Segment and Other Information
Segment information reported herein is consistent with how it is reviewed and evaluated by our chief operating decision maker. We have the following four4 business units, which are our reportable segments:
Compute and Networking Business Unit ("CNBU"(“CNBU”):Includes memory products sold into compute, networking,client, cloud server, enterprise, graphics, and cloud servernetworking markets.
Mobile Business Unit ("MBU"(“MBU”):Includes memory products sold into smartphone, tablet, and other mobile-device markets.
Storage Business Unit ("SBU"):Includes memory and storage products sold into smartphone and other mobile-device markets.
Storage Business Unit (“SBU”):Includes SSDs and component-level solutions sold into enterprise and cloud, client, cloud, and removableconsumer storage markets.markets, and other discrete storage products sold in component and wafer form.
Embedded Business Unit ("EBU"(“EBU”):Includes memory and storage products sold into automotive, industrial, connected home, and consumer electronics markets.
Certain operating expenses directly associated with the activities of a specific segment are charged to that segment. Other indirect operating income and expenses (income) are generally allocated to segments based on their respective percentage of cost of goods sold or forecasted wafer production. We do not identify or report internally our assets (other than goodwill) or capital expenditures by segment, nor do we allocate gains and losses from equity method investments, interest, other non-operating income or expense items, or taxes to segments.
| | | | | | | | | | | | | | | | | |
| Quarter ended | | Six months ended |
| March 3,
2022 | March 4,
2021 | | March 3,
2022 | March 4,
2021 |
| | | | | |
| Revenue | | | | | |
| CNBU | $ | 3,461 | | $ | 2,636 | | | $ | 6,867 | | $ | 5,182 | |
| MBU | 1,875 | | 1,811 | | | 3,782 | | 3,312 | |
| SBU | 1,171 | | 850 | | | 2,321 | | 1,761 | |
| EBU | 1,277 | | 935 | | | 2,497 | | 1,744 | |
| All Other | 2 | | 4 | | | 6 | | 10 | |
| $ | 7,786 | | $ | 6,236 | | | $ | 15,473 | | $ | 12,009 | |
| | | | | |
| Operating income (loss) | | | | | |
| CNBU | $ | 1,562 | | $ | 709 | | | $ | 3,086 | | $ | 1,192 | |
| MBU | 588 | | 464 | | | 1,212 | | 834 | |
| SBU | 178 | | (59) | | | 330 | | (55) | |
| EBU | 421 | | 141 | | | 843 | | 257 | |
| All Other | 1 | | 2 | | | 4 | | 2 | |
| 2,750 | | 1,257 | | | 5,475 | | 2,230 | |
| | | | | |
| Unallocated | | | | | |
| Stock-based compensation | (119) | | (112) | | | (235) | | (204) | |
| Inventory accounting policy change to FIFO | — | | (133) | | | — | | (133) | |
| Change in inventory cost absorption | — | | (160) | | | — | | (160) | |
| 3D XPoint inventory write-down | — | | (49) | | | — | | (49) | |
| Patent license charges | — | | (128) | | | — | | (128) | |
| Restructure and asset impairments | (5) | | (5) | | | (43) | | (13) | |
| Other | (80) | | (7) | | | (20) | | (14) | |
| (204) | | (594) | | | (298) | | (701) | |
| | | | | |
| Operating income | $ | 2,546 | | $ | 663 | | | $ | 5,177 | | $ | 1,529 | |
27
|
| | | | | | | | | | | | | | | |
| | Quarter ended | | Six months ended |
| | March 1,
2018 | | March 2,
2017 | | March 1,
2018 | | March 2,
2017 |
| Net sales | | | | | | | |
| CNBU | $ | 3,691 |
| | $ | 1,917 |
| | $ | 6,903 |
| | $ | 3,387 |
|
| MBU | 1,566 |
| | 1,082 |
| | 2,931 |
| | 2,114 |
|
| SBU | 1,254 |
| | 1,041 |
| | 2,637 |
| | 1,901 |
|
| EBU | 829 |
| | 590 |
| | 1,659 |
| | 1,168 |
|
| All Other | 11 |
| | 18 |
| | 24 |
| | 48 |
|
| | $ | 7,351 |
| | $ | 4,648 |
| | $ | 14,154 |
| | $ | 8,618 |
|
| | | | | | | | |
| Operating income (loss) | | | | | | | |
| CNBU | $ | 2,329 |
| | $ | 736 |
| | $ | 4,243 |
| | $ | 940 |
|
| MBU | 689 |
| | 170 |
| | 1,194 |
| | 259 |
|
| SBU | 251 |
| | 71 |
| | 651 |
| | 26 |
|
| EBU | 363 |
| | 193 |
| | 705 |
| | 371 |
|
| All Other | (2 | ) | | 7 |
| | (6 | ) | | 19 |
|
| | 3,630 |
| | 1,177 |
| | 6,787 |
| | 1,615 |
|
| | | | | | | | |
| Unallocated | | | | | | | |
| Stock-based compensation | (52 | ) | | (55 | ) | | (103 | ) | | (101 | ) |
| Restructure and asset impairments | (7 | ) | | (4 | ) | | (13 | ) | | (33 | ) |
| Flow-through of Inotera inventory step-up | — |
| | (60 | ) | | — |
| | (60 | ) |
| Other | (4 | ) | | (14 | ) | | (7 | ) | | (18 | ) |
| | (63 | ) | | (133 | ) | | (123 | ) | | (212 | ) |
| | | | | | | | |
| Operating income | $ | 3,567 |
| | $ | 1,044 |
| | $ | 6,664 |
|
| $ | 1,403 |
|
For the first six months of 2022, revenues from WPG Holdings Limited and Kingston Technology Company, Inc. were each 11% of total revenue.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended August 31, 2017.September 2, 2021. All period references are to our fiscal periods unless otherwise indicated. Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Our fiscal 2018Fiscal years 2022 and 20172021 each contain 52 weeks. All production data includes the production of IMFT and Inotera. All tabular dollar amounts are in millions, except per share amounts.
Our Management's Discussion and Analysis is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. This discussion is organized as follows:
Overview: Overview of our operations, business, and highlights of key events.
Results of Operations: An analysis of our financial results consisting of the following:
| |
◦ | Operating results by business segment; |
| |
◦ | Operating results by product; and |
| |
◦ | Operating expenses and other. |
Liquidity and Capital Resources: An analysis of changes in our balance sheet and cash flows and discussion of our financial condition and liquidity.
Critical Accounting Estimates
Recently Issued Accounting Standards
Overview
Micron Technology, Inc., including its consolidated subsidiaries, is an industry leader in innovative memory and storage solutions. Through our global brands – Micron, Crucial, and Ballistix– our broad portfolio of high-performance memory and storage technologies, including DRAM, NAND, NOR Flash, and 3D XPoint memory, issolutions transforming how the world uses information to enrich life. Backed by nearly 40 years oflife for all. With a relentless focus on our customers, technology leadership, ourand manufacturing and operational excellence, Micron delivers a rich portfolio of high-performance DRAM, NAND, and NOR memory and storage solutions enable disruptive trends, includingproducts through our Micron® and Crucial® brands. Every day, the innovations that our people create fuel the data economy, enabling advances in artificial intelligence machine learning, and autonomous vehicles in key market segments like cloud,5G applications that unleash opportunities — from the data center networking,to the intelligent edge and mobile.across the client and mobile user experience.
We manufacture our products at our worldwide wholly-owned facilities and joint venture facilities. In recent years, we have increased ouralso utilize subcontractors for certain manufacturing scale and product diversity through strategic acquisitions, expansion, and various partnering arrangements.
processes. We make significant investments to develop the proprietary product and process technology, which is implemented in our manufacturing facilities. We generally increase theincreases bit density per wafer and reducereduces per-bit manufacturing costs of each generation of product through advancements in product and process technology, such as our leading-edge line-width process technology and 3D NAND architecture.product. We continue to introduce new generations of products that offer improved performance characteristics, including higher data transfer rates, reduced package size,advanced packaging solutions, lower power consumption, improved read/write reliability, and increased memory density. Storage
The ramp of 176-layer NAND and 1α (1-alpha) DRAM across our product portfolio delivers major technology breakthroughs to customers across markets. For the first time in our history, we achieved industry leadership across these two flagship technologies. We delivered initial products incorporatingbased on these process technologies to the market in 2021. In the second quarter of 2022, we expanded our 176-layer NAND-based SSD portfolio with the introduction of the Micron 7450 SSD with NVMe, the world’s first vertically-integrated 176-layer NAND a controller, and firmware constitute a significantSSD for the data center. An increasing portion of our sales. We generally develop firmware and expect to introduceSSDs incorporate vertical integration with proprietary controllers intoand firmware that we have developed. This new SSD joins our SSDs infull portfolio of new products starting in 2018.product entries across memory and storage which have been well received by the market. In the second quarter of 2022, we achieved the first qualification of our 1α LPDDR5 DRAM, which delivers more than a 15% power improvement over the previous generation. We are leading the industry’s client DDR5 transition and are well positioned to lead the industry’s data center transition as platforms come to market later this year. We have partnered with customers to provide value-added innovation, and speed market adoption of our new solutions. Development of advanced technologies enables us to diversify our product portfolio toward a richer mix of differentiated, high-value solutions and to target high-growth markets.markets and specific customer requirements across data center, intelligent edge, client, and mobile environments.
We market our products through our internal sales force, independent sales representatives, and distributors primarily to original equipment manufacturers and retailers located around the world. We face intense competition in the semiconductor memory and storage markets and in order to remain competitive we must continuously develop and implement new products and technologies and decrease manufacturing costs. Our success is largely dependent on obtaining returns on our research and development (“R&D”) investments, efficient utilization of our manufacturing infrastructure, development and integration of advanced product and process technologies, market acceptance of our diversified portfolio of semiconductor-based memory and storage solutions, and efficient utilizationcapital spending.
Lehi, Utah Fab and 3D XPoint
In the second quarter of 2021, we updated our manufacturing infrastructure, successful ongoing development and integration of advanced product and process technology, return-driven capital spending, and successful R&D investments.
To leverageportfolio strategy to further strengthen our significant investments in R&D, we have formed, and may continue to form, strategic joint ventures that allow us to share the costs of developingfocus on memory and storage productinnovations for the data center market. In connection therewith, we determined that there was insufficient market validation to justify the ongoing investments required to commercialize 3D XPoint at scale. Accordingly, we ceased development of 3D XPoint technology and process technologyengaged in discussions with potential buyers for the sale of our facility located in Lehi, Utah that was dedicated to 3D XPoint production. As a result, we classified the property, plant, and equipment as held for sale as of the second quarter of 2021 and ceased depreciating the assets. On June 30, 2021, we announced a definitive agreement to sell our Lehi facility to TI and closed the sale on October 22, 2021.
In the first quarter of 2022, we received $893 million from TI for the sale of the Lehi facility and disposed of $918 million of net assets, consisting primarily of property, plant, and equipment of $921 million; $55 million of other assets, consisting primarily of a receivable for reimbursement of property taxes, equipment spare parts, and raw materials; and $58 million of liabilities, consisting primarily of a finance lease obligation. As a result of the disposition of the Lehi facility and other related adjustments, we recognized a loss of $23 million included in restructure and asset impairments in the first quarter of 2022.
In the third parties.quarter of 2021, we recognized a charge of $435 million included in restructure and asset impairments in connection with the definitive agreement with TI (and a tax benefit of $104 million included in income tax (provision) benefit) to write down the assets held for sale to the expected consideration, net of estimated selling costs. In addition,
from time to time,the second quarter of 2021, we also recognized a charge of $49 million in cost of goods sold to write down 3D XPoint inventory in connection with our decision to cease further development of this technology.
