
Intrinsic value - options exercisable	$	30,139			$	34,661			$	36,396
Intrinsic value - options exercised	$	12,750			$	23,925			$	29,674

As of June 30, 2019, the Company had $8.1 million of total unrecognized compensation expense related to unvested stock options granted and outstanding which is expected to be recognized over a weighted-average remaining period of 2.7 years.

Restricted Stock Units

During the fiscal years 2019, 2018, and 2017, the Company issued both service-based RSUs and market-based performance RSUs (“PRSUs”). Market-based PRSUs generally vest three years from the grant date if certain performance criteria are achieved and require continued employment. Based upon the terms of such awards, the number of shares that can be earned over the performance periods is based on the Company’s Common Stock price performance compared to the market price performance of the Philadelphia Semiconductor Sector Index (“SOX”), ranging from 0% to 150% of target. The stock price performance or market price performance is measured using the closing price for the 50-trading days prior to the dates the performance period begins and ends. The target number of shares represented by the market-based PRSUs is increased by 2% of target for each 1% that Common Stock price performance exceeds the market price performance of the SOX index. The result of the vesting formula is rounded down to the nearest whole number. Total stockholder return is a measure of stock price appreciation in this performance period.

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The following table summarizes restricted stock activity:

	Service-based RSUs Outstanding							Market-based RSUs Outstanding
Number of Shares			Weighted-Average Grant Date Fair Value				Number of Shares			Weighted-Average Grant Date Fair Value
June 26, 2016	3,256,513			$	71.34			1,078,591			$	63.12
Granted	1,224,877			114.13				435,694			111.75
Vested	(1,677,318	)		69.10				(592,321	)		46.67
Forfeited or canceled	(116,466	)		76.76				(59,509	)		66.81
June 25, 2017	2,687,606			$	92.01			862,455			$	83.83
Granted	964,391			183.97				285,866			170.15
Vested	(1,362,369	)		87.80				(407,024	)		76.88
Forfeited or canceled	(96,540	)		108.67				(47,571	)		91.36
June 24, 2018	2,193,088			$	134.34			693,726			$	104.59
Granted	893,622			161.64				163,529			165.78
Vested	(1,135,284	)		115.23				(301,622	)		70.58
Forfeited or canceled	(154,541	)		141.38				(120,859	)		104.73
June 30, 2019	1,796,885			$	159.36			434,774			$	144.57

The fair value of the Company’s service-based RSUs was calculated based on fair market value of the Company’s stock at the date of grant, discounted for dividends.

The fair value of the Company’s market-based PRSUs granted during fiscal years 2019, 2018, and 2017 was calculated using a Monte Carlo simulation model at the date of the grant. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award:

	Year Ended
June 30, 2019			June 24, 2018			June 25, 2017
Expected volatility	32.65	%		34.07	%		27.48	%
Risk-free interest rate	2.52	%		2.35	%		1.55	%
Expected term (years)	2.92			2.92			2.92
Dividend yield	2.49	%		1.05	%		1.50	%

As of June 30, 2019, the Company had $271.9 million of total unrecognized compensation expense related to all unvested RSUs granted which is expected to be recognized over a weighted-average remaining period of 2.2 years.

ESPP

The Company has an employee stock purchase plan which allows employees to designate a portion of their base compensation to be deducted and used to purchase the Company’s Common Stock at a purchase price per share of the lower of 85% of the fair market value of the Company’s Common Stock on the first or last day of the applicable purchase period. Unrecognized compensation costs associated with this plan are not considered material.

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Lam Research Corporation 2019 10-K 69

Note 6: Other Expense, Net

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

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
	(in thousands)
Interest income	$	98,771			$	85,813			$	57,858
Interest expense	(117,263		)		(97,387		)		(117,734		)
Gains on deferred compensation plan related assets, net	10,464				14,692				17,880
Loss on impairment of investments	—				(42,456		)		—
Gains (losses) on extinguishment of debt, net	118				542				(36,252		)
Foreign exchange gains (losses), net	826				(3,382		)		(569		)
Other, net	(11,077		)		(19,332		)		(11,642		)
	$	(18,161	)		$	(61,510	)		$	(90,459	)

Interest income in the year ended June 30, 2019, increased compared to the years ended June 24, 2018, and June 25, 2017, primarily as a result of higher yield. Interest expense in the year ended June 30, 2019, increased compared to the year ended June 24, 2018, primarily due to issuance of the $2.5 billion of senior notes. Interest expense in the year ended June 24, 2018, decreased compared to the year ended June 25, 2017, primarily due to the conversions of 2018 and 2041 Convertible Notes as well as the retirement of the 2018 Convertible Notes in May 2018.

The gain on deferred compensation plan related assets in fiscal years 2019, 2018 and 2017 was driven by an improvement in the fair market value of the underlying funds.

The loss on impairment of investments in the year ended June 24, 2018 was the result of a decision to sell selected investments held in foreign jurisdictions in connection with the Company’s cash repatriation strategy following the December 2017 U.S. tax reform.

Net loss on extinguishment of debt realized in the year ended June 25, 2017, was primarily a result of the special mandatory redemption of the Senior Notes due 2023 and 2026, as well as the termination of the Term Loan Agreement.

Note 7: Income Taxes

On December 22, 2017, the “Tax Cuts & Jobs Act” was signed into law and was effective for the Company starting in the quarter ended December 24, 2017. U.S. tax reform reduced the U.S. federal statutory tax rate from 35% to 21%, assessed a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. The impact on income taxes due to a 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 allowed 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 recorded what it believed to be reasonable estimates during the SAB 118 measurement period. During the December 2018 quarter, the Company finalized the accounting of the income tax effects of U.S. tax reform. Although the SAB 118 measurement period has ended, there may be some aspects of U.S. tax reform that remain subject to future regulations and/or notices which may further clarify certain provisions of U.S. tax reform. The Company may need to adjust its previously recorded amounts to reflect the recognition and measurement of its tax accounting positions in accordance with ASC 740; such adjustments could be material.

The computation of the one-time transition tax on accumulated unrepatriated foreign earnings was recorded on a provisional basis in the amount of $883.0 million in the fiscal year ended June 24, 2018, as permitted under SAB 118. The Company recorded a subsequent provisional adjustment of $36.6 million, as a result of incorporating new information into the estimate, in the Condensed Consolidated Financial Statements in the three months ended September 23, 2018. The Company finalized the computation of the transition tax liability during the December 2018 quarter. The final adjustment resulted in a tax benefit of $51.2 million, which was recorded in the Company’s Condensed Consolidated Financial Statements in the three months ended December 23, 2018. The final balance of total transition tax is $868.4 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 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 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. The Company made an accounting policy election in the September 2018 quarter to record deferred taxes in relation to the GILTI provision, and recorded a provisional tax benefit of $48.0 million in the Condensed Consolidated Financial Statements in the three months ended September 23, 2018, under SAB 118. The Company finalized the computation of the accounting policy election during the December 2018 quarter. The final adjustment resulted in a tax expense of $0.4 million, which was recorded in the Company’s Condensed Consolidated Financial Statements in the three months ended December 23, 2018. The final tax benefit of the election is $47.6 million.

