Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

	Page
Consolidated Statements of Operations — Years Ended June 28, 2020, June 30, 2019, and June 24, 2018	50
Consolidated Statements of Comprehensive Income — Years Ended June 28, 2020, June 30, 2019, and June 24, 2018	51
Consolidated Balance Sheets — June 28, 2020, and June 30, 2019	52
Consolidated Statements of Cash Flows — Years Ended June 28, 2020, June 30, 2019, and June 24, 2018	53
Consolidated Statements of Stockholders’ Equity — Years Ended June 28, 2020, June 30, 2019, and June 24, 2018	55
Notes to Consolidated Financial Statements	57
Reports of Independent Registered Public Accounting Firm	93

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Lam Research Corporation 2020 10-K 49

LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended
June 28, 2020				June 30, 2019				June 24, 2018
Revenue	$	10,044,736			$	9,653,559			$	11,076,998
Cost of goods sold	5,436,043				5,295,100				5,911,966
Gross margin	4,608,693				4,358,459				5,165,032
Research and development	1,252,412				1,191,320				1,189,514
Selling, general, and administrative	682,479				702,407				762,219
Total operating expenses	1,934,891				1,893,727				1,951,733
Operating income	2,673,802				2,464,732				3,213,299
Other expense, net	(98,824		)		(18,161		)		(61,510		)
Income before income taxes	2,574,978				2,446,571				3,151,789
Income tax expense	(323,225		)		(255,141		)		(771,108		)
Net income	$	2,251,753			$	2,191,430			$	2,380,681
Net income per share:
Basic	$	15.55			$	14.37			$	14.73
Diluted	$	15.10			$	13.70			$	13.17
Number of shares used in per share calculations:
Basic	144,814				152,478				161,643
Diluted	149,090				159,915				180,782

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2020 10-K 50

LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	Year Ended
June 28, 2020				June 30, 2019				June 24, 2018
Net income	$	2,251,753			$	2,191,430			$	2,380,681
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(6,441		)		(6,648		)		9,649
Cash flow hedges:
Net unrealized (losses) gains during the period	(30,603		)		2,461				(6,960		)
Net losses (gains) reclassified into earnings	2,137				(2,749		)		3,729
	(28,466		)		(288		)		(3,231		)
Available-for-sale investments:
Net unrealized gains (losses) during the period	1,842				3,535				(45,382		)
Net losses (gains) reclassified into earnings	935				(199		)		43,086
	2,777				3,336				(2,296		)
Defined benefit plans, net change in unrealized component	1,949				(2,981		)		129
Other comprehensive (loss) income, net of tax	(30,181		)		(6,581		)		4,251
Comprehensive income	$	2,221,572			$	2,184,849			$	2,384,932

See Notes to Consolidated Financial Statements

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LAM RESEARCH CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	June 28, 2020				June 30, 2019
ASSETS:
Cash and cash equivalents	$	4,915,172			$	3,658,219
Investments	1,795,080				1,772,984
Accounts receivable, less allowance for doubtful accounts of $5,465 as of June 28, 2020 and $5,021 as of June 30, 2019	2,097,099				1,455,522
Inventories	1,900,024				1,540,140
Prepaid expenses and other current assets	146,160				133,544
Total current assets	10,853,535				8,560,409
Property and equipment, net	1,071,499				1,059,077
Restricted cash and investments	253,911				255,177
Goodwill	1,484,436				1,484,597
Intangible assets, net	168,532				216,950
Other assets	727,134				425,123
Total assets	$	14,559,047			$	12,001,333
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Trade accounts payable	$	592,387			$	376,561
Accrued expenses and other current liabilities	1,272,655				946,641
Deferred profit	457,523				381,317
Current portion of convertible notes and finance leases	839,877				667,131
Total current liabilities	3,162,442				2,371,650
Senior notes, convertible notes, and finance leases, less current portion	4,970,848				3,822,768
Income taxes payable	909,709				892,790
Other long-term liabilities	332,559				190,821
Total liabilities	9,375,558				7,278,029
Commitments and contingencies
Temporary equity, convertible notes	10,995				49,439
Stockholders’ equity:
Preferred stock, at par value of $0.001 per share; authorized - 5,000 shares, none outstanding	—				—
Common stock, at par value of $0.001 per share; authorized 400,000 shares as of June 28, 2020 and June 30, 2019; issued and outstanding 145,331 shares as of June 28, 2020, and 144,433 shares as of June 30, 2019	145				144
Additional paid-in capital	6,695,858				6,409,405
Treasury stock, at cost, 145,432 shares as of June 28, 2020, and 140,573 shares as of June 30, 2019	(12,949,889		)		(11,602,573		)
Accumulated other comprehensive loss	(94,211		)		(64,030		)
Retained earnings	11,520,591				9,930,919
Total stockholders’ equity	5,172,494				4,673,865
Total liabilities and stockholders’ equity	$	14,559,047			$	12,001,333

See Notes to Consolidated Financial Statements

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Lam Research Corporation 2020 10-K 52

LAM RESEARCH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended
June 28, 2020				June 30, 2019				June 24, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,251,753			$	2,191,430			$	2,380,681
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	268,525				309,281				326,395
Deferred income taxes	(17,777		)		(4,980		)		3,046
Equity-based compensation expense	189,197				187,234				172,216
Impairment of investments	—				—				42,456
Amortization of note discounts and issuance costs	5,940				7,343				14,428
Other, net	688				(5,819		)		33,718
Changes in operating asset and liability accounts:
Accounts receivable, net of allowance	(641,827		)		732,138				(501,628		)
Inventories	(411,608		)		281,355				(701,008		)
Prepaid expenses and other assets	(14,354		)		(17,864		)		(14,391		)
Trade accounts payable	208,478				(131,472		)		35,655
Deferred profit	76,207				(178,074		)		112,413
Accrued expenses and other liabilities	211,229				(194,559		)		751,766
Net cash provided by operating activities	2,126,451				3,176,013				2,655,747
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and intangible assets	(203,239		)		(303,491		)		(273,469		)
Business acquisition, net of cash acquired	—				—				(115,697		)
Purchases of available-for-sale securities	(2,897,627		)		(2,930,049		)		(2,532,829		)
Proceeds from maturities of available-for-sale securities	1,647,379				466,539				650,255
Proceeds from sales of available-for-sale securities	1,235,248				1,137,302				5,035,460
Other, net	(25,845		)		(7,355		)		(15,184		)
Net cash (used for) provided by investing activities	(244,084		)		(1,637,054		)		2,748,536