Impact of COVID-19 on Our Business
Events surrounding the COVID-19 pandemic and their impact on economic activity have been unpredictable. As a result, we have experienced volatility in the markets in which we sell and/our products. The ultimate extent to which COVID-19 will impact our business depends on future developments, which are highly uncertain and very difficult to predict, including the effectiveness and utilization of vaccines for COVID-19 and its variants, the severity of COVID-19 and its variants, and the effectiveness of the actions to contain or license technologylimit their spread.
From the start of the COVID-19 pandemic, we proactively implemented preventative protocols, which we continuously assess and update for changes in conditions and emerging trends. These preventative protocols are intended to safeguard our team members, contractors, suppliers, customers, distributors, and communities, and to ensure business continuity. Government restrictions or severe outbreaks can impact our operations at certain sites. For example, some of our facilities and some of our subcontractors’ facilities at times have been required to operate at reduced staffing and capacity levels due to COVID-19 quarantines and other parties. public health protocols. While our global manufacturing sites are currently operating with close to full staff and at normal capacity levels, our facilities or those of our subcontractors could be required to temporarily curtail production levels or temporarily cease operations based on government mandates or our health and safety protocols. We may be required, or deem it to be in the best interest of our employees, customers, partners, suppliers, and stakeholders, to alter our business operations in order to maintain a healthy and safe environment. It is not clear what potential effects any such alterations or modifications may have on our business, including effects on our customers, employees, or on our financial results. We are following government policies and recommendations designed to slow the spread of COVID-19 and remain committed to the health and safety of our team members, contractors, suppliers, customers, distributors, and communities.
We continuously assess our efforts to respond to the COVID-19 pandemic, which have included the following:
•In each of our locations, we implement health and safety protocols based on applicable regulations and local conditions and, where possible, make testing and vaccination available and implement health and safety enhancements.
•We require that all U.S. employees and, in addition, contractors that enter our U.S. buildings and certain other locations, be fully vaccinated against COVID-19, subject to disability and religious exemptions.
•We continue to pursue additional opportunitieswork closely with our customer base to monetizebest match our investmentsupply to changing market conditions.
29
•We evaluate our supply chain and communicate with our suppliers to identify supply gaps and have taken steps to provide continuity, to the extent possible. In some cases, we have added alternative suppliers, executed long-term supply agreements, and increased our on-hand inventory of raw materials needed in intellectual propertyour operations.
•We have added assembly and test capacity to provide redundant manufacturing capability through partneringour network of captive operations and external partners.
•We have evaluated all our construction projects across our global manufacturing operations and enacted protocols to enhance the safety of our team members, suppliers, and contractors.
•We are working with government authorities in the jurisdictions where we operate and continuing to monitor our operations in an effort to ensure we follow government requirements, relevant regulations, industry standards, and best practices to help safeguard our team members, while safely continuing operations at our sites across the globe.
We believe these actions are appropriate and prudent to safeguard our team members, contractors, suppliers, customers, and communities, while allowing us to safely continue operations. We cannot predict how the steps we, our team members, government entities, suppliers, or customers take in response to the COVID-19 pandemic will ultimately impact our business, outlook, or results of operations.
Product Technologies
Our product portfolio of memory and storage solutions, is based on our high-performance semiconductor memory and storage technologies, including DRAM, NAND, and NOR. We sell our products into various markets through our business units in numerous forms, including wafers, components, modules, SSDs, managed NAND, and MCP products. Our system-level solutions, including SSDs and managed NAND, combine NAND, a controller, firmware, and in some cases DRAM.
DRAM: DRAM products are dynamic random access memory semiconductor devices with low latency that provide high-speed data retrieval with a variety of performance characteristics. DRAM products lose content when power is turned off (“volatile”) and are most commonly used in client, cloud server, enterprise, networking, graphics, industrial, and automotive markets. LPDRAM products, which are engineered to meet standards for performance and power consumption, are sold into smartphone and other arrangements.mobile-device markets (including client markets for Chromebooks and notebook PCs), as well as into the automotive, industrial, and consumer markets.
NAND: NAND products are non-volatile, re-writeable semiconductor storage devices that provide high-capacity, low-cost storage with a variety of performance characteristics. NAND is used in SSDs for the enterprise and cloud, client, and consumer markets and in removable storage markets. Managed NAND is used in smartphones and other mobile devices, and in consumer, automotive, and embedded markets. Low-density NAND is ideal for applications like automotive, surveillance, machine-to-machine, automation, printer, and home networking.
NOR: NOR products are non-volatile re-writable semiconductor memory devices that provide fast read speeds. NOR is most commonly used for reliable code storage (e.g., boot, application, operating system, and execute-in-place code in an embedded system) and for frequently changing small data storage and is ideal for automotive, industrial, and consumer applications.
Results of Operations
Consolidated Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | First Quarter | Second Quarter | Six months ended |
| 2022 | 2022 | 2021 | 2022 | 2021 |
| | | | | | | | | | |
| Revenue | $ | 7,786 | | 100% | $ | 7,687 | | 100% | $ | 6,236 | | 100% | $ | 15,473 | | 100% | $ | 12,009 | | 100% |
| Cost of goods sold | 4,110 | | 53% | 4,122 | | 54% | 4,587 | | 74% | 8,232 | | 53% | 8,624 | | 72% |
| Gross margin | 3,676 | | 47% | 3,565 | | 46% | 1,649 | | 26% | 7,241 | | 47% | 3,385 | | 28% |
| | | | | | | | | | |
| Research and development | 792 | | 10% | 712 | | 9% | 641 | | 10% | 1,504 | | 10% | 1,288 | | 11% |
| Selling, general, and administrative | 263 | | 3% | 259 | | 3% | 214 | | 3% | 522 | | 3% | 428 | | 4% |
| Restructure and asset impairments | 5 | | —% | 38 | | —% | 5 | | —% | 43 | | —% | 13 | | —% |
| Other operating (income) expense, net | 70 | | 1% | (75) | | (1)% | 126 | | 2% | (5) | | —% | 127 | | 1% |
| Operating income | 2,546 | | 33% | 2,631 | | 34% | 663 | | 11% | 5,177 | | 33% | 1,529 | | 13% |
| | | | | | | | | | |
| Interest income (expense), net | (43) | | (1)% | (35) | | —% | (32) | | (1)% | (78) | | (1)% | (70) | | (1)% |
| Other non-operating income (expense), net | 6 | | —% | (75) | | (1)% | 4 | | —% | (69) | | —% | 17 | | —% |
| Income tax (provision) benefit | (255) | | (3)% | (219) | | (3)% | (48) | | (1)% | (474) | | (3)% | (99) | | (1)% |
| Equity in net income (loss) of equity method investees | 9 | | —% | 4 | | —% | 16 | | —% | 13 | | —% | 29 | | —% |
| Net income | $ | 2,263 | | 29% | $ | 2,306 | | 30% | $ | 603 | | 10% | $ | 4,569 | | 30% | $ | 1,406 | | 12% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Quarter | | Six Months |
| | 2018 | | % of Net Sales | | 2017 | | % of Net Sales | | 2018 | | % of Net Sales | | 2018 | | % of Net Sales | | 2017 | | % of Net Sales |
| Net sales | $ | 7,351 |
| | 100 | % | | $ | 4,648 |
| | 100 | % | | $ | 6,803 |
| | 100 | % | | $ | 14,154 |
| | 100 | % | | $ | 8,618 |
| | 100 | % |
| Cost of goods sold | 3,081 |
| | 42 | % | | 2,944 |
| | 63 | % | | 3,056 |
| | 45 | % | | 6,137 |
| | 43 | % | | 5,903 |
| | 68 | % |
| Gross margin | 4,270 |
| | 58 | % | | 1,704 |
| | 37 | % | | 3,747 |
| | 55 | % | | 8,017 |
| | 57 | % | | 2,715 |
| | 32 | % |
| | | | | | | | | | | | | | | | | | | | |
| SG&A | 196 |
| | 3 | % | | 187 |
| | 4 | % | | 191 |
| | 3 | % | | 387 |
| | 3 | % | | 346 |
| | 4 | % |
| R&D | 523 |
| | 7 | % | | 473 |
| | 10 | % | | 448 |
| | 7 | % | | 971 |
| | 7 | % | | 943 |
| | 11 | % |
| Other operating (income) expense, net | (16 | ) | | — | % | | — |
| | — | % | | 11 |
| | — | % | | (5 | ) | | — | % | | 23 |
| | — | % |
| Operating income | 3,567 |
| | 49 | % | | 1,044 |
| | 22 | % | | 3,097 |
| | 46 | % | | 6,664 |
| | 47 | % | | 1,403 |
| | 16 | % |
| | | |
|
| | | | | | | | | | | | | | | | |
| Interest income (expense), net | (61 | ) | | (1 | )% | | (153 | ) | | (3 | )% | | (101 | ) | | (1 | )% | | (162 | ) | | (1 | )% | | (285 | ) | | (3 | )% |
| Other non-operating income (expense), net | (53 | ) | | (1 | )% | | 34 |
| | 1 | % | | (204 | ) | | (3 | )% | | (257 | ) | | (2 | )% | | 20 |
| | — | % |
| Income tax (provision) benefit | (143 | ) | | (2 | )% | | (38 | ) | | (1 | )% | | (114 | ) | | (2 | )% | | (257 | ) | | (2 | )% | | (69 | ) | | (1 | )% |
| Equity in net income (loss) of equity method investees | 1 |
| | — | % | | 7 |
| | — | % | | — |
| | — | % | | 1 |
| | — | % | | 5 |
| | — | % |
| Net income attributable to noncontrolling interests | (2 | ) | | — | % | | — |
| | — | % | | — |
| | — | % | | (2 | ) | | — | % | | — |
| | — | % |
| Net income attributable to Micron | $ | 3,309 |
| | 45 | % | | $ | 894 |
| | 19 | % | | $ | 2,678 |
| | 39 | % | | $ | 5,987 |
| | 42 | % | | $ | 1,074 |
| | 12 | % |
Net Sales
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Quarter | | Six Months |
| | 2018 | | % of Total | | 2017 | | % of Total | | 2018 | | % of Total | | 2018 | | % of Total | | 2017 | | % of Total |
| CNBU | $ | 3,691 |
| | 50 | % | | $ | 1,917 |
| | 41 | % | | $ | 3,212 |
| | 47 | % | | $ | 6,903 |
| | 49 | % | | $ | 3,387 |
| | 39 | % |
| MBU | 1,566 |
| | 21 | % | | 1,082 |
| | 23 | % | | 1,365 |
| | 20 | % | | 2,931 |
| | 21 | % | | 2,114 |
| | 25 | % |
| SBU | 1,254 |
| | 17 | % | | 1,041 |
| | 22 | % | | 1,383 |
| | 20 | % | | 2,637 |
| | 19 | % | | 1,901 |
| | 22 | % |
| EBU | 829 |
| | 11 | % | | 590 |
| | 13 | % | | 830 |
| | 12 | % | | 1,659 |
| | 12 | % | | 1,168 |
| | 14 | % |
| All Other | 11 |
| | — | % | | 18 |
| | — | % | | 13 |
| | — | % | | 24 |
| | — | % | | 48 |
| | 1 | % |
| | $ | 7,351 |
| | | | $ | 4,648 |
| | | | $ | 6,803 |
| |
|
| | $ | 14,154 |
| |
|
| | $ | 8,618 |
| |
|
|
Percentages of total net sales reflect rounding and may not total 100%.
Total net salesRevenue:Total revenue for the second quarter of 20182022 increased 8%1% as compared to the first quarter of 20182022 primarily due to strong executionincreases in both DRAM and market conditionsNAND sales partially offset by decreases in 3D XPoint sales, which ceased in the first quarter of 2022.
