Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations contains forward-looking statements, which are subject to risks, uncertainties, and changes in condition, significance, value, and effect. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in “Risk Factors” and elsewhere in this 2020 Form 10-K and other documents we file from time to time with the Securities and Exchange Commission. (See “Cautionary Statement Regarding Forward-Looking Statements” in Part I of this 2020 Form 10-K.)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a description of our results of operations and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this 2020 Form 10-K. MD&A consists of the following sections:

Executive Summary provides a summary of the key highlights of our results of operations and our management’s assessment of material trends and uncertainties relevant to our business.

Results of Operations provides an analysis of operating results.

Critical Accounting Policies and Estimates discusses accounting policies that reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Liquidity and Capital Resources provides an analysis of cash flows, contractual obligations, and financial position.

Executive Summary

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

Our customer base includes leading semiconductor memory, foundry, and integrated device manufacturers that make products such as NVM, DRAM, and logic devices. We aim to increase our strategic relevance with our customers by contributing more to their continued success. Our core technical competency is integrating hardware, process, materials, software, and process control enabling results on the wafer.

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

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individual steps. Fabricating these devices requires highly sophisticated process technologies to integrate an increasing array of new materials with precise control at the atomic scale. Along with meeting technical requirements, wafer processing equipment must deliver high productivity and be cost-effective.

Demand from the Cloud, IoT, and other markets is driving the need for increasingly powerful and cost-efficient semiconductors. At the same time, there are growing technical challenges with traditional scaling. These trends are driving significant inflections in semiconductor manufacturing, such as the increasing importance of vertical 3D scaling strategies as well as multiple patterning to enable shrinks.

We believe we are in a strong position with our leadership and competency in deposition, etch, and clean to facilitate some of the most significant innovations in semiconductor device manufacturing. We have a broad portfolio of products that provide complementary processing steps used throughout semiconductor manufacturing. Our Customer Support Business Group focuses attention on delivery solutions that meet our customers’ technical requirements as well as productivity needs during the equipment lifecycle. Several factors create opportunity for sustainable differentiation for us: (i) our focus on research and development, with several on-going programs relating to sustaining engineering, product and process development, and concept and feasibility; (ii) our ability to effectively leverage cycles of learning from our broad installed base; (iii) our collaborative focus with ecosystem partners; and (iv) our focus on delivering our multi-product solutions with a goal to enhance the value of Lam’s solutions to our customers.

During fiscal year 2020, customer demand remained relatively strong, however we experienced COVID-19-related production and supply chain disruptions, which impacted the timing of revenue recognition and negatively impacted our gross margin. While we are currently seeing improvements in both our own operations and those of our suppliers, risks and uncertainties related to the COVID-19 pandemic remain, which may negatively impact our revenue and gross margin. Over the longer term, while there are risks that the impact of COVID-19 to the broader macroeconomic environment may negatively impact our customer demand, we believe that secular demand for semiconductors will continue to drive sustainable growth for our products and services, and that technology inflections in our industry, including 3D device scaling, multiple patterning, process flow, and advanced packaging chip integration will lead to an increase in our served addressable market for our products and services in deposition, etch, and clean.

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

	Year Ended												Change
June 28, 2020				June 30, 2019				June 24, 2018				FY20 vs. FY19							FY19 vs. FY18
	(in thousands, except per share data and percentages)
Revenue	$	10,044,736			$	9,653,559			$	11,076,998			$	391,177			4.1	%		$	(1,423,439	)		(12.9	)%
Gross margin	$	4,608,693			$	4,358,459			$	5,165,032			$	250,234			5.7	%		$	(806,573	)		(15.6	)%
Gross margin as a percent of total revenue	45.9		%		45.1		%		46.6		%		0.8%							(1.5)%
Total operating expenses	$	1,934,891			$	1,893,727			$	1,951,733			$	41,164			2.2	%		$	(58,006	)		(3.0	)%
Net income	$	2,251,753			$	2,191,430			$	2,380,681			$	60,323			2.8	%		$	(189,251	)		(7.9	)%
Net income per diluted share	$	15.10			$	13.70			$	13.17			$	1.40			10.2	%		$	0.53			4.0	%

Fiscal year 2020 revenue increased 4% compared to fiscal year 2019, reflecting stronger customer demand for semiconductor equipment. Gross margin as a percentage of revenue increased primarily due to customer and product mix as well as lower amortization expense related to intangibles acquired through business combinations, partially offset by lower factory and field utilization. The increase in operating expenses in fiscal year 2020 compared to fiscal year 2019 was mainly driven by higher employee-related costs as a result of increased headcount and outsourcing services, partially offset by lower travel expense, miscellaneous costs and restructuring charges.

