Micron Technology, Inc. — Fiscal 2021 First-Quarter Form 10-Q
Business context and reporting period
Micron designs, develops, and manufactures DRAM, NAND, 3D XPoint, NOR, solid-state drives, and related memory and storage solutions. The filing covers the 13 weeks ended December 3, 2020, compared primarily with the 13 weeks ended November 28, 2019 and the fourth quarter ended September 3, 2020.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $5.773 billion | $5.144 billion | 12% increase |
| Gross margin | $1.736 billion; 30% | $1.366 billion; 27% | Margin up 3 percentage points |
| Operating income | $866 million; 15% of revenue | $518 million; 10% | 67% increase |
| Net income attributable to Micron | $803 million | $491 million | 64% increase |
| Diluted EPS | $0.71 | $0.43 | 65% increase |
| Operating cash flow | $1.967 billion | $2.011 billion | 2% decrease |
Revenue by technology was $4.056 billion from DRAM, $1.574 billion from NAND, and $143 million from other products. Compared with the prior-year quarter, DRAM revenue increased 17% and NAND revenue increased 11%, primarily from higher bit shipments, partly offset by lower average selling prices.
Segment revenue was $2.546 billion for Compute and Networking, $1.501 billion for Mobile, $911 million for Storage, and $809 million for Embedded. Segment operating income was $483 million, $370 million, $4 million, and $116 million, respectively.
Cash, cash equivalents, and marketable investments totaled $8.296 billion at December 3, 2020, including $5.985 billion of cash and equivalents. Total debt had a carrying value of $6.629 billion, consisting of $273 million current debt and $6.356 billion long-term debt. The $2.5 billion revolving credit facility was undrawn and fully available.
Cash used in investing activities was $3.418 billion, including $2.738 billion of property, plant, and equipment expenditures. Cash used in financing activities was $214 million. Cash, cash equivalents, and restricted cash decreased by $1.638 billion during the quarter to $6.052 billion.
Material changes versus comparable periods
- Revenue increased 12% year over year but decreased 5% from the preceding quarter, which contained an additional week.
- Gross margin improved year over year due primarily to manufacturing cost reductions and process execution, but declined from 34% in the preceding quarter to 30% because of lower average selling prices.
- Operating income increased year over year across CNBU, MBU, and SBU; Storage improved from a $217 million operating loss to approximately breakeven.
- MTU underutilization costs were $113 million in the quarter, compared with $125 million in the prior-year quarter and $135 million in the preceding quarter.
- Operating cash flow was broadly stable year over year, while capital expenditures increased significantly from approximately $1.943 billion to $2.738 billion.
- Cash and investments declined from $9.190 billion at September 3, 2020 to $8.296 billion at December 3, 2020, largely reflecting capital spending and investment activity.
Guidance, outlook, commentary, and risks
- Management estimated fiscal 2021 capital expenditures of approximately $9 billion, net of partner contributions, with spending weighted toward the first half of the year. The filing states that actual spending may vary with market conditions.
- Beginning in the second quarter of fiscal 2021, Micron adopted FIFO inventory accounting and changed inventory cost-absorption processes. Management expected a one-time increase in cost of goods sold of approximately $300 million in the second quarter.
- MTU underutilization costs were expected to decline gradually through 2021 as equipment was redeployed and capacity was right-sized.
- Management expected cash, investments, operating cash flow, and available financing to meet requirements for at least the next 12 months.
- COVID-19 continued to create uncertainty around demand, pricing, manufacturing, supply chains, construction projects, and workforce availability. Manufacturing sites were operating near full staffing and normal capacity at the filing date, but future restrictions or outbreaks could disrupt operations.
- U.S. trade restrictions that took effect September 15, 2020 prevented Micron from shipping products to Huawei. Huawei represented approximately 10% of revenue in the fourth quarter of fiscal 2020 and 12% in 2019.
- Key industry risks include volatile DRAM and NAND pricing, oversupply, intense competition, technology-transition execution, manufacturing utilization, customer concentration, international operations, supply-chain constraints, foreign exchange, and cybersecurity.
- Material contingencies include patent litigation, Chinese patent proceedings and injunctions, Qimonda litigation, antitrust matters, an investigation by China’s State Administration for Market Regulation, shareholder litigation, and binding arbitration with Intel. Micron stated that it could not reasonably estimate potential losses for these matters.
Important facts for investors to verify
- Whether the expected $300 million second-quarter inventory-accounting impact occurred and how it affected gross margin and earnings.
- Actual fiscal 2021 capital expenditures versus the approximately $9 billion estimate and the resulting effect on cash balances and debt.
- Trends in DRAM and NAND average selling prices, bit shipments, and gross margin, particularly given the industry’s pricing volatility.
- Progress in reducing MTU underutilization costs and the outcome of related arbitration with Intel.
- Developments in Huawei and other trade restrictions, including whether lost customer demand can be replaced.
- Updates on the disclosed patent, antitrust, Qimonda, securities, and other legal proceedings, for which the filing provides no clear potential-loss estimate.
- The conversion status of the 2032D convertible notes, which were convertible through March 31, 2021 based on the company’s share price and conversion terms described in the filing.