•Sales of DRAM products increased 2% primarily due to a high-single-digit percent increase in bit shipments partially offset by a mid-single-digit percent decline in average selling prices.
•Sales of NAND products increased 4% primarily due to a mid-single-digit percent increase in average selling prices.
Total revenue for the second quarter of 2022 increased 25% as compared to the second quarter of 2021 primarily due to increases in both DRAM across our primary markets, particularly for server, mobile, and client. The strong demand for ourNAND sales.
•Sales of DRAM products enabled usincreased 29% primarily due to a mid-10% increase DRAMin average selling prices and sales volumes resulting in higher CNBU and MBU sales. Despite significant increases in SSDbit shipments in the low-10% range.
•Sales of NAND products increased 19% primarily due to a low-10% increase in average selling prices and increases in bit shipments in the mid-single-digit percentage range.
Total revenue for the first six months of 2022 increased 29% as compared to the first six months of 2021 primarily due to increases in both DRAM and NAND sales.
•Sales of DRAM products increased 33% primarily due to a low-20% increase in average selling prices and increases in bit shipments in the low-10% range.
•Sales of NAND products increased 19% primarily due to increases in bit shipments in the low-10% range and a high-single-digit percent increase in average selling prices.
Overall Gross Margin:Our overall gross margin percentage increased to 47% for the second quarter of 2022 from 46% for the first quarter of 2022, primarily due to higher NAND margins resulting from higher average selling prices and manufacturing cost reductions partially offset by lower DRAM margins resulting from declines in average selling prices.
31
Our overall gross margin percentage increased to 47% for the second quarter of 2022 from 26% for the second quarter of 2021, primarily due to increases in average selling prices and manufacturing cost reductions resulting from strong execution in delivering products featuring advanced technologies. Our overall gross margin percentage increased to 47% for the first six months of 2022 from 28% for the first six months of 2021, primarily due to increases in average selling prices and manufacturing cost reductions. Effective as of the beginning of the second quarter of 2021, we changed our method of inventory costing from average cost to FIFO. Concurrently, as of the beginning of the second quarter of 2021, we modified our inventory cost-absorption processes used to estimate inventory values, which affects the timing of when costs are recognized. These changes resulted in a one-time increase to cost of goods sold of approximately $293 million in the second quarter of 20182021.
Revenue by Business Unit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | First Quarter | Second Quarter | Six months ended |
| 2022 | 2022 | 2021 | 2022 | 2021 |
| | | | | | | | | | |
| CNBU | $ | 3,461 | | 44% | $ | 3,406 | | 44% | $ | 2,636 | | 42% | $ | 6,867 | | 44% | $ | 5,182 | | 43% |
| MBU | 1,875 | | 24% | 1,907 | | 25% | 1,811 | | 29% | 3,782 | | 24% | 3,312 | | 28% |
| SBU | 1,171 | | 15% | 1,150 | | 15% | 850 | | 14% | 2,321 | | 15% | 1,761 | | 15% |
| EBU | 1,277 | | 16% | 1,220 | | 16% | 935 | | 15% | 2,497 | | 16% | 1,744 | | 15% |
| All Other | 2 | | —% | 4 | | —% | 4 | | —% | 6 | | —% | 10 | | —% |
| | $ | 7,786 | | | $ | 7,687 | | | $ | 6,236 | | | $ | 15,473 | | | $ | 12,009 | | |
Percentages of total revenue may not total 100% due to rounding.
Changes in revenue for each business unit for the second quarter of 2022 as compared to the first quarter of 2018, SBU2022 were as follows:
•CNBU revenue increased 2% primarily due to increases in bit shipments to client, cloud, and networking markets, partially offset by declines in DRAM average selling prices.
•MBU revenue decreased 2% primarily due to declines in NANDmobile DRAM average selling prices partially offset by increases in bit shipments.
•SBU revenue increased 2% primarily due to increases in bit shipments of SSDs partially offset by decreases in sales of component revenue.products.
•EBU revenue increased 5% primarily due to increases in bit shipments to automotive and industrial markets, partially offset by declines in bit shipments to consumer markets.
Total net sales
Changes in revenue for each business unit for the second quarter and first six months of 2018 increased 58% and 64%, respectively,2022 as compared to the corresponding periods of 2017. Solid execution2021 were as follows:
•CNBU revenue increased 31% and strong demand for our products across our primary markets, particularly in client, enterprise, mobile, and cloud, drove higher sales in the second quarter of 2018 for all operating segments and significant33%, respectively, primarily due to increases in sales volumes for both DRAMbit shipments to cloud and Trade NAND products as well as increases innetworking markets combined with higher average selling prices for DRAM.
•MBU revenue increased 4% and 14%, respectively, primarily due to higher average selling prices for mobile DRAM products.partially offset by declines in NAND bit shipments due to a mix shift in supply to SSDs.
•SBU revenue increased 38% and 32%, respectively, primarily due to increases in bit shipments for NAND products and higher average selling prices for NAND.
•EBU revenue increased 37% and 43%, respectively, primarily due to increases in bit shipments driven by strong demand growth in automotive and industrial markets combined with improved pricing for DRAM.
Operating Income (Loss) by Business Unit
Our overall gross margin
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | First Quarter | Second Quarter | Six months ended |
| 2022 | 2022 | 2021 | 2022 | 2021 |
| | | | | | | | | | |
| CNBU | $ | 1,562 | | 45% | $ | 1,524 | | 45% | $ | 709 | | 27% | $ | 3,086 | | 45% | $ | 1,192 | | 23% |
| MBU | 588 | | 31% | 624 | | 33% | 464 | | 26% | 1,212 | | 32% | 834 | | 25% |
| SBU | 178 | | 15% | 152 | | 13% | (59) | | (7)% | 330 | | 14% | (55) | | (3)% |
| EBU | 421 | | 33% | 422 | | 35% | 141 | | 15% | 843 | | 34% | 257 | | 15% |
| All Other | 1 | | 50% | 3 | | 75% | 2 | | 50% | 4 | | 67% | 2 | | 20% |
| | $ | 2,750 | | | $ | 2,725 | | | $ | 1,257 | | | $ | 5,475 | | | $ | 2,230 | | |
Percentages reflect operating income (loss) as a percentage increased to 58%of revenue for each business unit.
Changes in operating income or loss for each business unit for the second quarter of 2018 from 55% for the first quarter of 2018 primarily due to strong demand for our DRAM products that drove favorable pricing conditions, combined with overall reductions in manufacturing costs. The increase in our gross margin percentage for the second quarter of 2018 reflects margin expansion for DRAM products driven by the continued growth in product offerings and sales for server and mobile products featuring our 1X nm DRAM technology. Gross margin percentages increased for CNBU, MBU, and EBU operating segments in the second quarter of 20182022 as compared to the first quarter of 2018.2022 were as follows:
Our overall gross margin percentage•CNBU operating income increased to 58% for the second quarter of 2018 from 37% for the second quarter of 2017 and increased to 57% for the first six months of 2018 from 32% for the first six months of 2017, reflecting increases in the gross margin percentages for all operating segments, primarily due to strong executionhigher bit shipments and market demand together with manufacturing cost reductions. From January 2016 through December 6, 2016, the date we acquired the remaining interestreductions partially offset by declines in Inotera, we purchased all of Inotera's DRAM output under supply agreements ataverage selling prices based on a formula that equally shared margin between Inotera and us. For the first quarter of 2017, we purchased $504 million ofhigher R&D expenses.
•MBU operating income decreased primarily due to declines in mobile DRAM products from Inotera under these agreements, representing 37% of our aggregate DRAM bit production.average selling prices and higher R&D expenses, partially offset by manufacturing cost reductions.
Operating Results by Business Segments
CNBU
|
| | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Quarter | | Six Months |
| | 2018 | | 2017 | | 2018 | | 2018 | | 2017 |
| Net sales | $ | 3,691 |
| | $ | 1,917 |
| | $ | 3,212 |
| | $ | 6,903 |
| | $ | 3,387 |
|
| Operating income | 2,329 |
| | 736 |
| | 1,914 |
| | 4,243 |
| | 940 |
|
CNBU sales for the second quarter of 2018•SBU operating income increased 15% as compared to the first quarter of 2018primarily due to higher sales into cloud server and client markets and improved pricing for our DRAM products. As a result, CNBUmargins on SSDs.
•EBU operating income improvedwas relatively unchanged.
Changes in operating income or loss for the second quarter of 2018 compared to the first quarter of 2018. See "Operating Results by Product – DRAM" for further detail.
CNBU saleseach business unit for the second quarter and first six months of 2018 increased 93% and 104%, respectively,2022 as compared to the corresponding periods of 20172021 were as follows:
•CNBU operating income increased primarily due to increases inhigher average selling prices, for our products sold into the client market, growth in the cloud market driven by significant increases in DRAM content per server,bit shipments, and increases in sales into the enterprise market. Favorable conditions in key CNBU markets for the second quarter and first six months of 2018 drove increases in average selling prices and sales volumes as compared to the corresponding periods of 2017. CNBU operating income for the second quarter and first six months of 2018 improved from the corresponding periods of 2017 primarily due to improved pricing, manufacturing cost reductions, and product mix.reductions.
MBU
|
| | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Quarter | | Six Months |
| | 2018 | | 2017 | | 2018 | | 2018 | | 2017 |
| Net sales | $ | 1,566 |
| | $ | 1,082 |
| | $ | 1,365 |
| | $ | 2,931 |
| | $ | 2,114 |
|
| Operating income | 689 |
| | 170 |
| | 505 |
| | 1,194 |
| | 259 |
|
MBU sales are comprised primarily of DRAM and NAND, with mobile DRAM products accounting for a significant majority of the sales. MBU sales for the second quarter of 2018 increased 15% as compared to the first quarter of 2018 primarily due to strong acceptance of our low-power DRAM products and increases in sales of mobile DRAM products into smartphone markets. •MBU operating income for the second quarter of 2018 improved from the first quarter of 2018 primarily due to manufacturing cost reductions and increases in sales volumes for both DRAM and NAND products as well as improved DRAM pricing resulting from strong demand for our products.
MBU sales for the second quarter and first six months of 2018 increased 45% and 39%, respectively, as compared to the corresponding periods of 2017 primarily due to improvements in DRAM pricing and increases in sales volumes, driven by customer qualifications for LPDRAM and managed NAND products, combined with higher memory content in smartphones.
MBU operating income for the second quarter and first six months of 2018 improved from the corresponding periods of 2017 primarily due to increases in mobile DRAM average selling prices for mobile DRAM products, manufacturingand NAND cost reductions, and higher sales volumes.
SBU
|
| | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Quarter | | Six Months |
| | 2018 | | 2017 | | 2018 | | 2018 | | 2017 |
| Net sales | $ | 1,254 |
| | $ | 1,041 |
| | $ | 1,383 |
| | $ | 2,637 |
| | $ | 1,901 |
|
| Operating income | 251 |
| | 71 |
| | 400 |
| | 651 |
| | 26 |
|
SBU sales of Trade NAND products for the second quarter of 2018 decreased 7% as compared to the first quarter of 2018 due to declines in NAND component sales from lower average selling prices, partially offset by increases in SSD sales. Sales of SSD storage products for the second quarter of 2018 increased 22% as compared to the first quarter of 2018, driven by strong demand in cloud and client markets for products incorporating our TLC 3D NAND technology. SBU Non-Trade sales were $136 million for the second quarter of 2018 as compared to $122 million for the first quarter of 2018 and $158 million for the second quarter of 2017. higher R&D expenses.
•SBU operating income for the second quarter of 2018 was also adversely affected by costs associated with IMFT's production of 3D XPoint products at less than full capacity, partially offset by a mix shift to SSD products and NAND manufacturing cost reductions. See "Operating Results by Product – Trade NAND" for further details.