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	Year Ended
June 28, 2020				June 30, 2019				June 24, 2018
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt	$	1,974,651			$	2,476,720			$	—
Principal payments on long-term debt and capital lease obligations and payments for debt issuance costs	(667,537		)		(117,653		)		(755,694		)
Net (repayment) proceeds from commercial paper	—				(361,754		)		359,604
Proceeds from borrowings on revolving credit facility	1,250,000				—				750,000
Repayment of borrowings on revolving credit facility	(1,250,000		)		—				(750,000		)
Treasury stock purchases	(1,369,649		)		(3,780,611		)		(2,653,249		)
Dividends paid	(656,838		)		(678,348		)		(307,609		)
Reissuances of treasury stock related to employee stock purchase plan	85,439				77,961				75,624
Proceeds from issuance of common stock	8,084				6,813				9,258
Other, net	1,920				(13,208		)		9
Net cash used for financing activities	(623,930		)		(2,390,080		)		(3,272,057		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(2,750		)		(4,041		)		2,593
Net increase (decrease) in cash, cash equivalents and restricted cash	1,255,687				(855,162		)		2,134,819
Cash, cash equivalents and restricted cash at beginning of year	3,913,396				4,768,558				2,633,739
Cash, cash equivalents and restricted cash at end of year	$	5,169,083			$	3,913,396			$	4,768,558
Schedule of non-cash transactions
Accrued payables for stock repurchases	$	82			$	29			$	116
Accrued payables for capital expenditures	37,812				23,185				24,001
Dividends payable	167,129				158,868				174,372
Transfers of finished goods inventory to property and equipment, net	51,694				54,533				57,886
Supplemental disclosures:
Cash payments for interest	$	171,889			$	76,933			$	84,401
Cash payments for income taxes, net	222,909				300,268				142,800
Reconciliation of cash, cash equivalents, and restricted cash	June 28, 2020				June 30, 2019				June 24, 2018
Cash and cash equivalents	$	4,915,172			$	3,658,219			$	4,512,257
Restricted cash and investments	253,911				255,177				256,301
Total cash, cash equivalents, and restricted cash	$	5,169,083			$	3,913,396			$	4,768,558

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 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
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	—			—				—				—				—				139,355				139,355
Adoption of ASU 2016-16	—			—				—				—				—				(443		)		(443		)
Adoption of ASU 2018-02	—			—				—				—				(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

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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	1,288			$	1			$	8,083			$	—			$	—			$	—			$	8,084
Purchase of treasury stock	(5,371	)		(5		)		—				(1,369,697		)		—				—				(1,369,702		)
Reissuance of treasury stock	513			1				63,057				22,381				—				—				85,439
Equity-based compensation expense	—			—				189,197				—				—				—				189,197
Effect of conversion of convertible notes	4,468			4				(12,328		)		—				—				—				(12,324		)
Reclassification from temporary to permanent equity	—			—				38,444				—				—				—				38,444
Adoption of ASU 2016-02	—			—				—				—				—				3,018				3,018
Net income	—			—				—				—				—				2,251,753				2,251,753
Other comprehensive loss	—			—				—				—				(30,181		)		—				(30,181		)
Cash dividends declared ($4.60 per common share)	—			—				—				—				—				(665,099		)		(665,099		)
Balance at June 28, 2020	145,331			$	145			$	6,695,858			$	(12,949,889	)		$	(94,211	)		$	11,520,591			$	5,172,494

See Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 28, 2020

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 2020, 2019, and 2018 may not necessarily be indicative of future operating results.

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 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.

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 to the performance obligations in the contract, 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 contractually billed to the customer while variable consideration includes estimates for discounts and credits for

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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, as well as the tax effect of carryforwards. The Company records a valuation allowance to reduce its deferred tax

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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 uncertain tax positions 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 28, 2020, June 30, 2019, or June 24, 2018.

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 determining the cash flows attributable to a reporting unit. In addition, the Company makes certain judgments

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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. 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.

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 years ended June 28, 2020 and June 24, 2018, each included 52 weeks, and the fiscal year ended June 30, 2019 included 53 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 28, 2020 or June 30, 2019.

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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 28, 2020, June 30, 2019, and June 24, 2018.

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 finance 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, euros, Korean won, Taiwanese dollars, Chinese renminbi, Swiss franc, British pound sterling, Singapore dollars, Indian rupee, and Malaysian ringgit), 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.

Leases: Lease expense for operating leases is recognized on a straight-line basis over the lease term. The Company includes renewals and terminations in the calculation of the right-of-use asset and liability when the provision is reasonably certain to be exercised. The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments when the rate implicit in the lease is unknown.

The Company has elected the following practical expedients and accounting policy elections for accounting under ASC 842: (i) leases with an initial lease term of 12 months or less are not recorded on the balance sheet; and (ii) lease and non-lease components of a contract are accounted for as a single lease component.

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,

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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 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 February 2016, the FASB issued ASU 2016-02, “Leases.” The amendment establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. In January 2018 and July 2018, the FASB issued ASU 2018-01 and ASU 2018-11 amending the effects of ASU 2016-02, which in combination with ASU 2016-02 were codified as Accounting Standard Codification topic 842 (“ASC 842”). The Company adopted ASC 842 on the first day of the current fiscal year, July 1, 2019, under the modified-retrospective approach, applying the amendments to prospective reporting periods. Results for reporting periods beginning on or after July 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under ASC 840.

The Company elected the package of practical expedients that allowed the Company not to reassess (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct lease costs for existing leases. The Company did not elect to use hindsight in connection with the adoption of ASC 842.

The Company adopted ASC 842 by recording operating right-of-use assets of $110.8 million, net of deferred rent liabilities of $3.0 million that were reclassified to operating right-of-use assets, and operating lease liabilities of $113.8 million. The Company also recognized an adjustment of $3.0 million to retained earnings, net of tax; a reduction of $40.4 million to property and equipment, net; and a reduction of $43.8 million to finance leases ($42.3 million of which was previously recognized in long-term debt and finance lease obligations, less current portion and the remaining was previously recognized in current portion of long-term debt and finance lease obligations) related to its de-recognition of its previously recorded build-to-suit arrangements. The adoption of the standard did not materially impact the Company’s Consolidated Statement of Operations and had no impact on cash flows.