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Fiscal year 2019 revenue decreased 13% compared to fiscal year 2018, reflecting lower customer demand for semiconductor equipment. Gross margin as a percentage of revenue decreased primarily due to lower factory utilization. The decrease in operating expenses in fiscal year 2019 compared to fiscal year 2018 was mainly driven by lower employee-related costs and amortization related to intangibles acquired through business combinations, partially offset by restructuring charges.

Our cash and cash equivalents, investments, and restricted cash and investments balances totaled approximately $7.0 billion as of June 28, 2020, compared to $5.7 billion as of June 30, 2019. Cash flow provided from operating activities was $2.1 billion for fiscal year 2020 compared to $3.2 billion for fiscal year 2019. Cash flow provided from operating activities in fiscal year 2020 was primarily used for $1.4 billion in treasury stock purchases, $657 million in dividends paid to our stockholders, and $203 million of capital expenditures. These cash outflows were partially offset by $1.3 billion of net proceeds from issuance of debt and $94 million of treasury stock reissuance and Common Stock issuance resulting from our employee equity-based compensation programs.

Results of Operations

Revenue

	Year Ended
June 28, 2020				June 30, 2019				June 24, 2018
Revenue (in millions)	$	10,045			$	9,654			$	11,077
China	31		%		22		%		16		%
Korea	24		%		23		%		35		%
Taiwan	19		%		17		%		13		%
Japan	9		%		20		%		17		%
United States	8		%		8		%		7		%
Southeast Asia	6		%		6		%		7		%
Europe	3		%		4		%		5		%

Revenue increased in fiscal year 2020 compared to fiscal year 2019, but decreased compared to fiscal year 2018, primarily as a result of the variability of semiconductor capital investments by our customers. The overall Asia region continued to account for a majority of our revenues as a substantial amount of the worldwide capacity investments for semiconductor manufacturing continued to occur in this region.

The deferred revenue balance was $537 million as of June 28, 2020 compared to $449 million as of June 30, 2019, driven primarily by additional deferrals towards the future servicing of our existing installed base and COVID-19-related production disruptions.

The percentage of leading- and non-leading-edge equipment and upgrade revenue to each of the markets we serve was as follows:

	Year Ended
June 28, 2020			June 30, 2019
Memory	58	%		70	%
Foundry	31	%		20	%
Logic/integrated device manufacturing	11	%		10	%

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Gross Margin

	Year Ended												Change
June 28, 2020				June 30, 2019				June 24, 2018			FY20 vs. FY19							FY19 vs. FY18
	(in thousands, except percentages)
Gross margin	$	4,608,693			$	4,358,459			$	5,165,032			$	250,234			5.7	%		$	(806,573	)		(15.6	)%
Percent of revenue	45.9		%		45.1		%		46.6		%		0.8%							(1.5)%

The increase in gross margin as a percentage of revenue for fiscal year 2020 compared to fiscal year 2019 was primarily due to customer and product mix as well as lower amortization expense related to intangibles acquired through business combinations, partially offset by lower factory and field utilization.

The decrease in gross margin as a percentage of revenue for fiscal year 2019 compared to fiscal year 2018 was primarily due to lower factory utilization.

Research and Development

	Year Ended												Change
June 28, 2020				June 30, 2019				June 24, 2018			FY20 vs. FY19							FY19 vs. FY18
	(in thousands, except percentages)
Research & development	$	1,252,412			$	1,191,320			$	1,189,514			$	61,092			5.1	%		$	1,806			0.2	%
Percent of revenue	12.5		%		12.3		%		10.7		%		0.2%							1.6%

We continued to make significant R&D investments focused on leading-edge deposition, etch, clean, and other semiconductor manufacturing processes. The increase in R&D expense during fiscal year 2020 compared to fiscal year 2019 was mainly driven by an increase of $50 million in employee-related costs due to increased headcount, $19 million in outsourcing service costs, and $10 million in spending for supplies, partially offset by a decrease of $7 million in travel expense and $5 million in restructuring charges.