SBU sales of Trade NAND products for the second quarter and first six months of 2018 increased 23% and 40%, respectively, as compared to the corresponding periods of 2017 primarily due to increases in sales volumes from strong demand, particularly for sales of SSD products into the cloud market. SBU sales of SSD storage products for the second quarter and first six months of 2018 increased by 81% and 103%, respectively, as compared to the corresponding periods of 2017 primarily as a result of the launch of new SSD products incorporating our TLC 3D NAND technology. SBU operating income for the second quarter and first six months of 2018 improved from the corresponding periods of 2017 primarily due to manufacturing cost reductions and improvements in product mix.
EBU
|
| | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Quarter | | Six Months |
| | 2018 | | 2017 | | 2018 | | 2018 | | 2017 |
| Net sales | $ | 829 |
| | $ | 590 |
| | $ | 830 |
| | $ | 1,659 |
| | $ | 1,168 |
|
| Operating income | 363 |
| | 193 |
| | 342 |
| | 705 |
| | 371 |
|
EBU sales are comprised of DRAM, NAND, and NOR Flash in decreasing order of revenue. EBU sales for the second quarter of 2018 were relatively unchanged from the first quarter of 2018. EBU operating income for the second quarter of 2018 increased from the first quarter of 2018 primarily due to manufacturing cost reductions and improved pricing for DRAM products resulting from strong demand for our products.
EBU sales for the second quarter and first six months of 2018 increased 41% and 42%, respectively, as compared to the corresponding periods of 2017 primarily due to strong demand and higher sales volumes for DRAM, NAND, and eMCP in consumer markets. EBU operating income for the second quarter and first six months of 2018 increased as compared to the corresponding periods of 2017 as a result of increases in average selling prices, manufacturing cost reductions, and increases in sales volumes.bit shipments, partially offset by higher R&D expenses.
Operating Results by Product
Net Sales by Product
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Quarter | | Six Months |
| | 2018 | | % of Total | | 2017 | | % of Total | | 2018 | | % of Total | | 2018 | | % of Total | | 2017 | | % of Total |
| DRAM | $ | 5,213 |
| | 71 | % | | $ | 2,960 |
| | 64 | % | | $ | 4,562 |
| | 67 | % | | $ | 9,775 |
| | 69 | % | | $ | 5,381 |
| | 62 | % |
| Trade NAND | 1,805 |
| | 25 | % | | 1,412 |
| | 30 | % | | 1,866 |
| | 27 | % | | 3,671 |
| | 26 | % | | 2,684 |
| | 31 | % |
| Non-Trade | 136 |
| | 2 | % | | 158 |
| | 3 | % | | 122 |
| | 2 | % | | 258 |
| | 2 | % | | 281 |
| | 3 | % |
| Other | 197 |
| | 3 | % | | 118 |
| | 3 | % | | 253 |
| | 4 | % | | 450 |
| | 3 | % | | 272 |
| | 3 | % |
| | $ | 7,351 |
| | | | $ | 4,648 |
| | | | $ | 6,803 |
| | | | $ | 14,154 |
| | | | $ | 8,618 |
| | |
Percentages of total net sales reflect rounding and may not total 100%.
Non-Trade consists of NAND and 3D XPoint products manufactured and sold to Intel through IMFT under a long-term supply agreement at prices approximating cost. Information regarding products that combine both NAND and DRAM components is reported within Trade NAND. Other includes sales of NOR and trade 3D XPoint products.
DRAM
|
| | | | | |
| Second Quarter 2018 Versus | | First Six Months 2018 Versus |
| First Quarter 2018 | | Second Quarter 2017 | | First Six Months 2017 |
| | | | | |
| (percentage change) |
Average selling prices per gigabit | •EBU operating income increased low double digit | | increased low 40% range | | increased high 40% range |
Gigabits sold | increased mid single digit | | increased low 20% range | | increased low 20% range |
Increases in sales volumes and prices for the second quarter of 2018 as compared to the first quarter of 2018 and second quarter of 2017 resulted from strong conditions for server, mobile, and client markets. Our gross margin percentage on sales of DRAM products for the second quarter of 2018 improved from the first quarter of 2018 and second quarter of 2017 primarily due to increases in average selling prices due to favorable market conditions and manufacturing cost reductions.
Trade NAND
|
| | | | | |
| Second Quarter 2018 Versus | | First Six Months 2018 Versus |
| First Quarter 2018 | | Second Quarter 2017 | | First Six Months 2017 |
| | | | | |
| (percentage change) |
Average selling prices per gigabyte | decreased mid-teens range | | decreased high single digit | | decreased mid single digit |
Gigabytes sold | increased low double digit | | increased low 40% range | | increased low 40% range |
Decreases in net sales for the second quarter of 2018 as compared to the first quarter of 2018 resulted from declines in average selling prices partially offset by increase in sales of cloud and client SSDs driven by growth and gains in market share for SSD products. Increases in net sales for the second quarter of 2018 as compared to the second quarter of 2017 primarily resulted from increases in sales of cloud and client SSDs. Our ability to meet increased demand for SSDs and other NAND products in the second quarter of 2018 was primarily due to improvements in process technology, including our transition to 3D NAND products and strong execution. Our gross margin percentage on sales of Trade NAND for the second quarter of 2018 declined slightly from the first quarter of 2018 as declines in average selling prices outpaced manufacturing cost reductions. Our gross margin percentage on sales of Trade NAND for the second quarter of 2018 improved from the second quarter of 2017 as manufacturing cost reductions outpaced declinesfrom an increasing mix of leading edge bits, higher bit shipments, and improved DRAM pricing in average selling prices.industrial and consumer markets.
Operating Expenses and Other
Selling, General, and Administrative
SG&A expenses for the second quarter of 2018 were relatively unchanged compared to the first quarter of 2018. SG&A expenses for the second quarter of 2018 were 5% higher than the second quarter of 2017 primarily due to increases in payroll costs. SG&A expenses for the first six months of 2018 were 12% higher than the first six months of 2017 primarily due to increases in performance-based pay and other payroll costs.
Research and Development: R&D expenses vary primarily with the number of development and pre-qualification wafers processed, the cost of advanced equipment dedicated to new product and process development, and personnel costs. Because of the lead times necessary to manufacture our products, we typically begin to process wafers before completion of performance and reliability testing. Development of a product is deemed complete when it is qualified through internal reviews and tests for performance and reliability. R&D expenses can vary significantly depending on the timing of product qualification.
R&D expenses for the second quarter of 20182022 were 17%11% higher thanas compared to the first quarter of 20182022 primarily due to higher volumesemployee compensation as a result of product being processed that had not been qualified and increases in payroll costs.headcount and variable pay. R&D expenses for the second quarter and first six months of 20182022 were 11%24% and 17% higher, thanrespectively, as compared to the second quartercorresponding periods of 20172021, primarily due to increases in payroll costs. R&Demployee compensation and higher volumes of development and prequalification wafers.
Selling, General, and Administrative:SG&A expenses for the first six monthssecond quarter of 20182022 were slightly higherrelatively unchanged as compared to the first quarter of 2022. SG&A expenses for the second quarter and first six months of 20172022 increased 23% and 22%, respectively, as compared to the corresponding periods of 2021, primarily due to increases in payroll costs, partially offset by lower volumesemployee compensation, legal fees, professional services, and advertising.
33
We share the cost of certain product and process development activities with development partners, including Intel. We expect to continue to jointly develop NAND technologies with Intel through the third generation of 3D NAND, which is expected to be delivered in 2019. In the second quarter of 2018, we and Intel mutually agreed to independently develop subsequent generations of 3D NAND in order to better optimize the technology and products for each individual business' needs. Our R&D expenses were reduced by reimbursements under our arrangements by $58 million for the second quarter of 2018, $56 million for the first quarter of 2018, and $59 million for the second quarter of 2017.
Income Taxes
Income:Our income tax (provision) benefit consisted of the following:
| | | | | | | | | | | | | | | | | |
| Second Quarter | First Quarter | Second Quarter | Six months ended |
| 2022 | 2022 | 2021 | 2022 | 2021 |
| | | | | |
| Income before taxes | $ | 2,509 | | $ | 2,521 | | $ | 635 | | $ | 5,030 | | $ | 1,476 | |
| Income tax (provision) benefit | (255) | | (219) | | (48) | | (474) | | (99) | |
| Effective tax rate | 10.2 | % | 8.7 | % | 7.6 | % | 9.4 | % | 6.7 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Quarter | | Six Months |
| | 2018 | | 2017 | | 2018 | | 2018 | | 2017 |
| Provisional estimate for the Repatriation Tax, net of adjustments related to uncertain tax positions | $ | (1,335 | ) | | $ | — |
| | $ | — |
| | $ | (1,335 | ) | | $ | — |
|
| Remeasurement of deferred tax assets and liabilities reflecting lower U.S. corporate tax rates | (133 | ) | | — |
| | — |
| | (133 | ) | | — |
|
| Provisional estimate for the release of the valuation allowance on the net deferred tax assets of our U.S. operations | 1,337 |
| | — |
| | — |
| | 1,337 |
| | — |
|
| Utilization of and other changes in net deferred tax assets of MMJ, MMT, and MTTW | (17 | ) | | (8 | ) | | (26 | ) | | (43 | ) | | (21 | ) |
| Other income tax (provision) benefit | 5 |
| | (30 | ) | | (88 | ) | | (83 | ) | | (48 | ) |
| | $ | (143 | ) | | $ | (38 | ) | | $ | (114 | ) | | $ | (257 | ) | | $ | (69 | ) |
| | | | | | | | | | |
| Effective tax rate | 4.1 | % | | 4.1 | % | | 4.1 | % | | 4.1 | % | | 6.1 | % |
Our income taxes reflectChanges to our effective tax rate in the following:
various provisional estimates forperiods presented were primarily due to the impacts of the Tax Act, including the Repatriation Tax, remeasurement of deferred tax assets and liabilities at the lower U.S. corporate rate of 21%, and release of a substantial portion of the valuation allowance on the net deferred tax assetsgeographic mix of our U.S. operations; andearnings.
operations
We operate in a number of jurisdictions outside the United States, including Singapore, where we have tax incentive arrangements that further decrease our effective tax rates.
On December 22, 2017, the U.S. government enacted the Tax Act which lowers the U.S. corporate income tax rate from 35% to 21% and significantly affects how income from foreign operations is taxedarrangements. These incentives expire, in the United States. As a result of our fiscal year-end, our U.S. statutory federal rate will be 25.7% for 2018 (based on the 35% corporate rate through December 31, 2017 and 21% from that date through the end of fiscal year 2018) and 21% for subsequent years. The Tax Act imposes a Repatriation
Tax in 2018; provides a U.S. federal tax exemption on foreign earnings distributed to the United States; and, beginning in 2019, creates a Foreign Minimum Tax. The Tax Act allows us to elect to pay any Repatriation Tax due in eight annual interest-free payments in increasing amounts beginning in December 2018. In connection with the provisions of the Tax Act, we are continuing to evaluate whether to account for the Foreign Minimum Tax provisions that begin for us in 2019 as a period costwhole or in our measurement of deferred taxes.
SAB 118 allows the use of provisional amounts (reasonable estimates) if our analyses of the impacts of the Tax Act has not been completed when our financial statements for the second quarter of fiscal year 2018 are issued. Provisional amounts may be adjusted during a one-year measurement period as accounting for the income tax effects of the Tax Act are completed or as estimates are revised.
In accordance with SAB 118, we recorded certain provisional estimates included in the table above. Although the provisional estimates are based on the best available interpretations of the Tax Act, the final impacts may differ from the estimates due to, among other things, the issuance of additional regulatorypart, at various dates through 2034 and legislative guidance related to the Tax Act.