Updates Not Yet Effective

In June 2016, the FASB released ASU 2016-13, “Financial Instruments – Credit Losses.” The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including but not limited to, available for sale debt securities and accounts receivable. The FASB issued a subsequent amendment to the initial guidance in November 2019 within ASU 2019-11. The Company is required to adopt these amendments starting in the first quarter of fiscal year 2021 using a modified-retrospective approach. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact 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 amendment also precludes entities from presenting consideration from transactions with a collaborator that is not

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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 does not expect the adoption of this standard to have a material impact 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 starting in the first quarter of fiscal year 2021. The Company does not expect adoption of this standard to have a material impact on its Consolidated Financial Statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU may be applied prospectively through December 31, 2022. The Company expects to adopt this guidance and apply it to reference rate reform effected arrangement modifications.

Note 4: Revenue

Deferred Revenue

Revenue of $408.8 million included in deferred profit at June 30, 2019 was recognized during fiscal year 2020.

The following table summarizes the transaction price for contracts that have not yet been recognized as revenue as of June 28, 2020 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	$	463,759			$	73,668		(1)	$	—		(1)	$	537,427

(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 following table presents the Company’s revenue disaggregated between system and its customer-support related revenue:

	Year Ended
	June 28, 2020				June 30, 2019
	(in thousands)
Systems Revenue	$	6,625,130			$	6,451,104
Customer support-related revenue and other	3,419,606				3,202,455
	$	10,044,736			$	9,653,559

System revenue includes sales of new leading-edge equipment in deposition, etch and clean markets.

Customer support-related revenue includes sales of customer service, spares, upgrades, and non-leading-edge equipment from the Company’s Reliant product line.

The Company operates in one reportable business segment: manufacturing and servicing of wafer processing semiconductor manufacturing equipment. Refer to Note 20 - Segment, Geographic Information, and Major

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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 leading- and non-leading-edge equipment and upgrade revenue to each of the primary markets we serve:

	Year Ended
	June 28, 2020			June 30, 2019
Memory	58	%		70	%
Foundry	31	%		20	%
Logic/integrated device manufacturing	11	%		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 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 28, 2020, there were a total of 8,909,055 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 28, 2020				June 30, 2019				June 24, 2018
	(in thousands)
Equity-based compensation expense	$	189,197			$	187,234			$	172,216
Income tax benefit recognized related to equity-based compensation	$	36,135			$	47,396			$	87,505
Income tax benefit realized from the exercise and vesting of options and RSUs	$	67,060			$	49,242			$	90,297

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.

Restricted Stock Units

During the fiscal years 2020, 2019, and 2018, 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 a designated benchmark index, ranging from

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0% to 150% of target. The designated benchmark index was the Philadelphia Semiconductor Total Return Index (“XSOX”) for market-based PRSUs issued in 2020 and the Philadelphia Semiconductor Sector Index (“SOX”) for market-based PRSUs issued in 2019 and 2018. 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 designated benchmark index. Market-based PRSUs issued in 2020 utilized the XSOX, as adjusted for the reinvestment of dividends on Common Stock on the ex-dividend date, whereas market-based PRSUs issued in 2019 and 2018 utilized the SOX which excluded the impact of dividends. 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.

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 25, 2017	2,687,606			$	92.01			862,455			$	83.83
Granted	964,391			183.97				285,866			125.56
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			148.50
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
Granted	616,353			280.08				171,526			216.04
Vested	(912,409	)		151.53				(257,787	)		111.75
Forfeited or canceled	(94,265	)		176.30				(33,403	)		160.83
June 28, 2020	1,406,564			$	216.34			315,110			$	208.60

The fair value of the Company’s service-based RSUs was calculated based on the fair market value of the Company’s stock at the date of grant, discounted for dividends. Shares granted for market-based PRSUs includes both shares newly granted during the fiscal year, as well as adjustments to previous grants resulting from actual market price performance; total approximate number of shares newly granted were as follows for fiscal years ended June 28, 2020, June 30, 2019 and June 24, 2018; 86,000, 134,000, and 149,000, respectively.

The fair value of the Company’s market-based PRSUs granted during fiscal years 2020, 2019, and 2018 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:

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	Year Ended
June 28, 2020				June 30, 2019				June 24, 2018
Assumptions:
Expected volatility	35.81		%		32.65		%		34.07		%
Risk-free interest rate	0.85		%		2.52		%		2.35		%
Expected term (years)	2.92				2.92				2.92
Dividend yield	1.53		%		2.49		%		1.05		%
Resulting grant date fair value:	$	320.69			$	165.78			$	170.15

As of June 28, 2020, the Company had $293.2 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.

Stock Options

The following table summarizes stock option activity:

	Options Outstanding
Number of Shares			Weighted-Average Exercise Price
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
Granted	34,236			300.33
Exercised	(118,334	)		68.31
Forfeited or expired	(4,948	)		179.39
June 28, 2020	405,837			$	144.63

As of June 28, 2020 the options outstanding had a weighted-average remaining life of 4.2 years and a weighted-average exercise price of $144.63. As of June 28, 2020, the Company had 243,541 exercisable options outstanding with a weighted-average remaining life of 3.2 years and a weighted-average exercise price of $110.77.

The fair value of the Company’s stock options granted during fiscal years 2020, 2019, and 2018 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 28, 2020			June 30, 2019			June 24, 2018
Expected volatility	33.89	%		32.23	%		34.66	%
Risk-free interest rate	0.88	%		2.62	%		2.53	%
Expected term (years)	4.63			4.70			4.74
Dividend yield	1.53	%		2.70	%		1.05	%

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The year-end intrinsic value relating to stock options for fiscal years 2020, 2019, and 2018 is presented below:

	Year Ended
June 28, 2020				June 30, 2019				June 24, 2018
	(in thousands)
Intrinsic value - options outstanding	$	64,077			$	35,674			$	43,563
Intrinsic value - options exercisable	$	46,698			$	30,139			$	34,661
Intrinsic value - options exercised	$	21,137			$	12,750			$	23,925

As of June 28, 2020, the Company had $6.8 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 2.2 years.

ESPP

The Company has an employee stock purchase plan (the “ESPP”) 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. Typically, each offering period lasts twelve months and comprises one interim purchase date.

During fiscal year 2020, approximately 512 thousand shares of the Company’s Common Stock were sold to employees under the ESPP. At June 28, 2020, approximately 6.4 million shares were available for purchase under the ESPP, and the Company had $30.0 million of total unrecognized compensation cost related to the ESPP which is expected to be recognized over a remaining period of ten months.