R&D expense during fiscal year 2019 increased slightly compared to fiscal year 2018.

Selling, General, and Administrative

	Year Ended												Change
June 28, 2020				June 30, 2019				June 24, 2018			FY20 vs. FY19							FY19 vs. FY18
	(in thousands, except percentages)
Selling, general, and administrative ("SG&A")	$	682,479			$	702,407			$	762,219			$	(19,928	)		(2.8	)%		$	(59,812	)		(7.8	)%
Percent of revenue	6.8		%		7.3		%		6.9		%		(0.5)%							0.4%

The decrease in SG&A expense during fiscal year 2020 compared to fiscal year 2019 was primarily due to a $17 million decrease in spending for customer-related sales costs, a $9 million decrease in spending for supplies, a $9 million decrease in restructuring charges, and a $6 million decrease in spending for travel and entertainment, partially offset by an increase of $25 million in spending for rent, repair and utilities.

The decrease in SG&A expense during fiscal year 2019 compared to fiscal year 2018 was primarily due to a $65 million decrease in employee variable compensation and a $17 million decrease in amortization related to intangibles acquired through business combinations, partially offset by an increase of $10 million in depreciation and $8 million in restructuring charges.

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Other Expense, Net

Other expense, net, consisted of the following:

	Year Ended												Change
June 28, 2020				June 30, 2019				June 24, 2018			FY20 vs. FY19							FY19 vs. FY18
	(in thousands, except percentages)
Interest income	$	85,433			$	98,771			$	85,813			$	(13,338	)		(13.5	)%		$	12,958			15.1	%
Interest expense	(177,440		)		(117,263		)		(97,387		)		$	(60,177	)		51.3	%		$	(19,876	)		20.4	%
Gains on deferred compensation plan related assets, net	5,999				10,464				14,692				$	(4,465	)		(42.7	)%		$	(4,228	)		(28.8	)%
Loss on impairment of investments	—				—				(42,456		)		$	—			—	%		$	42,456			100.0	%
Foreign exchange (losses) gains, net	(3,317		)		826				(3,382		)		$	(4,143	)		(501.6	)%		$	4,208			(124.4	)%
Other, net	(9,499		)		(10,959		)		(18,790		)		$	1,460			(13.3	)%		$	7,831			(41.7	)%
	$	(98,824	)		$	(18,161	)		$	(61,510	)		$	(80,663	)		444.2	%		$	43,349			(70.5	)%

Interest income decreased in fiscal year 2020 compared to fiscal year 2019 as a result of lower yield, offset by a higher cash balance. Interest income increased in fiscal year 2019 compared to fiscal year 2018 as a result of higher yield, offset by a lower cash balance.

Interest expense increased in fiscal year 2020 compared to fiscal year 2019 primarily due to the full-year impact of the issuance of the $2.5 billion of senior notes that occurred in fiscal year 2019 and the issuance of $2.0 billion senior notes in fiscal year 2020. The increase in interest expense in fiscal year 2019 compared to fiscal year 2018 was also primarily due to the issuance of the $2.5 billion of senior notes in fiscal year 2019.

The gains on deferred compensation plan related assets in the periods presented were driven by an improvement in the fair market value of the underlying funds.

The loss on impairment of investments during fiscal year 2018 is the result of a decision to sell selected investments held in foreign jurisdictions in connection with our cash repatriation strategy following the December 2017 U.S. tax reform.

Income Tax Expense

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

	Year Ended												Change
June 28, 2020				June 30, 2019				June 24, 2018			FY20 vs. FY19							FY19 vs. FY18
	(in thousands, except percentages)
Income tax expense	$	323,225			$	255,141			$	771,108			$	68,084			26.7	%		$	(515,967	)		(66.9	)%
Effective tax rate	12.6		%		10.4		%		24.5		%		2.2%							(14.1)%

The increase in the effective tax rate in fiscal year 2020 as compared to fiscal year 2019 was primarily due to a cumulative income tax benefit reversal due to a court ruling in fiscal year 2020, as outlined below.