The components of income (loss) before income taxes were as follows:

	Year Ended
	June 30, 2019				June 24, 2018				June 25, 2017
	(in thousands)
United States	$	(59,876	)		$	128,190			$	7,553
Foreign	2,506,447				3,023,599				1,804,120
	$	2,446,571			$	3,151,789			$	1,811,673

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Significant components of the provision (benefit) for income taxes attributable to income before income taxes were as follows:

	Year Ended
	June 30, 2019				June 24, 2018				June 25, 2017
	(in thousands)
Federal:
Current	$	143,845			$	630,148			$	(70,858	)
Deferred	(10,722		)		12,871				99,700
	133,123				643,019				28,842
State:
Current	5,994				5,348				(963		)
Deferred	4,944				(3,273		)		(2,246		)
	10,938				2,075				(3,209		)
Foreign:
Current	110,283				132,566				85,479
Deferred	797				(6,552		)		2,798
	111,080				126,014				88,277
Total provision for income taxes	$	255,141			$	771,108			$	113,910

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. Significant components of the Company’s net deferred tax assets and liabilities were as follows:

	June 30, 2019				June 24, 2018
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	231,390			$	206,073
Allowances and reserves	97,671				118,559
Equity-based compensation	14,661				16,189
Inventory valuation differences	18,516				14,021
Prepaid cost sharing	74,139				65,644
Outside basis differences of foreign subsidiaries	16,260				—
Other	17,972				16,514
Gross deferred tax assets	470,609				437,000
Valuation allowance	(226,928		)		(199,839		)
Net deferred tax assets	243,681				237,161
Deferred tax liabilities:
Intangible assets	(9,883		)		(21,558		)
Convertible debt	(46,993		)		(60,252		)
Capital assets	(83,298		)		(61,429		)
Amortization of goodwill	(11,299		)		(10,738		)
Outside basis differences of foreign subsidiaries	—				(6,656		)
Other	(8,752		)		(7,955		)
Gross deferred tax liabilities	(160,225		)		(168,588		)
Net deferred tax assets	$	83,456			$	68,573

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Lam Research Corporation 2019 10-K 71

The increase in the gross deferred tax assets and valuation allowance between fiscal year 2019 and 2018 is primarily due to increases in tax carryforwards.

Realization of the Company’s net deferred tax assets is based upon the weighting of available evidence, including such factors as the recent earnings history and expected future taxable income. The Company believes it is more likely than not that such deferred tax assets will be realized with the exception of $227.0 million primarily related to California deferred tax assets. At June 30, 2019, the Company continued to record a valuation allowance to offset the entire California deferred tax asset balance due to the single sales factor apportionment resulting in lower taxable income in California.

At June 30, 2019, the Company had federal net operating loss carryforwards of $109.8 million. The majority of these losses will begin to expire in fiscal year 2020, and are subject to limitation on their utilization.

At June 30, 2019, the Company had state net operating loss carryforwards of $58.5 million. If not utilized, these losses will begin to expire in fiscal year 2020 and are subject to limitation on their utilization.

At June 30, 2019, the Company had state tax credit carryforwards of $322.4 million. Substantially all of these credits can be carried forward indefinitely.

A reconciliation of income tax expense provided at the federal statutory rate (21% in fiscal year 2019, 28.27% in fiscal year 2018, and 35% in fiscal year 2017) to actual income tax expense is as follows:

	Year Ended
	June 30, 2019				June 24, 2018				June 25, 2017
	(in thousands)
Income tax expense computed at federal statutory rate	$	513,780			$	891,011			$	634,086
State income taxes, net of federal tax benefit	(17,565		)		(50,585		)		(11,973		)
Foreign income taxed at different rates	(260,344		)		(939,808		)		(352,860		)
Settlements and reductions in uncertain tax positions	(31,291		)		(33,367		)		(144,519		)
Tax credits	(71,779		)		(69,301		)		(37,713		)
State valuation allowance, net of federal tax benefit	26,742				57,302				12,070
Equity-based compensation	(7,566		)		(35,875		)		13,187
Other permanent differences and miscellaneous items	39,251				43,214				1,632
U.S. tax reform impacts	63,913				908,517				—
	$	255,141			$	771,108			$	113,910

In July 2015, the U.S. Tax Court issued an opinion favorable to Altera with respect to Altera’s litigation with the IRS. The litigation related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the U.S. Tax Court accepted Altera’s position of excluding stock-based compensation from its intercompany cost-sharing arrangement. In June 2019, the Ninth Circuit, through a three-judge panel, reversed the 2015 decision of the U.S. Tax Court. Altera has petitioned the Ninth Circuit for an en banc rehearing of a larger panel of eleven Ninth Circuit judges. The Company will continue to monitor and evaluate the potential impact of this litigation on its fiscal year 2020 Consolidated Financial Statements. The estimated potential impact is in the range of $75 million, which may result in a decrease in deferred tax assets and an increase in tax expense.

Effective from fiscal year 2014 through 2017, the Company had a tax ruling in Switzerland for one of its foreign subsidiaries. The impact of the tax ruling decreased taxes by approximately $6.3 million for fiscal year 2017. The benefit of the tax ruling on diluted earnings per share was approximately $0.03 in fiscal year 2017. Effective fiscal year 2018, the Company has withdrawn its reduced tax rate ruling in Switzerland for this subsidiary due to the ruling being no longer necessary as the subsidiary meets the requirements to achieve the reduced tax rate under Swiss tax law.

Earnings of the Company’s foreign subsidiaries included in consolidated retained earnings that are indefinitely reinvested in foreign operations aggregated to approximately $458.4 million at June 30, 2019. If these earnings

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Lam Research Corporation 2019 10-K 72

were remitted to the United States, they would be subject to foreign withholding taxes of approximately $73.1 million at current statutory rates.

As of June 30, 2019, the total gross unrecognized tax benefits were $420.8 million, compared to $305.4 million as of June 24, 2018, and $339.4 million as of June 25, 2017. During fiscal year 2019, gross unrecognized tax benefits increased by $115.4 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $376.0 million, $268.3 million, and $247.6 million, as of June 30, 2019, June 24, 2018, and June 25, 2017, respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:

	(in thousands)
Balance as of June 26, 2016	$	417,432
Settlements and effective settlements with tax authorities	(6,691		)
Lapse of statute of limitations	(113,491		)
Increases in balances related to tax positions taken during prior periods	6,557
Decreases in balances related to tax positions taken during prior periods	(11,528		)
Increases in balances related to tax positions taken during current period	47,168
Balance as of June 25, 2017	339,447
Settlements and effective settlements with tax authorities	(693		)
Lapse of statute of limitations	(88,837		)
Increases in balances related to tax positions taken during prior periods	2,044
Decreases in balances related to tax positions taken during prior periods	(1,320		)
Increases in balances related to tax positions taken during current period	54,772
Balance as of June 24, 2018	305,413
Settlements and effective settlements with tax authorities	(3,705		)
Lapse of statute of limitations	(28,176		)
Increases in balances related to tax positions taken during prior periods	78,927
Decreases in balances related to tax positions taken during prior periods	(1,577		)
Increases in balances related to tax positions taken during current period	69,890
Balance as of June 30, 2019	$	420,772

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $19.1 million, $13.0 million, and $15.7 million cumulatively for gross interest and penalties as of June 30, 2019, June 24, 2018, and June 25, 2017, respectively.

The Company is subject to audits by state and foreign tax authorities. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of June 30, 2019, tax years 2004-2019 remain subject to examination in the jurisdictions where the Company operates.

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 $12 million.

Note 8: Net Income per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, restricted stock units, and convertible notes.

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The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share.

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
	(in thousands, except per share data)
Numerator:
Net income	$	2,191,430			$	2,380,681			$	1,697,763
Denominator:
Basic average shares outstanding	152,478				161,643				162,222
Effect of potential dilutive securities:
Employee stock plans	1,323				2,312				2,058
Convertible notes	5,610				12,258			(1)	16,861			(1)
Warrants	504				4,569				2,629
Diluted average shares outstanding	159,915				180,782				183,770
Net income per share - basic	$	14.37			$	14.73			$	10.47
Net income per share - diluted	$	13.70			$	13.17			$	9.24

(1)	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.