Note 6: Other Expense, Net

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

	Year Ended
June 28, 2020				June 30, 2019				June 24, 2018
	(in thousands)
Interest income	$	85,433			$	98,771			$	85,813
Interest expense	(177,440		)		(117,263		)		(97,387		)
Gains on deferred compensation plan related assets, net	5,999				10,464				14,692
Loss on impairment of investments	—				—				(42,456		)
Foreign exchange (losses) gains, net	(3,317		)		826				(3,382		)
Other, net	(9,499		)		(10,959		)		(18,790		)
	$	(98,824	)		$	(18,161	)		$	(61,510	)

Interest income in the year ended June 28, 2020, decreased compared to the year ended June 30, 2019, as a result of lower yield, offset by a higher cash balance. Interest income increased in the year ended June 30, 2019, compared to the year ended June 24, 2018, as a result of a higher yield, offset by a lower cash balance.

Interest expense in the year ended June 28, 2020, increased compared to the year ended June 30, 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 issuance of the $2.0 billion senior notes in fiscal year 2020. The increase in interest expense in the year ended June 30, 2019, compared to the year ended June 24, 2018, was also due to the issuance of the $2.5 billion of senior notes in fiscal year 2019, offset by conversions of the 2041 Convertible Notes and the retirement of the 2018 Convertible Notes in May 2018.

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The gains on deferred compensation plan related assets in the years presented were 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.

Note 7: Income Taxes

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

	Year Ended
	June 28, 2020				June 30, 2019				June 24, 2018
	(in thousands)
United States	$	44,739			$	(59,876	)		$	128,190
Foreign	2,530,239				2,506,447				3,023,599
	$	2,574,978			$	2,446,571			$	3,151,789

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

	Year Ended
	June 28, 2020				June 30, 2019				June 24, 2018
	(in thousands)
Federal:
Current	$	216,513			$	143,845			$	630,148
Deferred	(18,458		)		(10,722		)		12,871
	198,055				133,123				643,019
State:
Current	4,724				5,994				5,348
Deferred	6,524				4,944				(3,273		)
	11,248				10,938				2,075
Foreign:
Current	119,766				110,283				132,566
Deferred	(5,844		)		797				(6,552		)
	113,922				111,080				126,014
Total provision for income taxes	$	323,225			$	255,141			$	771,108

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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 28, 2020				June 30, 2019
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	249,874			$	231,390
Allowances and reserves	119,974				97,671
Equity-based compensation	7,167				14,661
Inventory valuation differences	26,069				18,516
Prepaid cost sharing	—				74,139
Outside basis differences of foreign subsidiaries	105,159				16,260
Operating lease liabilities	40,157				—
Other	26,361				17,972
Gross deferred tax assets	574,761				470,609
Valuation allowance	(244,973		)		(226,928		)
Net deferred tax assets	329,788				243,681
Deferred tax liabilities:
Intangible assets	(6,442		)		(9,883		)
Convertible debt	(24,530		)		(46,993		)
Capital assets	(105,508		)		(83,298		)
Amortization of goodwill	(12,256		)		(11,299		)
Right-of-use assets	(40,157		)		—
Other	(7,509		)		(8,752		)
Gross deferred tax liabilities	(196,402		)		(160,225		)
Net deferred tax assets	$	133,386			$	83,456

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, operating lease liabilities and right-of-use assets, and decreases in prepaid cost sharing.

The Company previously made an accounting policy election to record deferred taxes related to Global Intangible Low-Taxed Income (“GILTI”).

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 $245.0 million related to California deferred tax assets. At June 28, 2020, 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 28, 2020, the Company had federal net operating loss carryforwards of $29.1 million. If not utilized, these losses will begin to expire in fiscal year 2021, and are subject to limitation on their utilization.

At June 28, 2020, the Company had state net operating loss carryforwards of $91.4 million. If not utilized, these losses will begin to expire in fiscal year 2021 and are subject to limitation on their utilization.

At June 28, 2020, the Company had state tax credit carryforwards of $360.0 million. Substantially all of these credits can be carried forward indefinitely.

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Lam Research Corporation 2020 10-K 69

A reconciliation of income tax expense provided at the federal statutory rate (21% in fiscal year 2020 and fiscal year 2019, and 28.27% in fiscal year 2018) to actual income tax expense is as follows:

	Year Ended
	June 28, 2020				June 30, 2019				June 24, 2018
	(in thousands)
Income tax expense computed at federal statutory rate	$	540,745			$	513,780			$	891,011
State income taxes, net of federal tax benefit	(28,046		)		(17,565		)		(50,585		)
Foreign income taxed at different rates	(146,023		)		(260,344		)		(939,808		)
Settlements and reductions in uncertain tax positions	(12,854		)		(31,291		)		(33,367		)
Tax credits	(88,762		)		(71,779		)		(69,301		)
State valuation allowance, net of federal tax benefit	30,923				26,742				57,302
Equity-based compensation	(23,248		)		(7,566		)		(35,875		)
Other permanent differences and miscellaneous items	50,490				39,251				43,214
U.S. tax reform impacts	—				63,913				908,517
	$	323,225			$	255,141			$	771,108

In November 2019, the Ninth Circuit rejected the en banc appeal petitioned by Altera in July 2019. In that quarter, the Company evaluated the impact of the decision 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, the Company 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 the Company no longer reflected a net tax benefit within its financial statements related to excluding stock-based compensation from its inter-company cost-sharing arrangement. In February 2020, Altera petitioned the SCOTUS to hear their case. In June 2020, the SCOTUS denied the petition.

Earnings of the Company’s foreign subsidiaries included in consolidated retained earnings that are indefinitely reinvested in foreign operations aggregated to approximately $539.3 million at June 28, 2020. If these earnings were remitted to the United States, they would be subject to foreign withholding taxes of approximately $86.4 million at current statutory rates.

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As of June 28, 2020, the total gross uncertain tax positions were $476.7 million, compared to $420.8 million as of June 30, 2019, and $305.4 million as of June 24, 2018. During fiscal year 2020, gross uncertain tax positions increased by $55.9 million. The amount of uncertain tax positions that, if recognized, would impact the effective tax rate was $423.8 million, $376.0 million, and $268.3 million, as of June 28, 2020, June 30, 2019, and June 24, 2018, respectively. The aggregate changes in the balance of gross uncertain tax positions were as follows:

	(in thousands)
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
Settlements and effective settlements with tax authorities	(1,836		)
Lapse of statute of limitations	(8,026		)
Increases in balances related to tax positions taken during prior periods	3,206
Decreases in balances related to tax positions taken during prior periods	(3,989		)
Increases in balances related to tax positions taken during current period	66,568
Balance as of June 28, 2020	$	476,695

The Company recognizes interest expense and penalties related to the above uncertain tax positions within income tax expense. The Company had accrued $40.2 million, $19.1 million, and $13.0 million cumulatively for gross interest and penalties as of June 28, 2020, June 30, 2019, and June 24, 2018, 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 28, 2020, tax years 2004-2020 remain subject to examination in the jurisdictions where the Company operates. The Internal Revenue Service (“IRS”) is examining the Company’s U.S. federal income tax return for the fiscal year ended June 24, 2018. As of June 28, 2020, no significant adjustments have been proposed by the IRS. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the IRS will occur.