The decrease in the effective tax rate in fiscal year 2019 as compared to fiscal year 2018 was primarily due to the impact of U.S. tax reform and its mandated one-time transition tax on accumulated unrepatriated foreign earnings in fiscal year 2018.

In November 2019, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) rejected the en banc appeal petitioned by Altera Corporation (“Altera”) in July 2019. In that quarter, we evaluated the impact of the decision

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and viewed the denial as an indication that Altera’s position of excluding stock-based compensation expense in an inter-company cost-sharing arrangement was unlikely to be sustained upon further litigation. As a result, we reversed $74.5 million of net tax assets associated with stock-based compensation benefits related to previous years in the Condensed Consolidated Financial Statements in the three months ended December 29, 2019 and we no longer reflected a net tax benefit within our financial statements related to excluding stock-based compensation from our inter-company cost-sharing arrangement. In February 2020, Altera petitioned the Supreme Court of the United States ("SCOTUS") to hear their case. In June 2020, the SCOTUS denied the petition.

International revenues account for a significant portion of our total revenues, such that a material portion of our pre-tax income is earned and taxed outside the United States. International pre-tax income is taxable in the United States at a lower effective tax rate than the federal statutory tax rate. Please refer to Note 7 of our Consolidated Financial Statements in Part II, Item 8 of this 2020 Form 10-K.

Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Our gross deferred tax assets were $575 million and $471 million at the end of fiscal years 2020 and 2019, respectively. These gross deferred tax assets were offset by gross deferred tax liabilities of $196 million and $160 million at the end of fiscal years 2020 and 2019, respectively, and a valuation allowance of $245 million and $227 million at the end of fiscal years 2020 and 2019, respectively. The change in the gross deferred tax assets, gross deferred tax liabilities, and valuation allowance between fiscal year 2020 and 2019 is primarily due to increases in outside basis differences of foreign subsidiaries, tax credits, and operating lease liabilities and right-of-use assets, and decreases in prepaid cost sharing.

As of our fiscal year ended June 28, 2020, we continue 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. The valuation allowances were $245 million and $227 million at the end of fiscal years 2020 and 2019, respectively.

We evaluate if the deferred tax assets are realizable on a quarterly basis and will continue to assess the need for changes in valuation allowances, if any.

Uncertain Tax Positions

We re-evaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

Critical Accounting Policies and Estimates

A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make certain judgments, estimates and assumptions that could affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on historical experience and on various other assumptions we believe to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates, which could have a material impact on our business, results of operations, and financial condition. Our critical accounting estimates include:

•	the recognition and valuation of revenue from arrangements with multiple performance obligations which impacts revenue;

•	the valuation of inventory, which impacts gross margin;

•	the valuation of warranty reserves, which impacts gross margin;

•	the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions, which impact our provision for income tax expenses; and

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•	the valuation and recoverability of long-lived assets, which impacts gross margin and operating expenses when we record asset impairments or accelerate their depreciation or amortization.

We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements regarding the critical accounting estimates indicated above. See Note 2, “Summary of Significant Accounting Policies,” of our Consolidated Financial Statements in Part II, Item 8 of this 2020 Form 10-K for additional information regarding our accounting policies.

Revenue Recognition: On June 25, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“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.

We recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services by following a five-step process, (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when or as we satisfy a performance obligation, as further described below.

Identify the contract with a customer. We generally consider documentation of terms with an approved purchase order as a customer contract, provided that collection is considered probable, which is assessed based on the creditworthiness of the customer as determined by credit checks, payment histories, and/or other circumstances.

Identify the performance obligations in the contract. Performance obligations include sales of systems, spare parts, and services. In addition, our customer contracts contain provisions for installation and training services which have been deemed immaterial in the context of the contract.