As noted above, provisional estimates were recorded for the Repatriation Tax and the release of the valuation allowance on the net deferred tax assets of our U.S. operations. To determine the amount of the Repatriation Tax, we must determine the accumulated foreign earnings of our foreign subsidiaries and the amount of foreign income tax paid on such earnings. The provisional estimate of the Repatriation Tax is also based, in part, on the amount of cash and other specified assets anticipated to be held by our foreign subsidiaries as of August 30, 2018, the end of our fiscal year 2018, which may determine the portion of the accumulated foreign earnings taxed at an effective rate of 15.5% or 8%. As a result, the Repatriation Tax may change as amounts are finalized. The U.S. Department of Treasury has issued interpretive guidance regarding the Repatriation Tax and we expect that they will issue additional guidance. Based on the information available, we can reasonably estimate the Repatriation Tax and therefore recorded a provisional amount; however, we are continuing to gather additional information and analyze authoritative guidance to finalize the computation of the Repatriation Tax as well as the impacts on the valuation allowance release of the Repatriation Tax and the Tax Act.
We operate in a number of locations outside the Unites States, including Singapore, where we have tax incentive arrangements that are conditional, in part, upon meeting certain business operations and employment thresholds. The effect of tax incentive arrangements which expire in whole or in part at various dates through 2030, reduced our tax provision by $436$304 million (benefiting our diluted earnings per share by $0.35)$0.27) for the second quarter of 2018, by $3912022, $290 million ($0.320.26 per diluted share) infor the first quarter of 2018, and by $1322022, $45 million ($0.110.04 per diluted share) for the second quarter of 2017. The Tax Act establishes a new provision designed to impose the Foreign Minimum Tax beginning in 2019. Consequently, we may incur additional U.S. tax expense on income of our foreign subsidiaries that could offset a significant portion of the benefits realized from our tax incentive arrangements. Beginning in 2019, our tax rate may increase to the low teens percentage depending on profitability.
Other
Net interest expense decreased 40% for the second quarter of 2018 as compared to the first quarter of 2018 primarily due to decreases in debt obligations in the first six months of 2018. Net interest expense decreased 60% for the second quarter of 2018 as compared to the second quarter of 2017 primarily due to decreases in debt obligations, including the redemption of $6002021, $594 million in principal amount of notes in the fourth quarter of 2017 and the redemption and conversion of an aggregate of $2.42 billion in principal amount of notes in the first six months of 2018, as well as an increase in capitalized interest from higher levels of capital spending. Interest income also increased in the second quarter of 2018 as compared to the second quarter of 2017 primarily due to increases in our aggregate cash and investments. Net interest expense decreased 43%($0.53 per diluted share) for the first six months of 2018 as compared to2022, and $101 million ($0.09 per diluted share) for the first six months of 2017 primarily due2021.
On March 16, 2022, the Idaho governor signed a new law that is expected to decreases in debt obligations, increases in interestreduce our Idaho taxable income and as a result, we do not expect to utilize our tax credits in Idaho for the foreseeable future. We are in the process of increasesassessing the impact of the new law but currently estimate it to result in a valuation allowance against Idaho’s net deferred tax assets and an increase to tax expense of approximately $200 million in the third quarter of 2022.
Beginning in 2023, provisions in the Tax Cuts and Jobs Act of 2017 will require us to capitalize and amortize R&D expenditures rather than deducting the costs as incurred. Unless the effective date is deferred or the law is repealed, we expect a low-single-digit increase to our casheffective tax rate for several years.
Various tax reforms are being considered in multiple jurisdictions that, if enacted, contain provisions that could increase our tax expense. We continue to monitor the potential impact of these various tax reform proposals to our overall global effective tax rate and investments, and increases in capitalized interest.financial statements.
Further discussion of other operating and non-operating income and expenses can be found in "ItemSee “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Equity Plans and Other Non-Operating Income (Expense), Net" notes.Taxes.”
Other: Further discussion of other items can be found in “Item 1. Financial Statements – Notes to Consolidated Financial Statements.”
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from operations and financing obtained from capital markets and financial institutions. Cash generated from operations is highly dependent on selling prices for our products, which can vary significantly from period to period. We are continuously evaluating alternatives for efficiently funding our capital expenditures and ongoing operations. We expect, from time to time, in the future, to engage in a variety of financing transactions for such purposes, including the issuance of securities. We have an undrawn revolvingAs of March 3, 2022, $2.50 billion was available to draw under our Revolving Credit Facility.
Cash and marketable investments totaled $11.84 billion as of March 3, 2022 and $10.40 billion as of September 2, 2021. Our cash and investments consist primarily of bank deposits, money market funds, and liquid investment-grade, fixed-income securities, which are diversified among industries and individual issuers. To mitigate credit facility that expires in February 2020risk, we invest through high-credit-quality financial institutions and provides for additional borrowingsby policy generally limit the concentration of up to $750 million based on eligible receivables. We expect thatcredit exposure by restricting the amount of investments with any single obligor. As of March 3, 2022, $5.27 billion of our cash and marketable investments cash flows from operations, and available financing will be sufficient to meetwas held by our requirements at least through the next 12 months.foreign subsidiaries.
To develop new product and process technology, support future growth, achieve operating efficiencies, and maintain product quality, we must continue to invest in manufacturing technologies, facilities and equipment, and R&D. We estimate thatcapital expenditures in 20182022 for property, plant, and equipment, net of partner contributions, to be inbetween $11 billion and $12 billion. Capital expenditures for 2022 are driven by our continued 176-layer NAND transition, pilot line enablement for next generation NAND and DRAM, and continued infrastructure and prepayments to support the rangeintroduction of $7.5 billion plus or minus 5 percent, focused on technology transitions and product enablement. The actualEUV lithography. Actual amounts for 20182022 will vary depending on market conditions. As of March 1, 2018,3, 2022, we had commitmentspurchase obligations of approximately $1.6$2.96 billion for the acquisition of property, plant, and equipment, substantially all of which approximately $2.55 billion is expected to be paid within one year.
Cash For a description of other contractual obligations, such as debt and marketable investments totaled $8.56 billion and $6.05 billion as of March 1, 2018 and August 31, 2017, respectively. Our investments consist primarily of money market funds and liquid investment-grade fixed-income securities, diversified among industries and individual issuers. As of March 1, 2018, $3.94 billion of our cash and marketable investments was held by our foreign subsidiaries. To mitigate credit risk, we invest through high-credit-quality financial institutions and by policy generally limit the concentration of credit exposure by restricting the amount of investments with any single obligor.
In October 2017, we issued 34 million shares of our common stock for $41.00 per share in a public offering for proceeds of $1.36 billion, net of underwriting fees and other offering costs. In the first six months of 2018, we paid $2.93 billion in cash for the repurchase or settlement upon conversion of notes with an aggregate principal amount of $2.42 billion. See "Itemleases, see “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Leases” and “– Debt." We may redeem,”
On November 1, 2021, we issued $1 billion in aggregate principal amount of unsecured 2032 Green Bonds. Over time, we intend to allocate an amount equal to the net proceeds to fund eligible sustainability-focused projects involving renewable energy, green buildings, energy efficiency, water management, pollution control, and a circular economy.
Our Board of Directors has authorized the discretionary repurchase or otherwise retire additional debt in the future.
Limitations on the Use of Cash and Investments
MMJ Group:Cash and marketable investments included $495 million held by the MMJ Group asup to $10 billion of March 1, 2018. As a result of the corporate reorganization proceedings of MMJ initiated in March 2012, and for so long as such proceedings are continuing, the MMJ Group is prohibited from paying dividends to us. In addition,our outstanding common stock through open-market purchases, block trades, privately-negotiated transactions, derivative transactions, and/or pursuant to an order of the Japan Court, the MMJ Group cannot make loans or advances, other than certain ordinary course advances,Rule 10b5-1 trading plans. The repurchase authorization has no expiration date, does not obligate us to us without the consent of the Japan Courtacquire any common stock, and may, under certain circumstances, be subject to the approval of the legal trustee. As a result, the assets of the MMJ Group are not available for use by us in our other operations. Furthermore, certain uses of the assets of the MMJ Group, including investments in certain capital expenditures and in MMT, may require consent of MMJ's trustees and/or the Japan Court.
MSTW and MTTW: Cash and marketable investments included $59 million held by MSTW and MTTW as of March 1, 2018. The 2021 MSTW Term Loan contains covenants that limit or restrict the ability of MSTW and MTTW to pay dividends. As a result, the assets of MSTW and MTTW are not available for use by us in our other operations.
IMFT: Cash and marketable investments included $317 million held by IMFT as of March 1, 2018. Our ability to access funds held by IMFT to finance our other operations is subject to agreement by Intelmarket conditions and contractual limitations. Amounts held by IMFT are not anticipated to beour ongoing determination of the best use of available to finance our other operations.
Indefinitely Reinvested: Ascash. Through March 3, 2022, we have repurchased an aggregate of March 1, 2018, $3.18$4.70 billion of cash and marketable investments, including substantially all of the amounts held by MMJ, MSTW, and MTTW, was held by foreign subsidiaries whose earnings were considered to be indefinitely reinvested. As a result of the Tax Act, substantially all of our accumulated foreign earnings earned before December 31, 2017 were treated as taxable for U.S. federal income taxes; however, the repatriation of all or a portion of these earnings would continue to be subject to foreign and state tax upon repatriation to the United States. As we evaluate the impact of the Tax Act and the future cash needs of our global operations, we may revise the amount of the foreign earnings considered to be indefinitely reinvested outside of the United States. Determination of the amount of unrecognized deferred tax liabilities related to investments in these foreign subsidiaries is not practicable.
Cash Flows
|
| | | | | | | |
| | First Six Months |
| | 2018 | | 2017 |
| Net cash provided by operating activities | $ | 7,984 |
| | $ | 2,543 |
|
| Net cash provided by (used for) investing activities | (3,843 | ) | | (5,385 | ) |
| Net cash provided by (used for) financing activities | (1,420 | ) | | 2,341 |
|
| Effect of changes in currency exchange rates on cash, cash equivalents, and restricted cash | 4 |
| | (33 | ) |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 2,725 |
| | $ | (534 | ) |
Operating Activities:For the first six months of 2018, cash provided by operating activities was due primarily to cash generated by our operations and the effect of working capital adjustments, which included $630 million of cash used for increases in receivables, partially offset by $93 million of cash provided by an increase in accounts payable and accrued expenses. For the first six months of 2017, cash provided by operating activities was due primarily to cash generated by our operations and the effect of working capital adjustments, which included $773 million of cash used for net increases in receivables, $361 million of payments attributed to intercompany balances with Inotera, and $399 million of cash provided by net increases in accounts payable and accrued expenses.
Investing Activities: For the first six months of 2018, net cash used for investing activities consisted primarily of $4.22 billion of expenditures for property, plant, and equipment (which excludes offsets of amounts funded by our partners), partially offset by $198 million of net inflows from sales, maturities, and purchases of available-for-sale securities. For the first six months of 2017, net cash used for investing activities consisted primarily of $2.63 billion of net cash paid for the Inotera Acquisition (net of $361 million of payments attributed to intercompany balances with Inotera included in operating activities) and $2.43 billion of expenditures for property, plant, and equipment (which excludes offsets of amounts funded by our partners).
Financing Activities: For the first six months of 2018, net cash used for financing activities consisted primarily of redemption of our 2023 Secured Notes for $1.37 billion in cash, redemption of our 2023 Notes for $1.05 billion in cash, conversions of our convertible notes for $511 million of cash, and $449 million for repayments of other notes payable and capital leases, partially offset by net proceeds of $1.36 billion from the issuance of 34 million shares of our common stock for $41.00 per share in a public offering and $650 million of proceeds from IMFT Member Debt. For the first six months of 2017, net cash provided by financing activities consisted primarily of $2.48 billion of net proceeds from the 2021 MSTW Term Loan and $445 million of net proceeds from the 2021 MSAC Term Loan, partially offset by $556 million for repayments of debt.authorized amount. See "Item“Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt."Equity.”