The Company is in various stages of examinations in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its uncertain tax positions as a result of tax examinations or lapses of statute of limitations. The change in uncertain tax positions as a result of lapses of statute of limitations may range up to $17.5 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 28, 2020				June 30, 2019				June 24, 2018
	(in thousands, except per share data)
Numerator:
Net income	$	2,251,753			$	2,191,430			$	2,380,681
Denominator:
Basic average shares outstanding	144,814				152,478				161,643
Effect of potential dilutive securities:
Employee stock plans	1,236				1,323				2,312
Convertible notes	3,040				5,610				12,258			(1)
Warrants	—				504				4,569
Diluted average shares outstanding	149,090				159,915				180,782
Net income per share - basic	$	15.55			$	14.37			$	14.73
Net income per share - diluted	$	15.10			$	13.70			$	13.17

(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 28, 2020			June 30, 2019			June 24, 2018
	(in thousands)
Options and RSUs	206			578			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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Level 3: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities and based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data.

The Company’s primary financial instruments include its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and leases, and foreign currency related derivative instruments. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of lease obligations approximate their carrying value as the substantial majority of these obligations have interest rates that adjust to market rates on a periodic basis. Refer to Note 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 28, 2020, and June 30, 2019:

	June 28, 2020
																(Reported Within)
Cost				Unrealized Gain				Unrealized (Loss)				Fair Value				Cash and Cash Equivalents				Investments				Restricted Cash & Investments				Other Assets
	(in thousands)
Cash	$	977,862			$	—			$	—			$	977,862			$	973,978			$	—			$	3,884			$	—
Time deposit	2,244,655				—				—				2,244,655				1,994,628				—				250,027				—
Level 1:
Money market funds	1,709,350				—				—				1,709,350				1,709,350				—				—				—
U.S. Treasury and agencies	552,088				373				(9		)		552,452				76,992				475,460				—				—
Mutual funds	68,784				4,571				(928		)		72,427				—				—				—				72,427
Level 1 total	2,330,222				4,944				(937		)		2,334,229				1,786,342				475,460				—				72,427
Level 2:
Government-sponsored enterprises	31,442				12				—				31,454				25,999				5,455				—				—
Foreign government bonds	10,693				28				(5		)		10,716				2,540				8,176				—				—
Corporate notes and bonds	1,405,615				5,344				(302		)		1,410,657				131,685				1,278,972				—				—
Mortgage backed securities - residential	3,142				71				—				3,213				—				3,213				—				—
Mortgage backed securities - commercial	23,660				144				—				23,804				—				23,804				—				—
Level 2 total	1,474,552				5,599				(307		)		1,479,844				160,224				1,319,620				—				—
Total	$	7,027,291			$	10,543			$	(1,244	)		$	7,036,590			$	4,915,172			$	1,795,080			$	253,911			$	72,427

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	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

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 2020 or 2019. Gross realized gains/(losses) from sales of investments were insignificant in the fiscal years 2020, 2019, and 2018.

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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 28, 2020
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	$	189,437			$	(9	)		$	—			$	—			$	189,437			$	(9	)
Mutual funds	2,623				(289		)		5,011				(639		)		7,634				(928		)
Foreign government bonds	9,056				(5		)		—				—				9,056				(5		)
Corporate notes and bonds	332,924				(302		)		—				—				332,924				(302		)
	$	534,040			$	(605	)		$	5,011			$	(639	)		$	539,051			$	(1,244	)

The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities as of June 28, 2020, are as follows:

	Cost				Estimated Fair Value
	(in thousands)
Due in one year or less	$	5,527,654			$	5,529,241
Due after one year through five years	433,973				437,872
Due in more than five years	19,018				19,188
	$	5,980,645			$	5,986,301

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.

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

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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. During the year ended June 28, 2020, the Company entered into and settled a series of these interest rate swap arrangements with a notional value of $400 million. During the year ended June 28, 2020, the company recognized a net loss of $31.5 million of accumulated other comprehensive income, net of tax, related to these interest rate swap agreements. As of June 28, 2020, $31.1 million of losses related to these interest rate swap arrangements remain in accumulated other comprehensive income, which it expects to reclassify from other comprehensive income into earnings over the next 10.0 years.

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 28, 2020, June 30, 2019, or June 24, 2018 associated with forecasted transactions that failed to occur. There were no material gains or losses during the fiscal years ended June 30, 2019, or June 24, 2018 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 28, 2020, the Company had a net gain of $0.3 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 28, 2020, the Company had a net loss of $2.0 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 4.7 years.

Fair Value Hedges

The Company had interest rate contracts whereby the Company received fixed rates and paid 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 were designated as fair value hedges and hedged against changes in the fair value of our debt portfolio. The Company concluded that these interest rate contracts met the criteria necessary to qualify for the short-cut method of hedge accounting, and as such, an assumption was made that the change in the fair value of the hedged debt, due to changes in the benchmark rate, exactly offset the change in the fair value of the interest rate swap. Therefore, the derivative was considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness was recognized. During the year ended June 28, 2020, the Company terminated and consequently discontinued the hedging relationship of these interest rate contracts, refer to Note 14 - Long-Term Debt and Other borrowings for additional information regarding the accumulated fair value adjustment and the related amortization.

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).

