Business Context and Reporting Period
Micron Technology, Inc. designs and manufactures DRAM, NAND, NOR, SSD, and related memory and storage products for mobile, data center, client, automotive, industrial, and consumer markets. This unaudited Form 10-Q covers the 13-week quarter and six months ended March 4, 2021, compared with the periods ended February 27, 2020.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Revenue | $6.236 billion | $4.797 billion | +30% |
| Gross margin | $1.649 billion; 26% | $1.355 billion; 28% | Margin down 2 points |
| Operating income | $663 million; 11% | $440 million; 9% | +51% |
| Net income attributable to Micron | $603 million | $405 million | +49% |
| Diluted EPS | $0.53 | $0.36 | +47% |
For the first six months, revenue was $12.009 billion versus $9.941 billion, gross margin was $3.385 billion or 28% versus $2.721 billion or 27%, operating income was $1.529 billion versus $958 million, and net income attributable to Micron was $1.406 billion versus $896 million. Six-month diluted EPS was $1.23 versus $0.79.
- Q2 revenue increased 8% sequentially from $5.773 billion, led by DRAM and NAND shipments.
- Q2 revenue by technology was $4.444 billion from DRAM, $1.650 billion from NAND, and $142 million from other products.
- Q2 segment revenue was $2.636 billion for CNBU, $1.811 billion for MBU, $850 million for SBU, and $935 million for EBU. SBU generated a $59 million operating loss, while CNBU, MBU, and EBU generated operating income of $709 million, $464 million, and $141 million, respectively.
- Six-month operating cash flow was $5.024 billion versus $4.012 billion in the prior-year period.
- Six-month capital expenditures were $5.756 billion on a gross basis, and management estimated approximately $9 billion of 2021 capital expenditures net of partner contributions.
- Cash, equivalents, and marketable investments totaled $8.500 billion at March 4, 2021, compared with $9.190 billion at September 3, 2020. Cash, equivalents, and restricted cash declined by $1.116 billion during the first six months to $6.574 billion.
- Debt had a carrying value of $6.621 billion, including $323 million current and $6.298 billion long-term. The $2.5 billion revolving credit facility was undrawn and fully available.
- Total assets were $54.135 billion and shareholders’ equity was $40.663 billion at March 4, 2021.
Material Changes Versus Comparable Periods
- DRAM revenue increased 44% year over year in Q2, primarily from higher bit shipments in mobile, client, networking, and automotive markets. NAND revenue increased 9%, driven by higher bit shipments but offset by an upper-teens percentage decline in average selling prices.
- Gross margin declined year over year to 26% from 28%, principally because of inventory accounting and cost-absorption changes and lower average selling prices. Manufacturing cost reductions partially offset these effects.
- R&D expense decreased 6% in Q2 and 2% for the first six months, while SG&A was broadly unchanged.
- Operating results included a $293 million one-time increase in cost of goods sold from changing inventory costing to FIFO and modifying inventory cost-absorption processes. The FIFO change alone reduced Q2 operating income by $133 million, net income by $128 million, and diluted EPS by $0.11.
- Micron recorded a $49 million write-down of 3D XPoint inventory and a $128 million patent license charge in Q2. Other unallocated items included $112 million of stock-based compensation and $160 million related to inventory cost absorption.
- Cash flow from operations improved, but investing outflows increased substantially because of higher capital spending and net purchases of securities. Financing outflows were $209 million versus $1.207 billion in the prior-year period, when Micron repaid more debt and acquired the remaining interest in IM Flash Technologies.
Outlook, Commentary, Risks, and Unusual Items
- Micron ceased development of 3D XPoint at the end of Q2 after determining that market validation was insufficient to justify continued investment. The Lehi, Utah facility was classified as held for sale, with $1.44 billion of property, plant, and equipment included in held-for-sale assets.
- Management expected to reach an agreement to sell the Lehi facility during calendar 2021 and expected depreciation expense to decline by approximately $75 million in Q3 2021. Actual sale proceeds could differ materially from carrying value.
- Management stated that cash, operating cash flow, and available financing were expected to meet requirements for at least the next 12 months and the foreseeable future, subject to market conditions.
- COVID-19 continued to create uncertainty around demand, pricing, supply chains, manufacturing continuity, construction projects, and customer spending. Manufacturing sites were operating near normal capacity at the filing date.
- Key industry risks include volatile DRAM and NAND pricing, oversupply, intense competition, technology-transition execution, manufacturing disruptions, supply constraints, geopolitical and trade restrictions, and customer concentration. WPG Holdings represented 12% of first-half revenue; the filing also identifies significant exposure to restrictions affecting Huawei.
- Material contingencies include patent litigation, Chinese patent proceedings, U.S. and Canadian antitrust matters, a Qimonda dispute involving Inotera shares, shareholder derivative litigation, and binding arbitration with Intel. The company stated that it could not estimate potential losses for these matters.
- The 2032D convertible notes were convertible through June 30, 2021 based on the company’s stock-price test. At March 4, 2021, conversion value exceeded principal by approximately $995 million, creating potential cash settlement, dilution, or both.
- The company did not repurchase shares under its authorization during Q2. As of March 4, 2021, $7.16 billion remained available under the $10 billion authorization.
Important Facts for Investors to Verify
- Whether DRAM and NAND pricing, shipment growth, and product mix support or pressure gross margins after the Q2 accounting adjustments.
- The final sale price, timing, and any additional impairment or restructuring charges related to the Lehi facility and discontinued 3D XPoint program.
- Actual 2021 capital expenditures versus the approximately $9 billion estimate and the resulting effect on free cash flow and leverage.
- Conversion, refinancing, or settlement activity related to the 2032D notes and its effect on cash and diluted shares.
- Developments in patent, antitrust, Qimonda, Intel arbitration, and other legal matters for which the filing provides no clear loss estimate.
- The duration and commercial impact of COVID-19, export restrictions, Huawei limitations, and broader U.S.-China trade and geopolitical risks.