On March 29, 2022, our Board of Directors declared a quarterly dividend of $0.10 per share, payable in cash on April 26, 2022, to shareholders of record as of the close of business on April 11, 2022. The declaration and payment of any future cash dividends are at the discretion and subject to the approval of our Board of Directors. Our Board of Directors' decisions regarding the amount and payment of dividends will depend on many factors, including, but not limited to, our financial condition, results of operations, capital requirements, business conditions, debt service obligations, contractual restrictions, industry practice, legal requirements, regulatory constraints, and other factors that our Board of Directors may deem relevant.
Potential Settlement ObligationsWe expect that our cash and investments, cash flows from operations, and available financing will be sufficient to meet our requirements at least through the next 12 months and thereafter for the foreseeable future.
Cash Flows
| | | | | | | | |
| Six months ended |
| 2022 | 2021 |
| | |
| Net cash provided by operating activities | $ | 7,566 | | $ | 5,024 | |
| Net cash provided by (used for) investing activities | (5,176) | | (5,974) | |
| Net cash provided by (used for) financing activities | (979) | | (209) | |
| Effect of changes in currency exchange rates on cash, cash equivalents, and restricted cash | (16) | | 43 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 1,395 | | $ | (1,116) | |
Operating Activities: Cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation expense, amortization of Convertibleintangible assets, asset impairments, and stock-based compensation, and the effects of changes in operating assets and liabilities. The increase in cash provided by operating activities for the first six months of 2022 as compared to the first six months of 2021 was primarily due to higher net income adjusted for non-cash items, partially offset by an increase in inventories.
Investing Activities: For the first six months of 2022, net cash used for investing activities consisted primarily of $5.88 billion of expenditures for property, plant, and equipment; inflows of $66 million of partner contributions for capital expenditures; $893 million of net inflows from the sale of the Lehi, Utah fab; and $119 million of net outflows from purchases, sales, and maturities of available-for-sale securities.
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For the first six months of 2021, net cash used for investing activities consisted primarily of $5.76 billion of expenditures for property, plant, and equipment; inflows of $183 million of partner contributions for capital expenditures; and $425 million of net outflows from purchases, sales, and maturities of available-for-sale securities.
Financing Activities: For the first six months of 2022, net cash used for financing activities included $1.98 billion of repayments of debt primarily to redeem the 2023 Notes
Since and 2024 Notes, $667 million for the closing priceacquisition of 8.4 million shares of our common stock exceeded 130%under our $10 billion share repurchase authorization, $224 million of cash payments of dividends to shareholders, $112 million used for stock repurchases related to tax withholdings for employee equity awards, and $105 million of payments on equipment purchase contracts. Cash used for financing activities was partially offset by aggregate proceeds of $2.00 billion from the issuance of the conversion price per shareunsecured 2032 Green Bonds, 2041 Notes, and 2051 Notes. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt.”
For the first six months of all2021, net cash used for financing activities consisted primarily of $123 million for payments on equipment purchase contracts and $103 million for repayments of debt.
Critical Accounting Estimates
For a discussion of our convertible notes for at least 20 trading days in the 30 trading day period ended on December 31, 2017, holders may convert their notes through the calendar quarter ended March 31, 2018. The following table summarizes the potential settlements that we could be required to make for the calendar quarter ending March 31, 2018 if all holders converted their notes. The amounts in the table below are based on our closing share price of $47.62 as of March 1, 2018.
|
| | | | | | | | | | | | | | | | | |
| | Settlement Option | | | | If Settled With Minimum Cash Required | | If Settled Entirely With Cash |
| | Principal Amount | | Amount in Excess of Principal | | Underlying Shares | | Cash | | Remainder in Shares | |
| 2032C Notes | Cash and/or shares | | Cash and/or shares | | 18 |
| | $ | — |
| | 18 |
| | $ | 849 |
|
| 2032D Notes | Cash and/or shares | | Cash and/or shares | | 18 |
| | — |
| | 18 |
| | 845 |
|
2033E Notes(1) | Cash | | Cash and/or shares | | 5 |
| | 197 |
| | 1 |
| | 261 |
|
2033F Notes(1) | Cash | | Cash and/or shares | | 27 |
| | 393 |
| | 18 |
| | 1,272 |
|
| 2043G Notes | Cash and/or shares | | Cash and/or shares | | 35 |
| | — |
| | 35 |
| | 1,674 |
|
| | | |
| | 103 |
| | $ | 590 |
| | 90 |
| | $ | 4,901 |
|
| |
(1)
| Amounts as of March 1, 2018 include $178 million and $129 million for the settlement obligation (principal and amounts in excess of principal) of 2033E Notes and 2033F Notes, respectively, that had been converted but not settled. The settlement obligation of these notes will settle in cash in the third quarter of 2018. |
Contractual Obligations
As of March 1, 2018, the contractual obligations of principal and interest of all our notes payable was $9.80 billion, of which $610 million is due in the remainder of 2018, $3.30 billion is due in 2019 and 2020, $2.77 billion is due in 2021 and 2022, and $3.12 billion is due in 2023 and thereafter. There have been no other material changes to our contractual obligations as described in "Part Icritical accounting estimates, see “Part II – Item 2. Management's7. Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations – Critical Accounting Estimates” of our Annual Report on Form 10-K for the year ended August 31, 2017, other than our purchase commitments for the acquisition of property, plant, and equipment as described above.
Critical Accounting Estimates
For a discussion of our critical accounting estimates, see "Part I - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended August 31, 2017. Except for the critical accounting estimates associated with our income taxes as discussed below, thereSeptember 2, 2021. There have been no material changes to our critical accounting estimates since our Annual Report on Form 10-K for the year ended August 31, 2017.September 2, 2021.
Income taxes: We are required to estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. These estimates involve significant judgment and interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of our performance and other relevant factors. Realization of deferred tax assets is dependent on our ability to generate future taxable income. In recent periods, our results of operations have benefitted from increases in the amount of deferred taxes we expect to realize, primarily from the levels of capital spending and increases in the amount of taxable income we expect to realize in Japan and Taiwan. Our income tax provision or benefit is dependent, in part, on our ability to forecast future taxable income in these and other jurisdictions. Such forecasts are inherently difficult and involve significant judgments including, among others, projecting future average selling prices and sales volumes, manufacturing and overhead costs, levels of capital spending, and other factors that significantly impact our analyses of the amount of net deferred tax assets that are more likely than not to be realized.
In connection with the Tax Act, we recognized a provision for income taxes of $131 million in the second quarter of 2018, of which $133 million was related to the impact of remeasuring our deferred tax assets and liabilities to reflect the lower tax rate and $2 million of income tax benefit was considered a provisional estimate. The provisional estimate included $1.34 billion associated with the Repatriation Tax, essentially offset by a benefit of $1.34 billion for the release of the valuation allowance on the net deferred tax assets of our U.S. operations. Based on the information available, we recorded a provisional amount;
however, we are continuing to gather additional information and analyze authoritative guidance to finalize the computation of the Repatriation Tax as well as the impacts on the valuation allowance release as a result of the Tax Act.
Recently Issued Accounting Standards
See "Item 1. Financial Statements – Notes to Consolidated Financial Statements – Recently Issued Accounting Standards."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are affected by changes in currency exchange and interest rates. See discussion regarding certain interest rate risks below. For further discussion about market risk and sensitivity analysis related to changes in currency exchange rates, see "Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the year ended August 31, 2017.
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness and our investment portfolio. As of March 1, 20183, 2022 and August 31, 2017, the carrying valueSeptember 2, 2021, we had fixed-rate debt of our debt with fixed interest rates was $4.0 billion and $5.7$3.9 billion, respectively, and as a result, the fair value of our debt fluctuates with changes in market interest rates. In the first quarter of 2022, we issued new debt and repaid other debt, which significantly increased the average remaining maturity of our fixed-rate debt resulting in increased variability of its fair value from interest rate changes. We estimate that, as of March 1, 20183, 2022 and August 31, 2017,September 2, 2021, a decrease in market interest rates of 1% would increase the fair value of our fixed-rate debt by approximately $130$375 million and $273$200 million, respectively.
For further discussion about market risk and sensitivity analysis related to changes in currency exchange rates and interest rates, see “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended September 2, 2021.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that those disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the Commission'sSEC’s rules and forms and that such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, to allow timely decisiondecisions regarding disclosure.
During the second quarter of 2018,2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see "Part“Part I – Item 3. Legal Proceedings"Proceedings” of our Annual Report on Form 10-K for the year ended August 31, 2017September 2, 2021 and "Partthe sections titled “Part I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Contingencies"Contingencies” and "Item“Item 1A. Risk Factors" herein.Factors” in this Quarterly Report on Form 10-Q, as well as in our Quarterly Report on Form 10-Q for the first quarter of 2022.
SEC regulations require disclosure of certain proceedings related to environmental matters unless we reasonably believe that the related monetary sanctions, if any, will be less than a specified threshold. We use a threshold of $1 million for this purpose.
ITEM 1A. RISK FACTORS
In addition to the factors discussed elsewhere in this Form 10-Q, the following arethis section discusses important factors the order of which is not necessarily indicative of the level of risk that each poses to us, which could cause actual results or events to differ materially from those contained in any forward-looking statements made by us. The order of presentation is not necessarily indicative of the level of risk that each factor poses to us. Any of these factors could have a material adverse effect on our business, results of operations, financial condition, or stock price. Our operations could also be affected by other factors that are presently unknown to us or not considered significant. Any
Risk Factor Summary
Risks Related to Our Business, Operations, and Industry
•the effects of the factors belowCOVID-19 pandemic;
•volatility in average selling prices of our products;
•our ability to maintain or improve gross margins;
•the highly competitive nature of our industry;
•our ability to develop and produce new and competitive memory and storage technologies, products, and markets;
•dependency on specific customers, concentration of revenue with a select number of customers, and customers who are located internationally;
•our international operations, including geopolitical risks;
•limited availability and quality of materials, supplies, and capital equipment and dependency on third-party service providers for ourselves and our customers;
•products that fail to meet specifications, are defective, or are incompatible with end uses;
•disruptions to our manufacturing process from operational issues, natural disasters, or other events;
•breaches of our security systems or products, or those of our customers, suppliers, or business partners;
•attracting, retaining, and motivating highly skilled employees;
•achieving or maintaining certain performance obligations associated with incentives from various governments;
•future acquisitions and/or alliances;
•restructure charges;
•responsible sourcing requirements and related regulations; and
•a downturn in the worldwide economy.
Risks Related to Intellectual Property and Litigation
•protecting our intellectual property and retaining key employees who are knowledgeable of and develop our intellectual property;
•legal proceedings and claims;
•allegations of anticompetitive conduct;
•claims that our products or manufacturing processes infringe or otherwise violate the intellectual property rights of others or failure to obtain or renew license agreements covering such intellectual property; and
•alleged patent infringement complaints in Chinese courts.
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Risks Related to Laws and Regulations
•compliance with tariffs, trade restrictions, and/or trade regulations;
•tax expense and tax laws in key jurisdictions; and
•compliance with laws, regulations, or industry standards, including environmental, social, and governance (“ESG”) considerations.
Risks Related to Capitalization and Financial Markets
•our ability to generate sufficient cash flows or obtain access to external financing;
•our debt obligations;
•changes in foreign currency exchange rates;
•counterparty default risk;
•volatility in the trading price of our common stock; and
•fluctuations in the amount and timing of our common stock repurchases and payment of cash dividends and resulting impacts.