Determine the transaction price. The transaction price for our contracts with customers consists of both fixed and variable consideration provided it is probable that a significant reversal of revenue will not occur when the uncertainty related to variable consideration is resolved. Fixed consideration includes amounts to be contractually billed to the customer while variable consideration includes estimates for discounts and credits for future usage which are based on contractual terms outlined in volume purchase agreements and other factors known at the time. We generally invoice 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. Our contracts with customers typically do not include significant financing components as the period between the transfer of performance obligations and timing of payment are generally within one year.

Allocate the transaction price to the performance obligations in the contract. For contracts that contain multiple performance obligations, we allocate the transaction price to the performance obligations in the contract on a 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 we satisfy 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: Our policy is to assess the valuation of all inventories including manufacturing raw materials, work-in-process, finished goods, and spare parts in each reporting period. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. Estimates of market value include but are not limited to management’s forecasts related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, general semiconductor market conditions, and possible alternative uses. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period in which we make the revision.

Warranty: We record a provision for estimated warranty expenses to cost of sales for each system when we recognize revenue. We periodically monitor the performance and cost of warranty activities, if actual costs incurred are different than our estimates, we may recognize adjustments to provisions in the period in which

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those differences arise or are identified. We do not maintain general or unspecified reserves; all warranty reserves are related to specific systems.

Income Taxes: Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more likely than not that such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. In the event that we determine that we will not be able to realize all or part of our net deferred tax assets, an adjustment will be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the deferred tax assets will be realized, then the previously provided valuation allowance will be reversed.

We recognize 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. Our policy is to include interest and penalties related to uncertain tax positions as a component of income tax expense.

Long-lived Assets: We review goodwill at least annually for impairment. If certain events or indicators of impairment occur between annual impairment tests, we will perform an impairment test at that date. In testing for a potential impairment of goodwill, we: (1) allocate goodwill to the reporting units to which the acquired goodwill relates; (2) estimate the fair value of our reporting units; and (3) determine the carrying value (book value) of those reporting units. Prior to this allocation of the assets to the reporting units, we assess long-lived assets for impairment. Furthermore, if the estimated fair value of a reporting unit is less than the carrying value, we 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 our goodwill impairment process we first assess qualitative factors to determine whether it is necessary to perform a quantitative analysis. We do not calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount.

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. We determine the fair value of our reporting units by using an income approach. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.

In estimating the fair value of a reporting unit, we make estimates and judgments about the future cash flows of our reporting units, including estimated growth rates and assumptions about the economic environment. Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses, there is significant judgment involved in determining the cash flows attributable to a reporting unit. In addition, we make certain judgments about allocating shared assets to the estimated balance sheets of our reporting units. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge.

As a result, several factors could result in an impairment of a material amount of our goodwill balance in future periods, including but not limited to: (1) weakening of the global economy, weakness in the semiconductor equipment industry, or our failure to reach internal forecasts, which could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted cash flow value of our reporting units; and (2) a decline in our Common Stock price and resulting market capitalization, to the extent we determine that the decline is sustained and indicates a reduction in the fair value of our reporting units below their carrying value. Further, the value assigned to intangible assets, other than goodwill, is based on estimates and judgments regarding expectations such as the success and lifecycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, we may be required to record an impairment charge to write down the asset to its realizable value.

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For other long-lived assets, we routinely consider whether indicators of impairment are present. If such indicators are present, we determine whether the sum of the estimated undiscounted cash flows attributable to the assets is less than their carrying value. If the sum is less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. We recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The fair value of the asset then becomes the asset’s new carrying value, which we depreciate over the remaining estimated useful life of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value. In addition, for fully amortized intangible assets, we derecognize the gross cost and accumulated amortization in the period we determine the intangible asset no longer enhances future cash flows.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 3, “Recent Accounting Pronouncements,” of our Consolidated Financial Statements, included in Part II, Item 8 of this 2020 Form 10-K.

Liquidity and Capital Resources

Total gross cash, cash equivalents, investments, and restricted cash and investments balances were $7.0 billion at the end of fiscal year 2020 compared to $5.7 billion at the end of fiscal year 2019. This increase was primarily due to cash provided by operating activities and the issuance of $2.0 billion of senior notes, partially offset by Common Stock repurchases in connection with our stock repurchase program and dividends paid.