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:

	Year Ended
June 30, 2019			June 24, 2018			June 25, 2017
	(in thousands)
Options and RSUs	578			34			34

Note 9: Financial Instruments

Fair Value

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.

A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. The level of an asset or liability in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities with sufficient volume and frequency of transactions.

Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or model-derived valuations techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Lam Research Corporation 2019 10-K 74

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 14 - Long Term Debt and Other Borrowings for additional information regarding the fair value of the Company’s senior notes and convertible senior notes.

Investments

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 June 30, 2019, and June 24, 2018:

	June 30, 2019
																(Reported Within)
Cost				Unrealized Gain				Unrealized (Loss)				Fair Value				Cash and Cash Equivalents				Investments				Restricted Cash & Investments				Other Assets
	(in thousands)
Cash	$	467,460			$	—			$	—			$	467,460			$	462,310			$	—			$	5,150			$	—
Time deposit	1,563,686				—				—				1,563,686				1,313,659				—				250,027				—
Level 1:
Money market funds	1,644,659				—				—				1,644,659				1,644,659				—				—				—
U.S. Treasury and agencies	465,655				283				(24		)		465,914				86,981				378,933				—				—
Mutual funds	76,961				1,063				(283		)		77,741				—				—				—				77,741
Level 1 total	2,187,275				1,346				(307		)		2,188,314				1,731,640				378,933				—				77,741
Level 2:
Government-sponsored enterprises	16,005				5				(41		)		15,969				—				15,969				—				—
Foreign government bonds	24,408				35				—				24,443				—				24,443				—				—
Corporate notes and bonds	1,466,167				2,310				(99		)		1,468,378				150,610				1,317,768				—				—
Mortgage backed securities - residential	6,148				—				(4		)		6,144				—				6,144				—				—
Mortgage backed securities - commercial	29,587				140				—				29,727				—				29,727				—				—
Level 2 total	1,542,315				2,490				(144		)		1,544,661				150,610				1,394,051				—				—
Total	$	5,760,736			$	3,836			$	(451	)		$	5,764,121			$	3,658,219			$	1,772,984			$	255,177			$	77,741

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	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		)		152,136				—				152,136				—				—
Government-sponsored enterprises	110,963				—				(201		)		110,762				99,934				10,828				—				—
Foreign government bonds	19,986				—				(1		)		19,985				19,985				—				—				—
Corporate notes and bonds	516,955				95				(1,184		)		515,866				265,081				250,785				—				—
Mortgage backed securities - residential	804				—				(3		)		801				—				801				—				—
Level 2 total	801,086				132				(1,668		)		799,550				385,000				414,550				—				—
Total	$	5,276,170			$	648			$	(1,980	)		$	5,274,838			$	4,512,257			$	437,338			$	256,301			$	68,942

The Company accounts for its investment portfolio at fair value. Realized gains (losses) for investment sales are specifically identified. Management assesses the fair value of investments in debt securities that are not actively traded through consideration of interest rates and their impact on the present value of the cash flows to be received from the investments. The Company also considers whether changes in the credit ratings of the issuer could impact the assessment of fair value. Additionally, the Company considers factors such as the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.

During the fiscal year 2018, the Company recorded a $42.5 million other-than-temporary impairment charge on a portion of its available for sale investments as a result of a decision to sell selected investments held in foreign jurisdictions in conjunction with our cash repatriation strategy following the U.S. tax reform legislation. The Company did not recognize any losses on investments due to other-than-temporary impairments in fiscal year 2019 or 2017. Gross realized gains/(losses) from sales of investments were insignificant in the fiscal years 2019, 2018, and 2017.

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

	June 30, 2019
Unrealized Losses Less than 12 Months								Unrealized Losses 12 Months or Greater								Total
Fair Value				Gross Unrealized Loss				Fair Value				Gross Unrealized Loss				Fair Value				Gross Unrealized Loss
	(in thousands)
U.S. Treasury and agencies	$	25,704			$	(7	)		$	3,983			$	(17	)		$	29,687			$	(24	)
Mutual funds	4,859				(78		)		9,007				(205		)		13,866				(283		)
Government-sponsored enterprises	—				—				10,953				(41		)		10,953				(41		)
Corporate notes and bonds	67,984				(15		)		40,455				(84		)		108,439				(99		)
Mortgage backed securities - residential	6,129				(4		)		—				—				6,129				(4		)
	$	104,676			$	(104	)		$	64,398			$	(347	)		$	169,074			$	(451	)

The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities as of June 30, 2019, are as follows:

	Cost				Estimated Fair Value
	(in thousands)
Due in one year or less	$	4,842,996			$	4,844,145
Due after one year through five years	331,707				333,019
Due in more than five years	41,612				41,756
	$	5,216,315			$	5,218,920

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

Derivative Instruments and Hedging

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

Cash Flow Hedges

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

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

At inception and at each quarter-end, hedges are tested prospectively and retrospectively for effectiveness using regression analysis. Changes in the fair value of foreign exchange contracts due to changes in time value are included in the assessment of effectiveness. To qualify for hedge accounting, the hedge relationship must meet criteria relating to both the derivative instrument and the hedged item. These criteria include identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows will be measured. There were no material gains or losses during the fiscal years ended June 30, 2019, June 24, 2018, or June 25, 2017 associated with forecasted transactions that failed to occur. There were no material gains or losses during the fiscal years ended June 24, 2018, or June 25, 2017 associated with ineffectiveness.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be tested to demonstrate an expectation of providing highly effective offsetting changes to future cash flows on hedged transactions. When derivative instruments are designated and qualify as effective cash flow hedges, the Company recognizes effective changes in the fair value of the hedging instrument within accumulated other comprehensive income (loss) until the hedged exposure is realized. Consequently, the Company’s results of operations are not subject to fluctuation as a result of changes in the fair value of the derivative instruments. If hedges are not highly effective or if the Company does not believe that the underlying hedged forecasted transactions will occur, the Company may not be able to account for its derivative instruments as cash flow hedges. If this were to occur, future changes in the fair values of the Company’s derivative instruments would be recognized in earnings. Additionally, related amounts previously recorded in other comprehensive income would be reclassified to income immediately. As of June 30, 2019, the Company had a net loss of $2.2 million accumulated in other comprehensive income, net of tax, related to foreign exchange cash flow hedges which it expects to reclassify from other comprehensive income into earnings over the next 12 months. Additionally, as of June 30, 2019, the Company had a net loss of $2.1 million accumulated in other comprehensive income, net of tax, related to interest rate contracts which it expects to reclassify from other comprehensive income into earnings over the next 5.7 years.

Fair Value Hedges

The Company has interest rate contracts whereby the Company receives fixed rates and pays variable rates based on certain benchmark interest rates, resulting in a net increase or decrease to interest expense, a component of other expense, net in our Consolidated Statement of Operations. These interest rate contracts are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. The Company concluded that these interest rate contracts meet the criteria necessary to qualify for the short-cut method of hedge accounting, and as such, an assumption is made that the change in the fair value of the hedged debt, due to changes in the benchmark rate, exactly offsets the change in the fair value of the interest rate swap. Therefore, the derivative is considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness is recognized.

Balance Sheet Hedges

The Company also enters into foreign currency forward contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities, primarily cash, third-party accounts receivable, accounts payable, and intercompany receivables and payables. These forward contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these derivatives is recorded as a component of other income (expense) and offsets the change in fair value of the foreign currency denominated assets and liabilities, which are also recorded in other income (expense).