Risks Related to Our Business, Operations, and Industry
The effects of the COVID-19 pandemic could adversely affect our business, results of operations, and financial condition.
The effects of the public health crisis caused by the COVID-19 pandemic and the measures being taken to limit COVID-19’s spread are uncertain and difficult to predict, but may include, and in some cases, have included and may continue to include:
•A decrease in short-term and/or long-term demand and/or pricing for our products and global economic volatility that could reduce demand and/or pricing for our products, resulting from the spread of COVID-19 and/or the actions taken by governments, businesses, and/or the general public in an effort to limit exposure to and the spread of COVID-19, such as travel restrictions, quarantines, and business shutdowns or slowdowns;
•Negative impacts to our operations, including:
◦reductions in production levels, R&D activities, product development, technology transitions, yield enhancement activities, and qualification activities with our customers, resulting from our efforts to mitigate the impact of COVID-19 through measures we have enacted at our locations around the world in an effort to protect our employees’ and contractors’ health and well-being, including working from home, limiting the number of meeting attendees, reducing the number of people in certain of our sites at any one time, quarantines of team members, contractors, or vendors who are at risk of contracting, or have contracted, COVID-19, and limiting employee travel;
◦increased costs resulting from our efforts to mitigate the impact of COVID-19 through physical-distancing measures, working from home, upgrades to our sites, COVID-19 testing and vaccination, enhanced cleaning measures, and the increased use of personal protective equipment at our sites;
◦increased costs for, or unavailability of, transportation, raw materials, components, electricity and/or other energy sources, or other inputs necessary for the operation of our business;
◦reductions in, or cessation of operations at any site or in any jurisdiction resulting from government restrictions on movement and/or business operations or our measures to prevent and/or mitigate the spread of COVID-19 at one or more of our sites, such as we have experienced at some of our facilities from time to time since the start of the COVID-19 pandemic;
◦our inability to continue, or increased costs of, construction projects due to delays in obtaining materials, equipment, labor, engineering services, government permits, or any other essential aspect of projects, which could impact our ability to introduce new technologies, reduce costs, or meet customer demand; and
◦disruptions to our supply chain in connection with the sourcing and transportation of materials, components, equipment and engineering support, and services from or in geographic areas that have been impacted by COVID-19, by efforts to contain the spread of COVID-19, or by follow-on effects on the worldwide supply chain;
•Deterioration of worldwide credit and financial markets that could: limit our ability to obtain external financing to fund our operations and capital expenditures; result in losses on our holdings of cash and investments due to failures of financial institutions and other parties; or result in a higher rate of losses on our accounts receivable due to credit defaults.
While several COVID-19 vaccines have been approved and are available for use in the United States and certain other countries, we are unable to predict how widely utilized the vaccines ultimately will be, whether they will be effective in preventing the symptoms and spread of COVID-19 (including its variant strains), and when or if normal economic activity and business operations will resume.
These effects, alone or taken together, could have a material adverse effect on our business, results of operations, or financial condition,condition. The continuation of the pandemic or stock price.expanded or recurring outbreaks could exacerbate the adverse impact of such measures.
We have experienced volatilityVolatility in average selling prices for our semiconductor memory and storage products which may adversely affect our business.
We have experienced significant volatility in our average selling prices, including dramatic declines as noted in the table below, and may continue to experience such volatility in the future. In some prior periods, average selling prices for our products have been below our manufacturing costs and we may experience such circumstances in the future. Decreases in averageAverage selling prices for our products that decline faster than our costs could have a material adverse effect on our business, results of operations, or financial condition. | | | | | | | | |
| | DRAM | NAND |
| (percentage change in average selling prices) |
| | |
| 2021 from 2020 | 8 | % | (12) | % |
| 2020 from 2019 | (34) | % | (9) | % |
| 2019 from 2018 | (30) | % | (47) | % |
| 2018 from 2017 | 36 | % | (13) | % |
| 2017 from 2016 | 18 | % | (10) | % |
|
| | | | | |
| | DRAM | | Trade NAND |
| | | | |
| | (percentage change in average selling prices) |
| 2017 from 2016 | 19 | % | | (9 | )% |
| 2016 from 2015 | (35 | )% | | (20 | )% |
| 2015 from 2014 | (11 | )% | | (17 | )% |
| 2014 from 2013 | 6 | % | | (23 | )% |
| 2013 from 2012 | (11 | )% | | (18 | )% |
We may be unable to maintain or improve gross margins.
Our gross margins are dependent, in part, upon continuing decreases in per gigabit manufacturing costs achieved through improvements in our manufacturing processes and product designs, including, but not limited to, process line-width, additional 3D memory layers, additional bits per cell (i.e., cell levels), architecture, number of mask layers, number of fabrication steps, and yield. In future periods, we may be unable to reduce our per gigabit manufacturing costs at sufficient levels to maintain or improve gross margins. Factors that may limit our ability to maintain or reduce costs include, but are not limited to, strategic product diversification decisions affecting product mix, the increasing complexity of manufacturing processes, difficulties in transitioning to smaller line-width process technologies or additional 3D memory layers or NAND cell levels, process complexity including number of mask layers and fabrication steps, manufacturing yield, technological barriers, changes in process technologies, and new products that may require relatively larger die sizes. sizes, start-up or other costs associated with capacity expansion, and higher costs of goods and services due to inflationary pressures or market conditions.
Many factors may result in a reduction of our output or a delay in ramping production, which could lead to underutilization of our production assets. These factors may include, among others, a weak demand environment, industry oversupply, inventory surpluses, difficulties in ramping emerging technologies, declining selling prices, supply chain disruptions, and delays from equipment suppliers. A significant portion of our manufacturing costs are fixed and do not vary proportionally with changes in production output. As a result, lower utilization and corresponding increases in our per gigabit manufacturing costs may adversely affect our gross margins, business, results of operations, or financial condition.
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Per gigabit manufacturing costs may also be affected by a broader product portfolio, which may have smaller production quantities and shorter product lifecycles. Our business and the markets we serve are subject to rapid technological changes and material fluctuations in demand based on end-user preferences. As a result, we may have work in process or finished goods inventories that could become obsolete or in amounts that are in excess of our customers’ demand. Consequently, we may incur charges in connection with obsolete or excess inventories. In addition, due to the customized nature of certain of the products we manufacture, we may be unable to sell certain finished goods inventories to alternative customers or manufacture in-process inventory to different specifications, which may result in excess and obsolescence charges in future periods.
In addition, if we are unable to supply sufficient quantities of products that meet customer design and performance specifications, we may be required to sell such products at lower average selling prices, which may reduce our gross margins. Our gross margins may also be impacted by shifts in product mix, including due to market dynamics.
Our inability to maintain or improve gross margins could have a material adverse effect on our business, results of operations, or financial condition.
The semiconductor memory and storage markets are highly competitive.
We face intense competition in the semiconductor memory and storage markets from a number of companies, including Intel; Kioxia Holdings Corporation; Samsung Electronics Co., Ltd.; SK Hynixhynix Inc.; Toshiba Corporation; and Western Digital Corporation. Our competitors may use aggressive pricing to obtain market share or take business of our key customers. Some of our competitors are large corporations or conglomerates that may have greater resources to invest in technology, capitalize on growth opportunities, and withstand downturns in the semiconductor markets in which we compete. Consolidation of industry competitors could put us at a competitive disadvantage. disadvantage as our competitors may benefit from increased manufacturing scale and a stronger product portfolio.
In addition, some governments such as China,may provide, or have provided and may continue to provide, significant assistance, financial assistanceor otherwise, to some of our competitors or to new entrants. Ourentrants and may intervene in support of national industries and/or competitors. In particular, we face the threat of increasing competition as a result of significant investment in the semiconductor industry by the Chinese government and various state-owned or affiliated entities, such as Yangtze Memory Technologies Co., Ltd. (“YMTC”) and ChangXin Memory Technologies, Inc. (“CXMT”), that is intended to advance China’s stated national policy objectives. In addition, the Chinese government may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies.
We and our competitors generally seek to increase siliconwafer capacity, improve yields, and reduce die size in our and their product designs which may result in significant increases in worldwide supply and downward pressure on prices. Increases in worldwide supply of semiconductor memory and storage also result from fabrication capacity expansions, either by way of new facilities, increased capacity utilization, or reallocation of other semiconductor production to semiconductor memory and storage production. Our competitors may increase capital expenditures resulting in future increases in worldwide supply. We, and some of our competitors, have plans to ramp, or are constructing or ramping, production at new fabrication facilities. Increases in worldwide supply of semiconductor memory and storage, if not accompanied by commensurate increases in demand, wouldcould lead to further declines in average selling prices for our products and wouldcould materially adversely affect our business, results of operations, or financial condition. If competitors are more successful at developing or implementing new product or process technology, their products could have cost or performance advantages.
The competitive nature of our industry could have a material adverse effect on our business, results of operations, or financial condition.
Debt obligations could adversely affect our financial condition.
As of March 1, 2018, we had debt with a carrying value of $9.32 billion. In addition, the conversion value in excess of principal of our convertible notes as of March 1, 2018 was $3.18 billion. In the first six months of 2018, and full years of 2017 and 2016, we paid $2.93 billion and 4 million shares of our treasury stock as non-cash settlement, $1.63 billion, and $94 million, respectively, to repurchase and settle notes with principal amounts of $2.42 billion, $1.55 billion, and $57 million,
respectively. As of March 1, 2018, we had an undrawn revolving credit facility that provided for additional borrowings of up to $750 million based on eligible receivables. Events and circumstances may occur which would cause us to not be able to satisfy applicable draw-down conditions and utilize this revolving credit facility. We have incurred in the past, and expect to incur in the future, debt to finance our capital investments, business acquisitions, and restructuring of our capital structure.
Our debt obligations could adversely impact us. For example, these obligations could:
require us to use a large portion of our cash flow to pay principal and interest on debt, which will reduce the amount of cash flow available to fund working capital, capital expenditures, acquisitions, R&D expenditures, and other business activities;
require us to use cash and/or issue shares of our common stock to settle any conversion obligations of our convertible notes;
result in certain of our debt instruments being accelerated to be immediately due and payable or being deemed to be in default if certain terms of default are triggered, such as applicable cross payment default and/or cross-acceleration provisions;
result in all obligations owing under the 2021 MSTW Term Loan being accelerated to be immediately due and payable if MSTW fails to comply with certain covenants, including financial covenants;
increase the interest rate under the 2021 MSTW Term Loan if we or MSTW fails to maintain certain financial covenants;
adversely impact our credit rating, which could increase future borrowing costs;
limit our future ability to raise funds for capital expenditures, strategic acquisitions or business opportunities, R&D, and other general corporate requirements;
restrict our ability to incur specified indebtedness, create or incur certain liens, and enter into sale-leaseback financing transactions;
increase our vulnerability to adverse economic and semiconductor memory and storage industry conditions;
increase our exposure to interest rate risk from variable rate indebtedness;
continue to dilute our earnings per share as a result of the conversion provisions in our convertible notes; and
require us to continue to pay cash amounts substantially in excess of the principal amounts upon settlement of our convertible notes to minimize dilution of our earnings per share.
Our ability to meet our payment obligations under our debt instruments depends on our ability to generate significant cash flows in the future. This, to some extent, is subject to market, economic, financial, competitive, legislative, and regulatory factors as well as other factors that are beyond our control. There can be no assurance that our business will generate cash flow from operations, or that additional capital will be available to us, in amounts sufficient to enable us to meet our debt payment obligations and to fund other liquidity needs. If we are unable to generate sufficient cash flows to service our debt payment obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may be unable to meet our debt payment obligations, which could have a material adverse effect on our business, results of operations, or financial condition.