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As of June 28, 2020, the Company had the following outstanding foreign currency contracts that were entered into under its cash flow and balance sheet hedge programs:

	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	$	—			$	299,450			$	22,475			$	—
Euro	54,512				—				36,113				—
Korean won	20,492				—				—				50,715
Taiwan dollar	—				—				47,612				—
Chinese renminbi	—				—				35,071				—
Swiss franc	—				—				12,672				—
British pound sterling	—				—				11,191				—
Singapore dollar	—				—				10,062				—
Indian rupee	—				—				7,772				—
Malaysian ringgit	—				—				5,612				—
	$	75,004			$	299,450			$	188,580			$	50,715

The fair value of derivative instruments in the Company’s Consolidated Balance Sheet as of June 28, 2020, and June 30, 2019, were as follows:

	June 28, 2020												June 30, 2019
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		$	1,862			Accrued expenses and other current liabilities		$	1,405			Prepaid expense and other assets		$	119			Accrued expenses and other current liabilities		$	2,756
Interest rate contracts, short-term			—						—						—				Accrued expenses and other current liabilities		5,149
Interest rate contracts, long-term			—						—				Other assets		1,537						—
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepaid expense and other assets		155				Accrued expenses and other current liabilities		70				Prepaid expense and other assets		1,249				Accrued expenses and other current liabilities		748
Total derivatives			$	2,017					$	1,475					$	2,905					$	8,653

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 28, 2020, the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be

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an offset to assets and liabilities by $0.9 million, resulting in a net derivative asset of $1.1 million and net derivative liability of $0.6 million. As of June 30, 2019, the potential effect of rights of offset associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $2.4 million, resulting in a net derivative asset of $0.5 million and a net derivative liability of $6.2 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 28, 2020								Year Ended June 30, 2019
	Location of Gain (Loss) Recognized in or Reclassified into Income	Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified from AOCI into Income				Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified from AOCI into Income
Derivatives in Cash Flow Hedging Relationships		(in thousands)
Foreign exchange contracts	Revenue	$	4,095			$	2,418			$	8,143			$	10,821
Foreign exchange contracts	Cost of goods sold	(2,104		)		(3,101		)		(3,801		)		(5,949		)
Foreign exchange contracts	SG&A	(1,158		)		(1,501		)		(1,618		)		(2,321		)
Interest rate contracts	Other expense, net	(40,610		)		(700		)		—				(134		)
		$	(39,777	)		$	(2,884	)		$	2,724			$	2,417

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 28, 2020				June 30, 2019
Derivatives Not Designated as Hedging Instruments:	Location of (Loss) Gain Recognized in Income	Loss Recognized in Income				Gain Recognized in Income
		(in thousands)
Foreign exchange contracts	Other income	$	(5,971	)		$	4,124

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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 28, 2020
	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:
	$	10,044,736			$	5,436,043			$	682,479			$	(98,824	)
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	—				—				—				(12,882		)
Derivatives designated as hedging instruments	—				—				—				12,882
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	2,418				(3,101		)		(1,501		)		—
Interest rate contracts:
Amount of gain (loss) reclassified from accumulated other comprehensive income into income	—				—				—				(700		)

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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Lam Research Corporation 2020 10-K 79

As of June 28, 2020, two customers accounted for approximately 21% and 12%, of accounts receivable, respectively. As of June 30, 2019, four customers accounted for approximately 18%, 15%, 11%, 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 28, 2020, June 30, 2019, and June 24, 2018.

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 28, 2020				June 30, 2019
	(in thousands)
Raw materials	$	1,161,961			$	994,738
Work-in-process	251,199				174,219
Finished goods	486,864				371,183
	$	1,900,024			$	1,540,140

Note 11: Property and Equipment

Property and equipment, net, is presented in the table below. In connection with the adoption of ASC 842, the Company has excluded $18.4 million of finance right-of-use assets recorded within property and equipment, net from the table below. See Note 15 - Leases for additional information regarding these finance lease right-of-use assets.

	June 28, 2020				June 30, 2019
	(in thousands)
Manufacturing and engineering equipment	$	1,154,668			$	1,039,454
Buildings and improvements	660,865				664,061
Computer and computer-related equipment	178,193				190,974
Office equipment, furniture and fixtures	83,386				82,115
Land	58,805				46,155
	2,135,917				2,022,759
Less: accumulated depreciation and amortization	(1,082,827		)		(963,682		)
	$	1,053,090			$	1,059,077

Depreciation expense, excluding amortization of finance lease right of use assets during fiscal year 2020 was $198.8 million. During fiscal years 2019 and 2018, depreciation expense, including amortization of capital leases, was $182.1 million, and $165.2 million, respectively.

Note 12: Goodwill and Intangible Assets

Goodwill

The balance of goodwill was $1.5 billion as of June 28, 2020 and June 30, 2019, respectively. As of June 28, 2020 and 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 2020, 2019, or 2018.

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Intangible Assets

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

	June 28, 2020												June 30, 2019
	Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
	(in thousands)
Customer relationships	$	630,137			$	(532,550	)		$	97,587			$	630,165			$	(483,204	)		$	146,961
Existing technology	668,992				(654,382		)		14,610				669,399				(647,837		)		21,562
Patents and other intangible assets	98,342				(42,007		)		56,335				126,235				(77,808		)		48,427
Total intangible assets	$	1,397,471			$	(1,228,939	)		$	168,532			$	1,425,799			$	(1,208,849	)		$	216,950

The Company recognized $66.2 million, $127.3 million, and $161.2 million in intangible asset amortization expense during fiscal years 2020, 2019, and 2018, respectively. No intangible asset impairments were recognized in fiscal years 2020, 2019, or 2018.

The estimated future amortization expense of intangible assets as of June 28, 2020, is reflected in the table below. The table excludes $12.3 million of capitalized costs for intangible assets that have not yet been placed into service.

Fiscal Year	Amount
	(in thousands)
2021	$	65,949
2022	61,687
2023	16,156
2024	8,561
2025	3,868
Thereafter	16
	$	156,237

Note 13: Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

	June 28, 2020				June 30, 2019
	(in thousands)
Accrued compensation	$	402,401			$	336,090
Warranty reserves	117,839				127,932
Income and other taxes payable	215,652				49,926
Dividend payable	167,129				158,868
Other	369,634				273,825
	$	1,272,655			$	946,641

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Note 14: Long Term Debt and Other Borrowings

As of June 28, 2020, and June 30, 2019, the Company’s outstanding debt consisted of the following:

	June 28, 2020							June 30, 2019
	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	%
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	%		750,000				3.86	%
Fixed-rate 4.00% Senior Notes Due March 15, 2029 ("2029 Notes")	1,000,000				4.09	%		1,000,000				4.09	%
Fixed-rate 1.90% Senior Note Due June 15, 2030 ("2030 Notes")	750,000				2.01	%		—				—
Fixed-rate 2.625% Convertible Notes Due May 15, 2041 (“2041 Notes”)	48,460			(1)	4.28	%		212,349			(1)	4.28	%
Fixed-rate 4.875% Senior Notes Due March 15, 2049 ("2049 Notes")	750,000				4.93	%		750,000				4.93	%
Fixed-rate 2.875% Senior Note Due June 15, 2050 ("2050 Notes")	750,000				2.93	%		—				—
Fixed-rate 3.125% Senior Note Due June 15, 2060 ("2060 Notes")	500,000				3.18	%		—				—
Total debt outstanding, at par	5,848,460							4,512,349
Unamortized discount	(53,086		)					(73,191		)
Fair value adjustment - interest rate contracts	8,405			(2)				(3,612		)
Unamortized bond issuance costs	(8,301		)					(5,535		)
Total debt outstanding, at carrying value	$	5,795,478						$	4,430,011
Reported as:
Current portion of long-term debt	$	836,107						$	662,308
Long-term debt	4,959,371							3,767,703
Total debt outstanding, at carrying value	$	5,795,478						$	4,430,011

(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)	This amount represents a cumulative fair market gain for discontinued hedging relationships, net of an immaterial amount of amortization for the year ended June 28, 2020.