As of June 30, 2019, the Company had the following outstanding foreign currency contracts that were entered into under its cash flow and balance sheet hedge programs:

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	Notional Value
	Derivatives Designated as Hedging Instruments:								Derivatives Not Designated as Hedging Instruments:
	(in thousands)
Foreign currency forward contracts
	Buy Contracts				Sell Contracts				Buy Contracts				Sell Contracts
Japanese yen	—				$	115,844			$	76,013			$	36,732
Euro	43,776				—				23,964				—
Korean won	14,622				—				7,778				—
British pound sterling	—				—				45,783				—
Taiwan dollar	—				—				28,992				—
Swiss franc	—				—				26,694				—
Chinese renminbi	—				—				14,390				—
Indian rupee	—				—				9,473				—
Singapore dollar	—				—				8,874				—
	$	58,398			$	115,844			$	241,961			$	36,732

The fair value of derivative instruments in the Company’s Consolidated Balance Sheet as of June 30, 2019, and June 24, 2018, were as follows:

	June 30, 2019												June 24, 2018
Fair Value of Derivative Instruments (Level 2)												Fair Value of Derivative Instruments (Level 2)
Derivative Assets						Derivative Liabilities						Derivative Assets						Derivative Liabilities
Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value
	(in thousands)
Derivatives designated as hedging instruments:
Foreign exchange contracts	Prepaid expense and other assets		$	119			Accrued expenses and other current liabilities		$	2,756			Prepaid expense and other assets		$	7,581			Accrued expenses and other current liabilities		$	8,866
Interest rate contracts, short-term			—				Accrued expenses and other current liabilities		5,149						—				Accrued expenses and other current liabilities		7,468
Interest rate contracts, long-term	Other assets		1,537						—						—				Other long-term liabilities		23,720
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepaid expense and other assets		1,249				Accrued expenses and other current liabilities		748				Prepaid expense and other assets		111				Accrued expenses and other current liabilities		32
Total derivatives			$	2,905					$	8,653					$	7,692					$	40,086

Under the master netting agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis on its balance sheet. As of June 30, 2019, the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be an offset to assets and liabilities by $2.4 million, resulting in a net derivative asset of $0.5 million and net derivative liability of $6.2 million. As of June 24, 2018, the potential effect of rights of offset associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $5.6 million, resulting in a

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net derivative asset of $2.1 million and a net derivative liability of $34.4 million. The Company is not required to pledge, nor is the Company entitled to receive, cash collateral for these derivative transactions.

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

		Year Ended June 30, 2019								Year Ended June 24, 2018
	Location of Gain (Loss) Recognized in or Reclassified into Income	Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified from AOCI into Income				(Loss) Gain Recognized in AOCI				(Loss) Gain Reclassified from AOCI into Income
Derivatives in Cash Flow Hedging Relationships		(in thousands)
Foreign exchange contracts	Revenue	$	8,143			$	10,821			$	(8,305	)		$	(11,284	)
Foreign exchange contracts	Cost of goods sold	(3,801		)		(5,949		)		57				5,218
Foreign exchange contracts	SG&A	(1,618		)		(2,321		)		558				2,654
Interest rate contracts	Other expense, net	—				(134		)		—				(126		)
		$	2,724			$	2,417			$	(7,690	)		$	(3,538	)

The effect of derivative instruments not designated as cash flow hedges on the Company’s Consolidated Statement of Operations was as follows:

		Year Ended
June 30, 2019				June 24, 2018
Derivatives Not Designated as Hedging Instruments:	Location of Gain Recognized in Income	Gain Recognized in Income				Gain Recognized in Income
		(in thousands)
Foreign exchange contracts	Other income	$	4,124			$	7,756

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The following table presents the effect of the fair value cash flow hedge accounting on the Statement of Financial Performance as well as presents the location and amount of gain/(loss) recognized in Income on fair value and cash flow hedging relationships:

	Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
	Year ended
	June 30, 2019
	Revenue				Cost of Goods Sold				Selling, General and Administrative				Other Income (Expense)
	(in thousands)
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded:
	$	9,653,559			$	5,295,100			$	702,407			$	(18,161	)
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships in Subtopic 815-20:
Interest contracts:
Hedged items	—				—				—				(27,577		)
Derivatives designated as hedging instruments	—				—				—				27,577
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20:
Foreign exchange contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	10,821				(5,949		)		(2,321		)		—
Interest rate contracts:
Amount of loss reclassified from accumulated other comprehensive income into income	—				—				—				(134		)

Concentrations of Credit Risk

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

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

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

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

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As of June 30, 2019, four customers accounted for approximately 18%, 15%, 11%, and 10%, of accounts receivable, respectively. As of June 24, 2018, four customers accounted for approximately 24%, 17%, 10%, and 10% of accounts receivable, respectively. No other customers accounted for more than 10% of accounts receivable, respectively. The Company’s balance and transactional activity for its allowance for doubtful accounts is not material as of and for the twelve months ended June 30, 2019, June 24, 2018, and June 25, 2017.

Note 10: Inventories

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

	June 30, 2019				June 24, 2018
	(in thousands)
Raw materials	$	994,738			$	916,438
Work-in-process	174,219				222,921
Finished goods	371,183				736,803
	$	1,540,140			$	1,876,162

Note 11: Property and Equipment

Property and equipment, net, consist of the following:

	June 30, 2019				June 24, 2018
	(in thousands)
Manufacturing and engineering equipment	$	1,039,454			$	911,140
Buildings and improvements	664,061				530,032
Computer and computer-related equipment	190,974				182,451
Office equipment, furniture and fixtures	82,115				66,378
Land	46,155				46,155
	2,022,759				1,736,156
Less: accumulated depreciation and amortization	(963,682		)		(833,609		)
	$	1,059,077			$	902,547

Depreciation expense, including amortization of capital leases, during fiscal years 2019, 2018, and 2017, was $182.1 million, $165.2 million, and $152.3 million, respectively.

Note 12: Goodwill and Intangible Assets

Goodwill

The balance of goodwill was $1.5 billion as of June 30, 2019, and June 24, 2018, respectively. As of June 30, 2019, $61.1 million of the goodwill balance is tax deductible, and the remaining balance is not tax deductible due to purchase accounting and applicable foreign law. No goodwill impairments were recognized in fiscal years 2019, 2018, or 2017. Refer to Note 20 - Business Combinations for information regarding goodwill additions during the fiscal year ended June 24, 2018.

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Intangible Assets

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

	June 30, 2019												June 24, 2018
	Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
	(in thousands)
Customer relationships	$	630,165			$	(483,204	)		$	146,961			$	630,220			$	(433,309	)		$	196,911
Existing technology	669,399				(647,837		)		21,562				669,520				(576,844		)		92,676
Patents and other intangible assets	126,235				(77,808		)		48,427				99,767				(71,518		)		28,249
Total intangible assets	$	1,425,799			$	(1,208,849	)		$	216,950			$	1,399,507			$	(1,081,671	)		$	317,836

The Company recognized $127.3 million, $161.2 million, and $154.6 million in intangible asset amortization expense during fiscal years 2019, 2018, and 2017, respectively. No intangible asset impairments were recognized in fiscal years 2019, 2018, or 2017.

Refer to Note 20 - Business Combinations for information regarding intangible assets acquired during the fiscal year ended June 24, 2018.