Cash Flow from Operating Activities

Net cash provided by operating activities of $2.1 billion during fiscal year 2020 consisted of (in thousands):

Net income	$	2,251,753
Non-cash charges:
Depreciation and amortization	268,525
Equity-based compensation expense	189,197
Deferred income taxes	(17,777		)
Amortization of note discounts and issuance costs	5,940
Changes in operating asset and liability accounts	(571,875		)
Other	688
	$	2,126,451

Significant changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in accounts receivable of $642 million, inventories of $412 million, and prepaid assets of $14 million; partially offset by sources of cash: increases in accrued expenses and other liabilities of $211 million, accounts payable of $208 million, and deferred profit of $76 million.

Cash Flow from Investing Activities

Net cash used by investing activities during fiscal year 2020 was $244 million, primarily consisting of capital expenditures of $203 million.

Cash Flow from Financing Activities

Net cash used by financing activities during fiscal year 2020 was $624 million, primarily consisting of $1.4 billion in Common Stock repurchases, $657 million of dividends paid, partially offset by $1.3 billion of net proceeds from issuance of debt, and $94 million of stock issuance and treasury stock reissuances associated with our employee stock-based compensation plans.

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Liquidity

Given that the semiconductor industry is highly competitive and has historically experienced rapid changes in demand, we believe that maintaining sufficient liquidity reserves is important to support sustaining levels of investment in R&D and capital infrastructure. Anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash, cash equivalents, and short-term investments as of June 28, 2020, are expected to be sufficient to support our anticipated levels of operations, investments, debt service requirements, capital expenditures, capital redistributions, and dividends through at least the next twelve months. However, uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets, have in the past, and could in the future, impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors.

In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on demand for our products and services. While we have substantial cash balances, we may require additional funding and need or choose to raise the required funds through borrowings or public or private sales of debt or equity securities. We believe that, if necessary, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives. However, given the possibility of changes in market conditions or other occurrences, there can be no assurance that such funding will be available in needed quantities or on terms favorable to us.

Off-Balance Sheet Arrangements and Contractual Obligations

We have certain obligations to make future payments under various contracts, some of which are recorded on our balance sheet and some of which are not. Obligations that are recorded on our balance sheet in accordance with GAAP include our long-term debt, operating leases and finance leases which are outlined in the following table. Our off-balance sheet arrangements are presented as purchase obligations in the table. Our contractual obligations and commitments as of June 28, 2020, relating to these agreements and our guarantees are included in the following table based on their contractual maturity date.

The amounts in the table below exclude $439 million of liabilities related to uncertain tax positions as we are unable to reasonably estimate the ultimate amount or time of settlement. See Note 7 of our Consolidated Financial Statements in Part II, Item 8 of this 2020 Form 10-K for further discussion. The amounts in the table below also exclude $12 million associated with funding commitments related to non-marketable equity investments as we are unable to make a reasonable estimate regarding the timing of capital calls.

	Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
	(in thousands)
Operating leases	$	186,935			$	50,611			$	53,624			$	33,040			$	49,660
Financing leases	16,421				4,170				8,250				1,697				2,304
Purchase obligations	707,945				541,524				99,040				66,423				958
Long-term debt and interest expense (1)	8,966,111				997,407				351,881				351,881				7,264,942
One-time transition tax on accumulated unrepatriated foreign earnings (2)	729,422				69,469				138,938				303,926				217,089
Other long-term liabilities (3)	208,670				7,177				27,108				7,781				166,604
Total	$	10,815,504			$	1,670,358			$	678,841			$	764,748			$	7,701,557

(1)

The conversion period for the 2.625% Convertible Senior Notes due May 2041 (the “2041 Notes”) was open as of June 28, 2020, and as such the net carrying value of the 2041 Notes is included within current liabilities on our Consolidated Balance Sheet. The principal balances of the 2041 Notes are reflected in the payment period in the table above based on the contractual maturity assuming no conversion. See Note 14 of our Consolidated Financial Statements in Part II, Item 8 of this 2020 Form 10-K for additional information concerning the 2041 Notes and associated conversion features.

(2)	We may choose to apply existing tax credits, thereby reducing the actual cash payment.