The Company’s contractual cash obligations relating to its outstanding debt as of June 28, 2020, were as follows:

Payments Due by Fiscal Year:
	(in thousands)
2021 (1)	$	848,460
2022	—
2023	—
2024	—
2025	500,000
Thereafter	4,500,000
Total	$	5,848,460

(1)	As noted above, the conversion period for the 2041 Notes is open as of June 28, 2020. 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.

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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 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 by the Company 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 28, 2020, was $163.9 million. During the quarter ended June 28, 2020 and in the subsequent period through August 18, 2020, the Company received notice of conversion for an additional $18.1 million principal value of 2041 Notes, which will settle in the quarter ending September 27, 2020. As a result of the cumulative conversions, as of June 28, 2020, $48.5 million of the 2041 notes remain outstanding.

Selected additional information regarding the 2041 Notes outstanding as of June 28, 2020, and June 30, 2019, is as follows:

	2041 Notes
	June 28, 2020				June 30, 2019
	(in thousands, except years, percentages, conversion rate, and conversion price)
Carrying amount of permanent equity component, net of tax	$	161,467			$	160,604
Carrying amount of temporary equity component, net of tax	$	10,995			$	49,439
Remaining amortization period (years)	20.9				21.9
Fair Value of Notes (Level 2)	$	462,857
Conversion rate (shares of common stock per $1,000 principal amount of notes)	31.5206
Conversion price (per share of common stock)	$	31.73
If-converted value in excess of par value	$	413,636
Estimated share dilution using average quarterly stock price of $270.53 per share	1,348

Senior Notes

On May 5, 2020, the company 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”). The Company 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, 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 pays 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.

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 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 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 received a fixed rate and paid a variable rate based on a certain benchmark interest rate. During the year ended June 28, 2020, the Company terminated and consequently discontinued the hedging relationship of these interest rate contracts. Refer to Note 9 - Financial Instruments for additional information regarding

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these interest rate contracts. During the year ended June 28, 2020, the Company settled the 2020 Notes at par upon their maturity. Prior to settlement, the Company paid interest at an annual rate of 2.75% on the 2020 Notes.

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 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. The Company 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, 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 28, 2020, is as follows:

	Remaining Amortization period		Fair Value of Notes (Level 2)
	(years)		(in thousands)
2021 Notes	1.0		$	815,560
2025 Notes	4.7		$	565,985
2026 Notes	5.7		$	859,560
2029 Notes	8.7		$	1,185,430
2030 Notes	10.0		$	763,793
2049 Notes	28.7		$	1,045,035
2050 Notes	30.0		$	773,603
2060 Notes	40.0		$	527,825

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 28, 2020, 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 28, 2020, the Company had no outstanding borrowings under the CP Program.

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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, commercial paper, and the revolving credit facility during the fiscal years ended June 28, 2020, June 30, 2019, and June 24, 2018.

	Year Ended
	June 28, 2020				June 30, 2019				June 24, 2018
	(in thousands)
Contractual interest coupon	$	169,483			$	100,712			$	77,091
Amortization of interest discount	4,280				3,937				12,225
Amortization of issuance costs	1,632				1,426				2,034
Effect of interest rate contracts, net	1,037				4,086				3
Total interest cost recognized	$	176,432			$	110,161			$	91,353

Note 15: Leases

The Company leases certain office spaces, manufacturing and warehouse spaces, equipment, and vehicles. On July 1, 2019 the Company adopted ASC 842. Refer to Note 3 - Recent Accounting Pronouncements for additional information regarding the adoption. While the majority of the Company’s lease arrangements are operating leases, the Company has certain leases that qualify as finance leases.

The components of lease expense were as follows for the year ended June 28, 2020 (in thousands):

Financing lease cost:
Amortization of right-of-use assets	$	3,613
Interest on lease liabilities	506
Total finance lease cost	$	4,119
Operating lease cost	$	46,101
Variable lease cost	91,851

Variable lease payments are expensed as incurred and are not included within the right of use asset and lease liability calculation. Variable lease payments primarily include costs associated with the Company’s third party logistics arrangements that contain one or more embedded leases. Variable lease costs will fluctuate based on factory output and material receipt volumes. Short-term rental expense, for agreements less than one year in duration, were immaterial for the twelve months ended June 28, 2020.

Supplemental cash flow information related to leases was as follows as of June 28, 2020 (in thousands):

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	50,223
Financing cash flows paid for principal portion of finance leases	3,539
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	108,816
Finance leases	3,019

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Supplemental balance sheet information related to leases were as follows as of June 28, 2020 (in thousands):

Operating leases
Other assets	$	174,583
Accrued expenses and other current liabilities	$	49,480
Other long-term liabilities	123,889
Total operating lease liabilities	$	173,369
Finance Leases
Property and Equipment, net	$	18,409
Current portion of long-term debt and lease liabilities	$	3,770
Long-term debt and lease liabilities	11,477
Total finance lease liabilities	$	15,247

	June 28, 2020
	Weighted-Average Remaining Lease Term		Weighted-Average Discount Rate
	(in years)
Operating leases	9.0		2.57	%
Finance leases	4.1		2.79	%

As of June 28, 2020, the maturities of lease liabilities are as follows:

	Operating Leases				Finance Leases
	(in thousands)
2021	$	50,611			$	4,170
2022	31,178				6,709
2023	22,446				1,541
2024	18,279				1,080
2025	14,761				617
Thereafter	49,660				2,304
Total lease payments	$	186,935			$	16,421
Less imputed interest	(13,566		)		(1,174		)
Total	$	173,369			$	15,247

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Selected 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, and 2018 was $28.1 million, and $23.5 million, respectively.