The estimated future amortization expense of intangible assets as of June 30, 2019, was as follows:

Fiscal Year	Amount
	(in thousands)
2020	$	65,226
2021	63,986
2022	59,671
2023	15,241
2024	8,900
Thereafter	3,926
	$	216,950

Note 13: Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

	June 30, 2019				June 24, 2018
	(in thousands)
Accrued compensation	$	336,090			$	506,471
Warranty reserves	127,932				192,480
Income and other taxes payable	49,926				185,384
Dividend payable	158,868				174,372
Other	273,825				250,502
	$	946,641			$	1,309,209

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Note 14: Long Term Debt and Other Borrowings

As of June 30, 2019, and June 24, 2018, the Company’s outstanding debt consisted of the following:

	June 30, 2019							June 24, 2018
	Amount (in thousands)				Effective Interest Rate			Amount (in thousands)				Effective Interest Rate
Fixed-rate 2.75% Senior Notes Due March 15, 2020 (“2020 Notes”)	500,000				2.88	%		500,000				2.88	%
Fixed-rate 2.80% Senior Notes Due June 15, 2021 (“2021 Notes”)	800,000				2.95	%		800,000				2.95	%
Fixed-rate 3.80% Senior Notes Due March 15, 2025 (“2025 Notes”)	500,000				3.87	%		500,000				3.87	%
Fixed-rate 3.75% Senior Notes Due March 15, 2026 ("2026 Notes")	750,000				3.86	%		—				—
Fixed-rate 4.00% Senior Notes Due March 15, 2029 ("2029 Notes")	1,000,000				4.09	%		—				—
Fixed-rate 2.625% Convertible Notes Due May 15, 2041 (“2041 Notes”)	212,349			(1)	4.28	%		326,953			(1)	4.28	%
Fixed-rate 4.875% Senior Notes Due March 15, 2049 ("2049 Notes")	750,000				4.93	%		—				—
Commercial paper	—				—			360,000				2.33	%	(2)
Total debt outstanding, at par	4,512,349							2,486,953
Unamortized discount	(73,191		)					(85,196		)
Fair value adjustment - interest rate contracts	(3,612		)					(31,189		)
Unamortized bond issuance costs	(5,535		)					(1,820		)
Total debt outstanding, at carrying value	$	4,430,011						$	2,368,748
Reported as:
Current portion of long-term debt and commercial paper	$	662,308						$	608,532
Long-term debt	3,767,703							1,760,216
Total debt outstanding, at carrying value	$	4,430,011						$	2,368,748

(1)

As of the report date, these notes were convertible at the option of the bondholder. This is a result of the following condition being met: the market value of the Company’s Common Stock was greater than 130% of the convertible notes conversion price for 20 or more of the 30 consecutive trading days preceding the quarter-end. As a result, the 2041 Notes were classified in current liabilities and a portion of the equity component associated with the convertible notes, representing the unamortized discount, was classified in temporary equity on the Company’s Consolidated Balance Sheets. Upon closure of the conversion period, the notes not converted will be reclassified back into noncurrent liabilities and the temporary equity will be reclassified into permanent equity.

(2)	Represents the weighted-average effective interest rate for all outstanding balances as of the report date.

The Company’s contractual cash obligations relating to its outstanding debt as of June 30, 2019, were as follows:

Payments Due by Fiscal Year:
	(in thousands)
2020 (1)	$	712,349
2021	800,000
2022	—
2023	—
2024	—
Thereafter	3,000,000
Total	$	4,512,349

(1)	As noted above, the conversion period for the 2041 Notes is open as of June 30, 2019. As there is the potential for conversion at the option of the holder, the principal balance of the 2041 Notes has been included in the one-year payment period.

Convertible Senior Notes

In June 2012, with the acquisition of Novellus, the Company assumed $700 million in aggregate principal amount of 2.625% Convertible Senior Notes due May 15, 2041 (the “2041 Notes”). The Company pays cash interest at an annual rate of 2.625%, on a semi-annual basis on May 15 and November 15 of each year. The 2041 Notes also have a contingent interest payment provision that may require the Company to pay additional interest, up to 0.60% per year, based on certain thresholds, beginning with the semi-annual interest payment on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the 2041 Notes.

The Company separately accounts for the liability and equity components of the 2041 Notes. The initial debt components of the 2041 Notes were valued based on the present value of the future cash flows using the Company’s borrowing rate at the date of the issuance or assumption for similar debt instruments without the conversion feature, which equals the effective interest rate on the liability component disclosed in the table below, respectively. The equity component was

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initially valued equal to the principle value of the notes, less the present value of the future cash flows using the Company’s borrowing rate at the date of the issuance or assumption for similar debt instruments without a conversion feature, which equated to the initial debt discount.

The 2041 Notes may be redeemed on or after May 21, 2021 at a price equal to outstanding principal plus accrued and unpaid interest if the last reported sales price of common shares has been equal to or more than 150% of the then applicable conversion price for at least 20 trading days during the 30 consecutive trading days prior to the redemption notice date.

Under certain circumstances, the 2041 Notes may be converted into shares of the Company’s Common Stock. The number of shares each debenture is convertible into is based on conversion rates, disclosed in the table below. The principal value of the 2041 Note conversions in the fiscal year ended June 30, 2019, were $114.6 million. During the quarter ended June 30, 2019 and in the subsequent period through August 16, 2019, the Company received notice of conversion for an additional $27.9 million principal value of 2041 Notes, which will settle in the quarter ending September 29, 2019.

Selected additional information regarding the 2041 Notes outstanding as of June 30, 2019, and June 24, 2018, is as follows:

	2041 Notes
	June 30, 2019				June 24, 2018
	(in thousands, except years, percentages, conversion rate, and conversion price)
Carrying amount of permanent equity component, net of tax	$	160,604			$	159,120
Carrying amount of temporary equity component, net of tax	$	49,439			$	78,192
Remaining amortization period (years)	21.9				22.9
Fair Value of Notes (Level 2)	$	1,229,475
Conversion rate (shares of common stock per $1,000 principal amount of notes)	30.9197
Conversion price (per share of common stock)	$	32.34
If-converted value in excess of par value	$	1,020,965
Estimated share dilution using average quarterly stock price of $189.73 per share	5,447

Convertible Warrants

During the fiscal year 2019, the Company had warrants outstanding in connection with its 2018 convertible notes that matured in May 2018. The 7.6 million warrants were fully exercised during the fiscal year ended June 30, 2019, resulting in the issuance of approximately 4.1 million shares of the Company’s Common Stock.

Senior Notes

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

On March 12, 2015, the Company completed a public offering of $500 million aggregate principal amount of the Company’s Senior Notes due March 15, 2020 (the “2020 Notes”) and $500 million aggregate principal amount of the Company’s Senior Notes due March 15, 2025 (the “2025 Notes”). The Company pays interest at an annual rate of 2.75% and 3.80% on the 2020 Notes and 2025 Notes, respectively, on a semi-annual basis on March 15 and September 15 of each year. During the year ended June 26, 2016, the Company entered into a series of interest rate contracts hedging the fair value of a portion of the 2025 Notes par value, whereby the Company receives a fixed rate and pays a variable rate based on a certain benchmark interest rate. Refer to Note 9 - Financial Instruments for additional information regarding these interest rate contracts.

On June 7, 2016, the Company completed a public offering of $800 million aggregate principal amount of Senior Notes due June 2021 (the “2021 Notes”). The Company pays interest at an annual rate of 2.80% on the 2021 Notes on a semi-annual basis on June 15 and December 15 of each year.

The Company may redeem the 2020, 2021, 2025, 2026, 2029 and 2049 Notes (collectively the “Senior Notes”) at a redemption price equal to 100% of the principal amount of such series (“par”), plus a “make whole” premium as described in the indenture in respect to the Senior Notes and accrued and unpaid interest before February 15, 2020, for

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the 2020 Notes, before May 15, 2021 for the 2021 Notes, before December 15, 2024 for the 2025 Notes, before January 15, 2026 for the 2026 Notes, before December 15, 2028 for the 2029 Notes, and before September 15, 2048 for the 2049 Notes. The Company may redeem the Senior Notes at par, plus accrued and unpaid interest at any time on or after February 15, 2020, for the 2020 Notes, on or after May 15, 2021 for the 2021 Notes, on or after December 24, 2024, for the 2025 Notes, on or after January 15, 2026 for the 2026 Notes, on or after December 15, 2028 for the 2029 Notes, and on or after September 15, 2048 for the 2049 Notes. In addition, upon the occurrence of certain events, as described in the indenture, the Company will be required to make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount of the respective note, plus accrued and unpaid interest.