(3)	Certain tax-related liabilities and post-retirement benefits classified as other non-current liabilities on the Consolidated Balance Sheet are included in the “More than 5 Years” category due to the uncertainty in the timing and amount of

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future payments. Additionally, the balance excludes contractual obligations recorded in our Consolidated Balance Sheet as current liabilities and the long-term portion of operating leases.

Operating Leases

We lease most of our administrative, R&D, and manufacturing facilities; regional sales/service offices; and certain equipment under non-cancelable operating leases. Certain of our facility leases for buildings located in Fremont and Livermore, California; Tualatin, Oregon; and certain other facility leases provide us with an option to extend the leases for additional periods or to purchase the facilities. Certain of our facility leases provide for periodic rent increases based on the general rate of inflation. In addition to amounts included in the table above, we have guaranteed residual values for certain of our Fremont and Livermore facility leases of up to $250 million. See Note 15 to our Consolidated Financial Statements in Part II, Item 8 of this 2020 Form 10-K for further discussion.

Financing Leases

Financing leases reflect building and office equipment lease obligations. The amounts in the table above include the interest portion of payment obligations.

Purchase Obligations

Purchase obligations consist of significant contractual obligations either on an annual basis or over multi-year periods related to our outsourcing activities or other material commitments, including vendor-consigned inventories. The contractual cash obligations and commitments table presented above contains our minimum obligations at June 28, 2020, under these arrangements and others. For obligations with cancellation provisions, the amounts included in the preceding table were limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee. Actual expenditures will vary based on the volume of transactions and length of contractual service provided.

Income Taxes

During the December 2017 quarter, a one-time transition tax on accumulated unrepatriated foreign earnings, estimated at $991 million, was recognized associated with the December 2017 U.S. tax reform. In accordance with SAB 118, we finalized the amount of the transition tax during the period ended December 23, 2018. The final amount was $868.4 million. We elected to pay the one-time transition tax over a period of eight years with 8% of the transition tax to be paid each September 15 for years 2018 through 2022, and 15%, 20%, and 25%, respectively, to be paid each September 15 for years 2023 through 2025.

Long-Term Debt

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

On March 4, 2019, we completed a public offering of $750 million aggregate principal amount of the Company’s Senior Notes due March 15, 2026 (the “2026 Notes”), $1 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”). We pay interest at an annual rate of 3.75%, 4.00%, and 4.875%, respectively on the 2026, 2029 and 2049 Notes, on a semi-annual basis on March 15 and September 15 of each year.

On June 7, 2016, we completed a public offering of $800.0 million aggregate principal amount of Senior Notes due June 15, 2021, (the “2021 Notes”). We pay 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.

On March 12, 2015, we completed a public offering of $500 million aggregate principal amount of Senior Notes due March 15, 2020 (the “2020 Notes”) and $500 million aggregate principal amount of Senior Notes due

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March 15, 2025 (the “2025 Notes”). We pay interest at an annual rate of 3.80% on the 2025 Notes, on a semi-annual basis on March 15 and September 15 of each year. During the year ended June 28, 2020, $500 million principal value of 2020 Notes were settled upon maturity.

We may redeem the 2021, 2025, 2026, 2029, 2030, 2049, 2050, and 2060 Notes (collectively the “Senior Notes”) at a redemption price equal to 100% of the principal amount of such series (“par”), plus a “make whole” premium as described in the indenture in respect to the Senior Notes and accrued and unpaid interest before 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, before March 15, 2030 for the 2030 Notes, before September 15, 2048 for the 2049 Notes, before December 15, 2049 for the 2050 Notes, and before December 15, 2059 for the 2060 Notes. We may redeem the Senior Notes at par, plus accrued and unpaid interest at any time 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, on or after March 15, 2030 for the 2030 Notes, on or after September 15, 2048 for the 2049 Notes, on or after December 15, 2049 for the 2050 Notes, and on or after December 15, 2059 for the 2060 Notes. In addition, upon the occurrence of certain events, as described in the indenture, we 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.

