MICRON TECHNOLOGY INC quarterly report, Q3 FY2021

Micron Technology, Inc. — Fiscal 2021 Q3 Form 10-Q

Business context and reporting period

Micron designs and manufactures DRAM, NAND, NOR, SSD, managed NAND and other memory and storage products for data center, client, mobile, automotive, industrial and consumer markets. The report covers the 13-week quarter and nine months ended June 3, 2021, compared primarily with May 28, 2020 and, for sequential analysis, the quarter ended March 4, 2021.

Key financial metrics

Metric	Q3 FY2021	Q3 FY2020	Change
Revenue	$7.422 billion	$5.438 billion	+36%
Gross profit	$3.126 billion	$1.763 billion	+77%
Gross margin	42%	32%	+10 percentage points
Operating income	$1.799 billion	$888 million	+103%
Operating margin	24%	16%	+8 percentage points
Net income attributable to Micron	$1.735 billion	$803 million	+116%
Diluted EPS	$1.52	$0.71	+114%

For the first nine months, revenue was $19.431 billion versus $15.379 billion, gross margin was 34% versus 29%, operating income was $3.328 billion versus $1.846 billion, and net income attributable to Micron was $3.141 billion versus $1.699 billion. Diluted EPS was $2.75 versus $1.50.

Q3 revenue increased 19% sequentially from $6.236 billion. DRAM revenue was $5.448 billion, up 52% year over year, driven by high-30% range bit-shipment growth and low-double-digit average selling price growth. NAND revenue was $1.812 billion, up 9%, as low-30% range bit-shipment growth more than offset upper-teens percentage average selling price declines.

Segment revenue was $3.304 billion for CNBU, $1.999 billion for MBU, $1.009 billion for SBU and $1.105 billion for EBU. Segment operating income was $1.342 billion, $683 million, $53 million and $282 million, respectively.

Net cash provided by operating activities for the first nine months was $8.584 billion, compared with $6.035 billion in the prior-year period. Capital expenditures were $8.015 billion on a reported basis, or approximately $7.67 billion net of partner contributions. Net cash used in investing activities was $8.055 billion, and net cash used in financing activities was $437 million.

At June 3, 2021, cash and equivalents were $7.759 billion, short-term investments were $590 million and long-term marketable investments were $1.399 billion, totaling $9.748 billion. Cash, equivalents and restricted cash totaled $7.826 billion. Total debt carrying value was $6.715 billion, including $297 million current debt and $6.418 billion long-term debt. The $2.5 billion revolving credit facility was undrawn and fully available.

Material changes versus comparable periods

• Profitability improved substantially because of stronger DRAM pricing, manufacturing cost reductions, higher bit shipments and lower Lehi facility and 3D XPoint costs.
• Q3 gross margin improved to 42% from 26% in Q2 FY2021, when cost of goods sold included approximately $293 million from inventory-costing and cost-absorption changes.
• Compared with Q3 FY2020, CNBU revenue increased 49%, MBU revenue increased 31%, EBU revenue increased 64% and SBU revenue was approximately unchanged. SBU operating income declined to $53 million from $177 million, primarily because of lower NAND selling prices.
• Inventories declined to $4.537 billion from $5.373 billion at September 3, 2020, while receivables increased to $4.231 billion from $3.912 billion.
• Micron changed inventory costing from average cost to FIFO beginning in Q2 FY2021. The change produced a $133 million charge to cost of goods sold, reduced net income by $128 million and reduced diluted EPS by $0.11 for Q2 and the first nine months.
• Debt was refinanced in May 2021: Micron drew approximately $1.19 billion under a new 2024 Term Loan A and used the proceeds to repay the prior term loan. The company also entered into the new five-year $2.5 billion revolving facility.
• Micron repurchased 1.7 million shares for $150 million in Q3 and had repurchased $2.99 billion under its $10 billion authorization through June 3, 2021.

Guidance, outlook and unusual items

• Micron estimated fiscal 2021 capital expenditures, net of partner contributions, to be somewhat above $9.5 billion, focused on technology transitions and product enablement. Actual spending may vary with market conditions.
• Management stated that cash, investments, operating cash flow and available financing should be sufficient for requirements through at least the next 12 months and the foreseeable future.
• Micron ceased development of 3D XPoint after determining that market validation was insufficient to justify commercialization at scale. It classified the Lehi, Utah facility as held for sale and ceased depreciating the assets.
• On June 30, 2021, Micron announced a definitive agreement to sell the Lehi facility to Texas Instruments for $900 million in cash, with closing anticipated later in calendar 2021. The filing records a $435 million Q3 impairment charge and a $104 million related tax benefit; it also records a $49 million Q2 3D XPoint inventory write-down.
• Lehi assets held for sale totaled approximately $960 million at June 3, 2021. Additional losses remain possible if the transaction terms, assets or liabilities change before closing.
• The Q3 effective tax rate was 3.6%, aided by a $104 million Lehi-related tax benefit and $276 million of tax-incentive benefits. Gross unrecognized tax benefits were $632 million, and the IRS was auditing the 2018 and 2019 tax years.
• COVID-19 continued to create demand, supply-chain and operational uncertainty. Most manufacturing sites operated near normal capacity, but the Muar, Malaysia facility had reduced staffing and capacity and India facilities faced engineering constraints.

Risks, contingencies and other considerations

• Memory and storage markets are cyclical and highly competitive; average selling prices, supply-demand conditions, product mix, utilization and manufacturing yields can materially affect margins. A 5% change in estimated inventory selling prices would have changed estimated net realizable value by approximately $400 million at June 3, 2021.
• Revenue is concentrated: WPG Holdings represented 13% of first-nine-month revenue, and approximately one-half of revenue historically came from the top ten customers. International sales, geopolitical tensions, tariffs and export restrictions remain material risks; Huawei restrictions had previously affected a customer representing approximately 10% of Q4 2020 revenue.
• Material litigation and contingencies include patent infringement matters involving substantially all major product categories, Chinese patent proceedings, Qimonda insolvency litigation, U.S. and Canadian DRAM antitrust matters, securities claims and arbitration with Intel. Micron cannot reasonably estimate potential losses for these matters.
• Micron faces risks from COVID-19, supply-chain and equipment availability, manufacturing disruptions, foreign exchange movements, cybersecurity, government incentives, trade restrictions and dependence on advanced technology transitions.
• Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether the $900 million Texas Instruments sale of the Lehi facility closes on schedule and whether additional impairment charges arise.
• Future DRAM and NAND pricing, bit-shipment growth, inventory levels and segment margins, particularly the sustainability of the 42% Q3 gross margin.
• Actual fiscal 2021 capital expenditures relative to the estimate of somewhat above $9.5 billion and the resulting free cash flow.
• The effect of COVID-19, supply-chain constraints, Malaysia and India operating restrictions, and geopolitical or export-control developments.
• Progress and potential exposure in patent, antitrust, Qimonda, Intel arbitration and other legal matters for which no loss range was provided.
• The sustainability of tax incentives, the $632 million of unrecognized tax benefits and the outcome of IRS examinations.
• Debt maturities, variable-rate exposure, convertible-note settlements and the company’s future use of its $10 billion share-repurchase authorization.