Selected additional information regarding the Senior Notes outstanding as of June 30, 2019, is as follows:

	Remaining Amortization period		Fair Value of Notes (Level 2)
	(years)		(in thousands)
2020 Notes	0.7		$	500,855
2021 Notes	2.0		$	806,232
2025 Notes	5.7		$	528,895
2026 Notes	6.7		$	786,915
2029 Notes	9.7		$	1,063,670
2049 Notes	29.7		$	828,188

Revolving Credit Facility

On March 12, 2014, the Company established an unsecured Credit Agreement. This agreement was amended on November 10, 2015 (the “Amended and Restated Credit Agreement”), October 13, 2017 (the “2nd Amendment”), and February 25, 2019 (the “3rd Amendment”). Under the Amended and Restated Credit Agreement (as amended by the 2nd and 3rd Amendment), the Company has a revolving credit facility of $1.25 billion with a syndicate of lenders with an expansion option that will allow the Company, subject to certain requirements, to request an increase in the facility of up to an additional $600.0 million, for a potential total commitment of $1.85 billion. The facility matures on October 13, 2022.

Interest on amounts borrowed under the credit facility is, at the Company’s option, based on (1) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.5%, or (c) one-month LIBOR plus 1.0%, plus a spread of 0.0% to 0.5%, or (2) LIBOR multiplied by the statutory rate, plus a spread of 0.9% to 1.5%, in each case as the applicable spread is determined based on the rating of the Company’s non-credit enhanced, senior unsecured long-term debt. Principal and any accrued and unpaid interest is due and payable upon maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s credit rating. The Amended and Restated Credit Agreement contains affirmative covenants, negative covenants, financial covenants, and events of default. As of June 30, 2019, the Company had no borrowings outstanding under the credit facility and was in compliance with all financial covenants.

Commercial Paper Program

On November 13, 2017, the Company established a commercial paper program under which the Company may issue unsecured commercial paper notes on a private placement basis up to a maximum aggregate principal amount of $1.25 billion. The net proceeds from the CP Program will be used for general corporate purposes, including repurchases of the Company’s Common Stock from time to time under the Company’s stock repurchase program. Amounts available under the CP Program may be re-borrowed. The CP Program is backstopped by the Company’s Revolving Credit Arrangement. As of June 30, 2019, the Company had no outstanding borrowings under the CP Program.

Interest Cost

The following table presents the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the debt discount, issuance costs, and effective portion of interest rate contracts with respect to the Senior Notes, convertible notes, the term loan agreement, commercial paper, and the revolving credit facility during the fiscal years ended June 30, 2019, June 24, 2018, and June 25, 2017.

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	Year Ended
	June 30, 2019				June 24, 2018				June 25, 2017
	(in thousands)
Contractual interest coupon	$	100,712			$	77,091			$	95,195
Amortization of interest discount	3,937				12,225				22,873
Amortization of issuance costs	1,426				2,034				2,414
Effect of interest rate contracts, net	4,086				3				(4,756		)
Total interest cost recognized	$	110,161			$	91,353			$	115,726

The increase in interest expense during the 12 months ended June 30, 2019, is primarily the result of the issuance of $2.5 billion of Senior Notes in March 2019.

Note 15: Retirement and Deferred Compensation Plans

Employee Savings and Retirement Plan

The Company maintains a 401(k) retirement savings plan for its eligible employees in the United States. Each participant in the plan may elect to contribute from 1% to 75% of annual eligible earnings to the plan, subject to statutory limitations. The Company makes matching employee contributions in cash to the plan at the rate of 50% of the first 6% of earnings contributed. Employees participating in the 401(k) retirement savings plan are fully vested in the Company matching contributions, and investments are directed by participants. The Company made matching contributions of $24.1 million, $21.4 million, and $15.2 million, in fiscal years 2019, 2018, and 2017, respectively.

Deferred Compensation Arrangements

The Company has an unfunded, non-qualified deferred compensation plan whereby certain executives may defer a portion of their compensation. Participants earn a return on their deferred compensation based on their allocation of their account balance among various mutual funds. The Company controls the investment of these funds, and the participants remain general creditors of the Company. Participants are able to elect the payment of benefits on a specified date at least three years after the opening of a deferral sub-account or upon retirement. Distributions are made in the form of lump sum or annual installments over a period of up to 20 years as elected by the participant. If no alternate election has been made, a lump sum payment will be made upon termination of a participant’s employment with the Company. As of June 30, 2019, and June 24, 2018, the liability of the Company to the plan participants was $207.0 million and $188.0 million, respectively, which was recorded in accrued expenses and other current liabilities and other long-term liabilities on the Consolidated Balance Sheets. As of June 30, 2019, and June 24, 2018, the Company had investments in the aggregate amount of $228.9 million and $209.0 million, respectively, which correlate to the deferred compensation obligations, which were recorded in other assets on the Consolidated Balance Sheets.

Post-Retirement Healthcare Plan

The Company maintains a post-retirement healthcare plan for certain executive and director retirees. Coverage continues through the duration of the lifetime of the retiree or the retiree’s spouse, whichever is longer. The benefit obligation was $40.5 million and $37.2 million as of June 30, 2019, and June 24, 2018, respectively.

Note 16: Commitments and Contingencies

The Company has certain obligations to make future payments under various contracts; some of these are recorded on its balance sheet and some are not. Obligations that are recorded on the Company’s balance sheet include the Company’s capital lease obligations. Obligations that are not recorded on the Company’s balance sheet include contractual relationships for operating leases, purchase obligations, and certain guarantees. The Company’s commitments relating to capital leases and off-balance sheet agreements are included in the tables below. These amounts exclude $373.0 million of liabilities related to uncertain tax benefits because the Company is unable to reasonably estimate the ultimate amount or time of settlement. See Note 7 - Income Taxes for further discussion.

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Capital Leases

Capital leases reflect building and office equipment leases. The Company’s contractual cash obligations relating to its existing capital leases, including interest, as of June 30, 2019, were as follows:

Payments Due by Fiscal Year (1):	Capital Leases
	(in thousands)
2020	$	7,729
2021	11,753
2022	5,669
2023	5,165
2024	4,932
Thereafter	14,801
Total	50,049
Interest on capital leases	16,697
Current portion of capital leases	4,858
Long-term portion of capital leases	$	28,494

(1)	Excludes balances associated with the Company’s build-to-suit lease arrangements that are classified as capital leases in the Consolidated Balance Sheets, but for which cash payment is not anticipated.

Operating Leases and Related Guarantees

The Company leases the majority of its administrative, R&D and manufacturing facilities, regional sales/service offices, and certain equipment under non-cancelable operating leases. Certain of the Company’s facility leases for buildings located at its Fremont, California headquarters; Tualatin, Oregon campus; and certain other facility leases provide the Company with options to extend the leases for additional periods or to purchase the facilities. Certain of the Company’s facility leases provide for periodic rent increases based on the general rate of inflation. The Company’s rental expense for facilities occupied during fiscal years 2019, 2018, and 2017 was $28.1 million, $23.5 million, and $20.2 million, respectively.

The Company has operating leases regarding certain improved properties in Fremont and Livermore, California (the “Operating Leases”). The Company is required to maintain cash collateral in an aggregate of approximately $250.0 million in separate interest-bearing accounts as security for the Company’s obligations. These amounts are recorded with other restricted cash and investments in the Company’s Consolidated Balance Sheet as of June 30, 2019.