In June 2012, with the acquisition of Novellus, we assumed $700 million in aggregate principal amount of 2.625% Convertible Senior Notes due May 2041. We pay cash interest on the 2041 Notes at an annual rate of 2.625%, on a semi-annual basis. The 2041 Notes may be converted, under certain circumstances, into our Common Stock.

We may redeem the 2041 Notes 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.

During the quarter-ended June 28, 2020, the market value of our Common Stock was greater than or equal to 130% of the 2041 Notes conversion prices for 20 or more trading days of the 30 consecutive trading days preceding the quarter end. As a result, the 2041 Notes are convertible at the option of the holder and are classified as current liabilities in our Consolidated Balance Sheets for fiscal year 2020. As of June 28, 2020, $48.5 million of the 2041 notes remain outstanding, as a result of cumulative conversion activity.

During fiscal year 2020, 2019, and 2018, we made $668 million, $117 million, and $753 million, respectively, in principal payments on long-term debt and finance/capital leases.

Revolving Credit Arrangements

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 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 our option, based on (1) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.5%, or (c) one-month London Interbank Offered Rate (“LIBOR”) plus 1.0%, plus a spread of 0.0% to 0.5%, or (2) LIBOR multiplied by the statutory reserve rate, plus a spread of 0.9% to 1.5%, in each case as the applicable spread is determined based on the rating of our non-credit enhanced, senior unsecured long-term debt. Principal and any accrued and unpaid interest is due and payable upon maturity. Additionally, we will pay the lenders a quarterly commitment fee that varies based on our credit rating. The Amended Credit Agreement contains affirmative covenants, negative covenants, financial covenants, and events of default. As of June 28, 2020, we had no borrowings outstanding under the Amended Credit Agreement and were in compliance with all financial covenants.

LIBOR is currently expected to be discontinued by the end of calendar year 2021. We expect to amend the Amended and Restated Credit Agreement prior to that occurrence to provide for an alternative reference interest

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rate plus an appropriate spread that approximates the existing reference interest rate as calculated in accordance with LIBOR. Despite the current expectations, we cannot be sure when LIBOR is discontinued, that we will be able to reach an agreement with the administrative agent under the Amended and Restated Credit Agreement on an alternate reference interest rate plus an appropriate spread, or that changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. If we should fail to reach agreement with the administrative agent on an alternate reference interest rate prior to such time as LIBOR is unavailable as a reference rate, then the borrowings will bear interest at a base rate determined in accordance with the Amended and Restated Credit Agreement tied to either the prime rate or federal funds rate, plus a spread.

Commercial Paper Program

On November 13, 2017, we established a commercial paper program (the “CP Program”) under which we may issue unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $1.25 billion. Individual maturities may vary but cannot not exceed 397 days from the date of issue. The net proceeds from the CP Program will be used for general corporate purposes, including repurchases of our Common Stock from time to time under our stock repurchase program. If at any time, funds are not available under favorable terms under the CP Program, we may utilize the Amended Credit Agreement for funding. Amounts available under the CP Program may be re-borrowed. The CP Program is backstopped by our Revolving Credit Arrangement. As of June 28, 2020, we had no outstanding borrowings under the CP Program.

Other Guarantees

We have issued certain indemnifications to our lessors for taxes and general liability under some of our agreements. We have entered into certain insurance contracts that may limit our exposure to such indemnifications. As of June 28, 2020, we had not recorded any liability on our Consolidated Financial Statements in connection with these indemnifications, as we do not believe, based on information available, that it is probable that we will pay any material amounts under these guarantees.

Generally, we indemnify, under pre-determined conditions and limitations, our customers for infringement of third-party intellectual property rights by our products or services. We seek to limit our liability for such indemnity to an amount not to exceed the sales price of the products or services subject to our indemnification obligations. We do not believe, based on information available, that it is probable that we will pay any material amounts under these guarantees.

We provide guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of June 28, 2020, the maximum potential amount of future payments that we could be required to make under these arrangements and letters of credit was $59 million. We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid.

We have entered into indemnification agreements with our officers and directors, consistent with our Bylaws and Certificate of Incorporation; and under local law, we may be required to provide indemnification to our employees for actions within the scope of their employment. Although we maintain 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. We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under such indemnification agreements or statutory obligations.

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