The Company has operating leases regarding certain improved properties in Fremont and Livermore, California (the “California Operating Leases”). The Company is required to maintain cash collateral in an aggregate of approximately $250 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 28, 2020.

During the term of the California Operating Leases and when the terms of the California 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 California Operating Leases is generally no more than $220.4 million; however, under certain default circumstances, the guarantee with regard to the California 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.

Note 16: 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 $23.6 million, $24.1 million, and $21.4 million, in fiscal years 2020, 2019, and 2018, 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 28, 2020, and June 30, 2019, the liability of the Company to the plan participants was $220.0 million and $207.0 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 28, 2020, and June 30, 2019, the Company had investments in the aggregate amount of $235.1 million and $228.9 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 $41.0 million and $40.5 million as of June 28, 2020, and June 30, 2019, respectively.

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Note 17: 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 operating and finance lease obligations. Obligations that are not recorded on the Company’s balance sheet include contractual relationships for purchase obligations and certain guarantees. The Company’s commitments relating to off-balance sheet agreements are included in the tables below. These amounts exclude $439.5 million of liabilities related to uncertain tax positions because the Company is unable to reasonably estimate the ultimate amount or time of settlement. See Note 7 - Income Taxes for further discussion.

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 28, 2020, 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 28, 2020, the maximum potential amount of future payments that the Company could be required to make under these arrangements and letters of credit was $58.6 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 28, 2020, 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 28, 2020, were as follows:

Payments Due by Fiscal Year:	Purchase Obligations
	(in thousands)
2021	$	541,524
2022	49,520
2023	49,520
2024	33,211
2025	33,212
Thereafter	958
Total	$	707,945

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. As of June 28, 2020, warranty reserves totaling $11.4 million were recognized in other long-term liabilities, the remainder were included in accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.

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

	Year Ended
June 28, 2020				June 30, 2019
	(in thousands)
Balance at beginning of period	$	127,932			$	192,480
Warranties issued during the period	151,508				249,737
Settlements made during the period	(131,177		)		(307,079		)
Changes in liability for pre-existing warranties	(19,066		)		(7,206		)
Balance at end of period	$	129,197			$	127,932

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 18: 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 28, 2020, the Company has purchased approximately $3.2 billion of shares under this authorization, $0.7 billion via open market trading and $2.5 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 30, 2019												$	3,033,500
Quarter ended September 29, 2019	383			$	75,196			$	196.34			$	2,958,304
Quarter ended December 29, 2019	3,224		(2)	$	1,000,475			$	—			$	1,957,829
Quarter ended March 29, 2020	1,239		(2)	$	146,397			$	274.37			$	1,811,432
Quarter ended June 28, 2020	145			$	38,005			$	261.34			$	1,773,427

(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 380 thousand shares at a total cost of $109.6 million during the 12 months ended June 28, 2020, 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 November 22, 2019, the Company entered into two separate accelerated share repurchase agreements (collectively, the "November 2019 ASR") with two financial institutions to repurchase a total of $1.0 billion of Common Stock. The Company took an initial delivery of approximately 2.9 million shares, which represented 75% of the prepayment amount divided by the Company’s closing stock price on November 22, 2019. The total number of shares received under the November 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 November 2019 ASR occurred during March 2020, resulting in the receipt of approximately 705 thousand additional shares, which yielded a weighted-average share price of approximately $280.27 for the transaction period.

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 agreements occurred during November 2019, resulting in the receipt of approximately 361 thousand additional shares, which yielded a weighted-average share price of approximately $215.60 for the transaction period.

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Note 19: Comprehensive Income (Loss)

The components of accumulated other comprehensive loss, net of tax at the end of June 28, 2020, as well as the activity during the fiscal year ended June 28, 2020, 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 30, 2019	$	(39,370	)		$	(4,330	)		$	2,146			$	(22,476	)		$	(64,030	)
Other comprehensive (loss) income before reclassifications	(6,428		)		(30,603		)		1,842				1,949				(33,240		)
Losses (gains) reclassified from accumulated other comprehensive income (loss) to net income	(13		)	(1)	2,137			(2)	935			(1)	—				3,059
Net current-period other comprehensive income (loss)	(6,441		)		(28,466		)		2,777				1,949				(30,181		)
Balance as of June 28, 2020	$	(45,811	)		$	(32,796	)		$	4,923			$	(20,527	)		$	(94,211	)

(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: $2.1 million gain; cost of goods sold: $2.6 million loss; selling, general, and administrative expenses: $1.1 million loss; and other income and expense: $0.5 million loss.

Tax related to other comprehensive income, and the components thereto, for the years ended June 28, 2020, June 30, 2019, and June 24, 2018 was not material.

Note 20: 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 28, 2020				June 30, 2019				June 24, 2018
Revenue:	(in thousands)
China	$	3,083,916			$	2,161,440			$	1,784,436
Korea	2,391,257				2,205,348				3,832,798
Taiwan	1,906,223				1,596,261				1,397,978
Japan	954,743				1,969,869				1,882,799
United States	812,482				748,601				820,438
Southeast Asia	587,638				615,813				781,360
Europe	308,477				356,227				577,189
Total revenue	$	10,044,736			$	9,653,559			$	11,076,998

	June 28, 2020				June 30, 2019				June 24, 2018
Long-lived assets:	(in thousands)
United States	$	930,970			$	933,054			$	784,469
Europe	74,103				72,928				73,336
Korea	40,318				28,200				24,312
Southeast Asia	8,643				5,542				3,715
China	6,261				6,844				5,466
Japan	5,793				5,750				3,327
Taiwan	5,411				6,759				7,922
	$	1,071,499			$	1,059,077			$	902,547

In fiscal year 2020, four customers accounted for approximately 24%, 14%, 10%, and 10% of total revenues, respectively. 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. No other customers accounted for more than 10% of total revenues.

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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 the Financial Statements

We have audited the accompanying consolidated balance sheets of Lam Research Corporation (the “Company“) as of June 28, 2020 and June 30, 2019, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders‘ equity, for each of the three years in the period ended June 28, 2020, 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 28, 2020 and June 30, 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 28, 2020, 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 28, 2020, 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 18, 2020 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 Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.

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Inventory - Valuation

Description of the Matter	The Company’s inventories totaled $1.9 billion as of June 28, 2020, 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 18, 2020

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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 28, 2020, 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 28, 2020, 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 28, 2020 and June 30, 2019, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders‘ equity, for each of the three years in the period ended June 28, 2020, and the related notes and our report dated August 18, 2020 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 18, 2020

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