During the term of the Operating Leases and when the terms of the Operating Leases expire, the property subject to those Operating Leases may be re-marketed. The Company has guaranteed to the lessor that each property will have a certain minimum residual value. The aggregate guarantee made by the Company under the Operating Leases is generally no more than $220.4 million; however, under certain default circumstances, the guarantee with regard to an Operating Lease may be 100% of the lessor’s aggregate investment in the applicable property, which in no case will exceed $250.0 million, in the aggregate.

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The Company’s contractual cash obligations with respect to operating leases, excluding the residual value guarantees discussed above, as of June 30, 2019, were as follows:

Payments Due by Fiscal Year:	Operating Leases
	(in thousands)
2020	$	37,427
2021	23,277
2022	13,304
2023	6,752
2024	5,804
Thereafter	11,825
Total	$	98,389

Other Guarantees

The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into insurance contracts that are intended to limit its exposure to such indemnifications. As of June 30, 2019, the Company had not recorded any liability on its Consolidated Financial Statements in connection with these indemnifications, as it does not believe that it is probable that any material amounts will be paid under these guarantees.

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

The Company provides guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of June 30, 2019, the maximum potential amount of future payments that the Company could be required to make under these arrangements and letters of credit was $42.5 million. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid.

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

Purchase Obligations

Purchase obligations consist of non-cancelable significant contractual obligations either on an annual basis or over multi-year periods. The contractual cash obligations and commitments table presented below contains the Company’s minimum obligations at June 30, 2019, under these arrangements and others. For obligations with cancellation provisions, the amounts included in the following 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.

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The Company’s commitments related to these agreements as of June 30, 2019, were as follows:

Payments Due by Fiscal Year:	Purchase Obligations
	(in thousands)
2020	$	345,498
2021	14,473
2022	14,473
2023	6,721
2024	6,721
Thereafter	36,675
Total	$	424,561

Warranties

The Company provides standard warranties on its systems. The liability amount is based on actual historical warranty spending activity by type of system, customer, and geographic region, modified for any known differences such as the impact of system reliability improvements.

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

	Year Ended
June 30, 2019				June 24, 2018
	(in thousands)
Balance at beginning of period	$	192,480			$	161,981
Warranties issued during the period	249,737				235,252
Settlements made during the period	(307,079		)		(196,680		)
Changes in liability for pre-existing warranties	(7,206		)		(8,073		)
Balance at end of period	$	127,932			$	192,480

Legal Proceedings

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

Note 17: Stock Repurchase Program

In November 2018, the Board of Directors authorized the Company to repurchase up to an additional $5.0 billion of Common Stock. These repurchases can be conducted on the open market or as private purchases and may include the use of derivative contracts with large financial institutions, in all cases subject to compliance with applicable law. This repurchase program has no termination date and may be suspended or discontinued at any time. Funding for this repurchase program may be through a combination of cash on hand, cash generation, and borrowings. As of June 30, 2019, the Company has purchased approximately $2.0 billion of shares under this authorization, $0.5 billion via open market trading and $1.5 billion utilizing accelerated share repurchase arrangements.

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

Period	Total Number of Shares Repurchased			Total Cost of Repurchase				Average Price Paid Per Share**(1)**				Amount Available Under Repurchase Program
	(in thousands, except per share data)
Available balance as of June 24, 2018												$	1,733,638
Quarter ended September 23, 2018	7,807			$	1,733,530			$	183.55			$	108
Board authorization, $5.0 billion, November 2018	—			$	—			$	—			$	5,000,000
Quarter ended December 23, 2018	1,683		(2)	$	—			$	—			$	5,000,000
Quarter ended March 31, 2019	5,702		(2)	$	861,506			$	168.78			$	4,138,494
Quarter ended June 30, 2019	5,867			$	1,104,994			$	185.16			$	3,033,500

(1)	Average price paid per share excludes effect of accelerated share repurchases; see additional disclosure below regarding the Company’s accelerated share repurchase activity during the fiscal year.

(2)	Includes shares received at final settlement of accelerated share repurchase agreements; see additional disclosures below regarding the Company’s accelerated share repurchase activity during the fiscal year.

In addition to the shares repurchased under the Board-authorized repurchase program shown above, the Company acquired 0.5 million shares at a total cost of $80.5 million during the 12 months ended June 30, 2019, which the Company withheld through net settlements to cover minimum tax withholding obligations upon the vesting of restricted stock unit awards granted under the Company’s equity compensation plans. The shares retained by the Company through these net share settlements are not a part of the Board-authorized repurchase program but instead are authorized under the Company’s equity compensation plan.

Accelerated Share Repurchase Agreements

On June 4, 2019, the Company entered into four separate accelerated share repurchase agreements (collectively, the "June 2019 ASR") with two financial institutions to repurchase a total of $750 million of Common Stock. The Company took an initial delivery of approximately 3.1 million shares, which represented 75% of the prepayment amount divided by the Company’s closing stock price on June 4, 2019. The total number of shares received under the June 2019 ASR will be based upon the average daily volume weighted average price of the Company’s Common Stock during the repurchase period, less an agreed upon discount. Final settlement of the June 2019 ASR is anticipated to occur no later than November 20, 2019.

On January 31, 2019, the Company entered into two separate accelerated share repurchase agreements (collectively, the "January 2019 ASR") with two financial institutions to repurchase a total of $760 million of Common Stock. The Company took an initial delivery of approximately 3.3 million shares, which represented 75% of the prepayment amount divided by the Company’s closing stock price on January 30, 2019. The total number of shares received under the January 2019 ASR was based upon the average daily volume weighted average price of the Company’s Common Stock during the repurchase period, less an agreed upon discount. Final settlement of the agreements occurred during May 2019, resulted in the receipt of approximately 0.8 million additional shares, which yielded a weighted-average share price of approximately $182.32 for the transaction period.

On August 15, 2018, the Company entered into four separate accelerated share repurchase agreements (collectively, the " August 2018 ASR") with two financial institutions to repurchase a total of $1.4 billion of Common Stock. The Company took an initial delivery of approximately 5.8 million shares, which represented 75% of the prepayment amount divided by the Company’s closing stock price on August 14, 2018. The total number of shares received under the August 2018 ASR was based upon the average daily volume weighted average price of the Company’s Common Stock during the repurchase period, less an agreed upon discount. Final settlement of two of the agreements occurred during the quarter ended December 23, 2018. Approximately 1.7 million shares were received at final settlement, which resulted in a weighted-average share price of approximately $148.72 for the transaction period. The remaining two agreements settled during the quarter ended March 31, 2019, resulting in the receipt of approximately 1.8 million additional shares, which yielded a weighted-average share price of approximately $146.00 for the transaction period.

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Note 18: Comprehensive Income (Loss)

The components of accumulated other comprehensive loss, net of tax at the end of June 30, 2019, as well as the activity during the fiscal year ended June 30, 2019, were as follows:

	Accumulated Foreign Currency Translation Adjustment				Accumulated Unrealized Gain or Loss on Cash Flow Hedges				Accumulated Unrealized Holding Gain or Loss on Available-For- Sale Investments				Accumulated Unrealized Components of Defined Benefit Plans				Total
	(in thousands)
Balance as of June 24, 2018	$	(32,722	)		$	(4,042	)		$	(1,190	)		$	(19,495	)		$	(57,449	)
Other comprehensive (loss) income before reclassifications	(9,470		)		2,860				3,535				(1,153		)		(4,228		)
Losses (gains) reclassified from accumulated other comprehensive income (loss) to net income	2,822			(1)	(2,749		)	(2)	(199		)	(1)	—				(126		)
Effects of ASU 2018-02 adoption	—				(399		)		—				(1,828		)		(2,227		)
Net current-period other comprehensive income (loss)	(6,648		)		(288		)		3,336				(2,981		)		(6,581		)
Balance as of June 30, 2019	$	(39,370	)		$	(4,330	)		$	2,146			$	(22,476	)		$	(64,030	)

(1)	Amount of after-tax gain reclassified from accumulated other comprehensive income into net income located in other expense, net.

(2)	Amount of after-tax gain reclassified from accumulated other comprehensive income into net income located in revenue: $9.6 million gain; cost of goods sold: $5.0 million loss; selling, general, and administrative expenses: $1.7 million loss; and other income and expense: $0.1 million loss.

Tax related to other comprehensive income, and the components thereto, for the years ended June 30, 2019, June 24, 2018 and June 25, 2017 was not material.

Note 19: Segment, Geographic Information, and Major Customers

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, while long-lived assets are attributed to the geographic locations in which the assets are located.

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Revenues and long-lived assets by geographic region were as follows:

	Year Ended
June 30, 2019				June 24, 2018				June 25, 2017
Revenue:	(in thousands)
Korea	$	2,205,348			$	3,832,798			$	2,480,329
China	2,161,440				1,784,436				1,023,195
Japan	1,969,869				1,882,799				1,041,969
Taiwan	1,596,261				1,397,978				2,095,669
United States	748,601				820,438				629,937
Southeast Asia	615,813				781,360				401,877
Europe	356,227				577,189				340,644
Total revenue	$	9,653,559			$	11,076,998			$	8,013,620

	June 30, 2019				June 24, 2018				June 25, 2017
Long-lived assets:	(in thousands)
United States	$	933,054			$	784,469			$	575,264
Europe	72,928				73,336				77,211
Korea	28,200				24,312				19,982
China	6,844				5,466				1,906
Taiwan	6,759				7,922				7,970
Japan	5,750				3,327				1,083
Southeast Asia	5,542				3,715				2,179
	$	1,059,077			$	902,547			$	685,595

In fiscal year 2019, four customers accounted for approximately 15%, 14%, 14%, and 14% of total revenues, respectively. In fiscal year 2018, five customers accounted for approximately 25%, 14%, 14%, 13%, and 12% of total revenues, respectively. In fiscal year 2017, five customers accounted for approximately 23%, 16%, 12%, 11%, and 10% of total revenues, respectively. No other customers accounted for more than 10% of total revenues.

Note 20: Business Combinations

Coventor Acquisition

On August 28, 2017, the Company completed the acquisition of the outstanding shares of Coventor, Inc., a privately-held company that is a provider of simulation and modeling solutions for semiconductor process technology, MEMS, and the Internet of Things, for a total purchase consideration of $137.6 million.

The following table represents the purchase price allocation and summarizes the aggregate estimated fair value of the net assets acquired on the closing date of the acquisition:

	Purchase Price Allocation
	(in thousands)
Intangible assets	$	48,500
Assets acquired (including cash of $8.7 million)	11,463
Goodwill	98,917
Liabilities assumed	(21,269		)
Fair value of net assets acquired	$	137,611

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The Company elected to close the measurement period as of June 24, 2018. The operating results of the acquired entity, from the date of acquisition, have been included in the Company’s Consolidated Financial Statements for fiscal years ended June 24, 2018 and June 30, 2019. Goodwill represents the excess of the purchase price over the net tangible and identifiable intangible assets acquired. None of the goodwill recognized is deductible for income tax purposes.

The identified intangible assets assumed in the acquisition of Coventor were recognized as follows based upon their fair values as of August 28, 2017:

	Fair Value				Weighted-Average Estimated Useful Life
	(In thousands)				(In years)
Existing technology	$	26,200			6.0
Customer relationships	15,000				6.0
Trade names and other intangible assets	7,300				6.4
Total identified intangible assets	$	48,500			6.0

Acquired existing technology represents the fair value of products that have reached technological feasibility and are a part of Coventor’s product offerings and customer relationships represent the fair values of the underlying relationships and agreements with Coventor’s customers.

During the years ended June 24, 2018, and June 25, 2017, the Company expensed as incurred acquisition-related costs of $2.9 million and $9.8 million, respectively, within selling, general, and administrative expense in the Consolidated Statement of Operations. No acquisition-related costs were recognized during the year ended June 30, 2019.

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Lam Research Corporation 2019 10-K 94

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Lam Research Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Lam Research Corporation (the “Company“) as of June 30, 2019 and June 24, 2018, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders‘ equity, for each of the three years in the period ended June 30, 2019, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and June 24, 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 20, 2019 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 2 and 3 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers in the year ended June 30, 2019 due to the adoption of ASU No. 2014‑09, Revenue from Contracts with Customers, as amended.

Basis for Opinion

These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Revenue Recognition Accounting Standard Adoption

Description of the Matter	As described above and more fully described in Notes 2 and 3 to the consolidated financial statements, the Company adopted Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) on the first day of the fiscal year ended June 30, 2019, using the modified retrospective approach. Under ASC 606, the Company recognizes revenue when it determines control has passed to the customer, which includes judgment to determine when product specifications are met and the Company has right to payment. The implementation resulted in changes in the timing of recognition of system sales. This change required the exercise of auditor judgment in evaluating management’s determination of when control has passed to the customer, and the determination of the cumulative effect of adoption of ASC 606.
How We Addressed the Matter in Our Audit	We evaluated and tested the Company’s processes and the design and operating effectiveness of internal controls addressing the identified audit risks. This included controls over management’s assessment of when control of goods transferred to the customer and over the calculation and recording of the cumulative effect adjustment recorded at the date of adoption, which resulted from the change in timing of revenue recognition. Our audit procedures included, among others, evaluating management’s revenue recognition policy reflecting management’s determination of when control has passed to the customer, evaluating the data and assumptions used in management’s judgment over when transfer of control has occurred, and testing the transfer of control by agreeing relevant information, including associated terms and conditions, to underlying contracts entered into by the Company. We tested if the cumulative effect adjustment made under the modified retrospective adoption approach was in accordance with ASC 606, including testing the mathematical accuracy, and assessed the completeness of the financial statement disclosures. We also performed procedures to address the completeness and accuracy of the underlying data used in the calculations and the Company’s disclosures.

Inventory - Valuation

Description of the Matter	The Company’s inventories totaled $1.5 billion as of June 30, 2019, representing 13% of total assets. As explained in Note 2 to the consolidated financial statements, the Company assesses 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 net realizable value if less than cost. Auditing management’s estimates for excess and obsolete inventory involved subjective auditor judgment because management’s assessment of whether a write down is required and the measurement of any excess of cost over net realizable value is judgmental and considers a number of qualitative factors that are affected by market and economic conditions outside the Company’s control.
How We Addressed the Matter in Our Audit	We evaluated and tested the Company’s processes and the design and operating effectiveness of internal controls addressing the identified audit risks. This included controls over management’s assessment of inventory valuation, including the development of forecasted usage of inventories and consideration of how factors outside of the Company’s control might affect management’s judgment related to the valuation of excess and obsolete inventory. Our audit procedures included, among others, evaluating the significant assumptions (e.g., forecasts related to the Company’s future manufacturing schedules, customer demand, technological and/or market obsolescence, and possible alternative uses) and the underlying data used in management’s excess and obsolete inventory valuation assessment. We evaluated inventory levels compared to forecasted demand, historical sales and specific product considerations. We also assessed the historical accuracy of management’s estimates.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1981.

San Jose, California

August 20, 2019

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Lam Research Corporation

Opinion on Internal Control over Financial Reporting

We have audited Lam Research Corporation’s internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Lam Research Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of June 30, 2019 and June 24, 2018, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders‘ equity, for each of the three years in the period ended June 30, 2019, and the related notes and our report dated August 20, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

San Jose, California

August 20, 2019

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