We may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations, make scheduled debt payments, and make adequate capital investments.
Our cash flows from operations depend primarily on the volume of semiconductor memory and storage products sold, average selling prices, and manufacturing costs. To develop new product and process technology, support future growth, achieve operating efficiencies, and maintain product quality, we must make significant capital investments in manufacturing technology, capital equipment, facilities, R&D, and product and process technology. We estimate that net cash expenditures in 2018 for property, plant, and equipment will be approximately $7.5 billion plus or minus 5 percent, which reflects the offset of amounts we expect to be funded by our partners. Investments in capital expenditures, offset by amounts funded by our partners, were $2.11 billion in the second quarter of 2018. As of March 1, 2018, we had cash and marketable investments of $8.56 billion. As of March 1, 2018, $3.18 billion of cash and marketable investments, including substantially all of the cash held by the MMJ Group, MSTW, and MTTW, was held by foreign subsidiaries whose earnings were considered to be indefinitely reinvested. As a result of the Tax Act, substantially all of our accumulated foreign earnings earned before December 31, 2017 were treated as taxable; however, the repatriation of all or a portion of these earnings would continue to be subject to foreign and state tax upon repatriation to the United States. In addition, cash of $317 million held by IMFT was generally not available to finance our other operations.
The 2021 MSTW Term Loan contains covenants that limit or restrict MSTW's ability to create liens in or dispose of collateral securing obligations under the 2021 MSTW Term Loan, mergers involving MSTW and/or MTTW, loans or
guarantees to third parties by MTTW and/or MSTW, and MSTW's and/or MTTW's distribution of cash dividends. As a result, the assets of MSTW and/or MTTW are not available for use by us in our other operations.
As a result of the corporate reorganization proceedings of MMJ initiated in 2012, and for so long as such proceedings are continuing, MMJ is prohibited from paying dividends, including any cash dividends, to us and such proceedings require that excess earnings be used in MMJ's business or to fund the MMJ creditor payments. In addition, pursuant to an order of the Japan Court, MMJ cannot make loans or advances, other than certain ordinary course advances, to us without the consent of the Japan Court and may, under certain circumstances, be subject to approval of the legal trustee. As a result, the assets of MMJ are not available for use by us in our other operations. Furthermore, certain uses of the assets of MMJ, including certain capital expenditures of MMJ and MMT or further investments in MMT, may require consent of MMJ's trustees and/or the Japan Court.
In the past we have utilized external sources of financing when needed. As a result of our debt levels, expected debt amortization, and general economic conditions, it may be difficult for us to obtain financing on terms acceptable to us. There can be no assurance that we will be able to generate sufficient cash flows, use cash held by MMJ to fund its capital expenditures, access capital markets or find other sources of financing to fund our operations, make debt payments, and make adequate capital investments to remain competitive in terms of technology development and cost efficiency. Our inability to do any of the foregoing could have a material adverse effect on our business, results of operations, or financial condition.
Our future success depends on our ability to develop and produce new and competitive new memory and storage technologies.
Our key semiconductor memory and storage products and technologies face technological barriers to continue to meet long-term customer needs. These barriers include potential limitations on stacking additional 3D memory layers, increasing bits per cell (i.e., cell levels), shrinking products in order to reduce costs, meeting higher density requirements, and improving power consumption and reliability. To meet these requirements, weWe may face technological barriers to continue to shrink our products at our current or historical rate, which has generally reduced per-unit cost. We have invested and expect thatto continue to invest in R&D for new memoryand existing products and process technologies, willsuch as EUV lithography, to continue to deliver advanced
product requirements. Such new technologies can add complexity and risk to our schedule and may affect our costs and production output. We may be developed byunable to recover our investment in R&D or otherwise realize the semiconductoreconomic benefits of reducing die size or increasing memory and storage industry.densities. Our competitors are working to develop new memory and storage technologies that may offer performance andand/or cost advantages to existing technologies and render existing technologies obsolete. Accordingly, our future success may depend on our ability to develop and produce viable and competitive new memory and storage technologies. There can be no assurance of the following:
•that we will be successful in developing competitivenew semiconductor memory and storage technologies;
•that we will be able to cost-effectively manufacture new products;
•that we will be able to successfully market these technologies; and
•that margins generated from sales of these products will allow us to recover costs of development efforts.
We develop and produce advanced memory and storage technologies including 3D XPoint memory, a new class of non-volatile technology. There isand there can be no assurance that our efforts to develop and market new product technologies will be successful. Unsuccessful efforts to develop new semiconductor memory and storage technologies could have a material adverse effect on our business, results of operations, or financial condition.
A significant portion of our revenue is concentrated with a select number of customers.
In each of the last three years, approximately one-half of our total revenue was from our top ten customers. A disruption in our relationship with any of these customers could adversely affect our business. We could experience fluctuations in our customer base or the mix of revenue by customer as markets and strategies evolve. Our customers’ demand for our products may fluctuate due to factors beyond our control. In addition, any consolidation of our customers could reduce the number of customers to whom our products may be sold. Our inability to meet our customers’ requirements or to qualify our products with them could adversely impact our revenue. A meaningful change in the inventory strategy of our customers could impact our industry bit demand growth outlook. The loss of, or restrictions on our ability to sell to, one or more of our major customers, such as occurred with our former customer, Huawei Technologies, Co. Ltd. (“Huawei”), or any significant reduction in orders from, or a shift in product mix by, customers could have a material adverse effect on our business, results of operations, or financial condition.
We face geopolitical and other risks associated with our international sales and operations that could materially adversely affect our business, results of operations, or financial condition.
In 2021, 56% of our revenue was from sales to customers who have headquarters located outside the United States. We ship our products to the locations specified by our customers. Customers with global supply chains and operations may request we deliver products to countries where they own or operate production facilities or to countries where they utilize third-party subcontractors or warehouses. As a result, 89% of our revenue in 2021 was from products shipped to customer locations outside the United States.
A substantial portion of our operations are conducted in Taiwan, Singapore, Japan, Malaysia, China, and India, and many of our customers, suppliers, and vendors also operate internationally. Our operations, and the global supply chain of the technology industry, are subject to a number of risks, including the effects of actions and policies of various governments across our global operations and supply chain. For example, political, economic, or other actions may adversely affect our operations in Taiwan. A majority of our DRAM production output in 2021 was from our fabrication facilities in Taiwan and any loss of output could have a material adverse effect on us. Any political, economic, or other actions may also adversely affect our customers and the technology industry supply chain, for which Taiwan is a central hub, and as a result, could have a material adverse impact on us.
In addition, the U.S. government has in the past restricted American firms from selling products and software to certain of our customers and may in the future impose similar bans or other restrictions on sales to one or more of our significant customers. These restrictions may not prohibit our competitors from selling similar products to our customers, which may result in our loss of sales and market share. Even when such restrictions are lifted, financial or other penalties or continuing export restrictions imposed with respect to our customers could have a continuing negative impact on our future revenue and results of operations, and we may not be able to recover any customers or market share we lose while complying with such restrictions.
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Our international sales and operations are subject to a variety of risks, including:
•export and import duties, changes to import and export regulations, customs regulations and processes, and restrictions on the transfer of funds, including currency controls in China, which could negatively affect the amount and timing of payments from certain of our customers and, as a result, our cash flows;
•imposition of bans on sales of goods or services to one or more of our significant foreign customers;
•public health issues (for example, an outbreak of a contagious disease such as COVID-19, Severe Acute Respiratory Syndrome (“SARS-CoV”), avian and swine influenza, measles, or Ebola);
•compliance with U.S. and international laws involving international operations, including the Foreign Corrupt Practices Act of 1977, as amended, export and import laws, and similar rules and regulations;
•theft of intellectual property;
•political and economic instability, including the effects of disputes between China and Taiwan and Russia’s invasion of Ukraine;
•government actions or civil unrest preventing the flow of products and materials, including delays in shipping and obtaining products and materials, cancellation of orders, or loss or damage of products;
•problems with the transportation or delivery of products and materials;
•issues arising from cultural or language differences and labor unrest;
•longer payment cycles and greater difficulty in collecting accounts receivable;
•compliance with trade, technical standards, and other laws in a variety of jurisdictions;
•contractual and regulatory limitations on the ability to maintain flexibility with staffing levels;
•disruptions to manufacturing or R&D activities as a result of actions imposed by foreign governments;
•changes in economic policies of foreign governments; and
•difficulties in staffing and managing international operations.
If we or our customers, suppliers, or vendors are impacted by any of these risks, it could have a material adverse effect on our business, results of operations, or financial condition.
Our business, results of operations, or financial condition could be adversely affected by the limited availability and quality of materials, supplies, and capital equipment, or dependency on third-party service providers.
Our supply chain and operations are dependent on the availability of materials that meet exacting standards and the use of third parties to provide us with components and services. We generally have multiple sources of supply for our materials and services. However, only a limited number of suppliers are capable of delivering certain materials, components, and services that meet our standards and, in some cases, materials, components, or services are provided by a single or sole source, and we may be unable to qualify new suppliers on a timely basis. Various factors could impact the availability of materials or components such as chemicals, silicon wafers, gases, photoresist, controllers, substrates, lead frames, printed circuit boards, targets, and reticle glass blanks. These factors could include a shortage of raw materials or a disruption in the processing or purification of those raw materials into finished goods. Shortages or increases in lead times have occurred in the past, are currently occurring with respect to some materials and components, and may occur from time to time in the future. Constraints within our supply chain for certain materials and integrated circuit components could limit our bit shipments, which could have a material adverse effect on our business, results of operations, or financial condition.
Our manufacturing processes are also dependent on our relationships with third-party manufacturers of controllers, analog integrated circuits, and other components used in some of our products and with outsourced semiconductor foundries, assembly and test providers, contract manufacturers, logistic carriers, and other service providers. Although we have certain long-term contracts with some of our suppliers, many of these contracts do not provide for long-term capacity commitments. To the extent we do not have firm commitments from our third-party suppliers over a specific time period or for any specific capacity and/or quantity, our suppliers may allocate capacity to their other customers and capacity and/or materials may not be available when we need it or at reasonable prices. Inflationary pressures and shortages have increased, and may continue to increase, costs for materials, supplies, and services. Regardless of contract structure, large swings in demand may exceed our contracted supply and/or our suppliers’ capacity to meet those demand changes resulting in a shortage of parts, materials, or capacity needed to manufacture our products.
Certain materials are primarily available in a limited number of countries, including rare earth elements, minerals, and metals. Trade disputes, geopolitical tensions, economic circumstances, political conditions, or public health issues, such as COVID-19, may limit our ability to obtain such materials. Although these rare earth and other
materials are generally available from multiple suppliers, China is the predominant producer of certain of these materials. If China were to restrict or stop exporting these materials, our suppliers’ ability to obtain such supply may be constrained and we may be unable to obtain sufficient quantities, or obtain supply in a timely manner, or at a commercially reasonable cost. Constrained supply of rare earth elements, minerals, and metals may restrict our ability to manufacture certain of our products and make it difficult or impossible to compete with other semiconductor memory manufacturers who are able to obtain sufficient quantities of these materials from China.
We and/or our suppliers and service providers could be affected by regional conflicts, sanctions, tariffs, embargoes, or other trade restrictions, as well as laws and regulations enacted in response to concerns regarding climate change, conflict minerals, responsible sourcing practices, public health crises, contagious disease outbreaks, or other matters, which could limit the supply of our materials and/or increase the cost. For example, Russia’s invasion of Ukraine as well as sanctions against Russia could result in higher costs or reduced availability of supplies, materials, components, or services. Environmental regulations could limit our ability to procure or use certain chemicals or materials in our operations or products. In addition, disruptions in transportation lines could delay our receipt of materials. Our ability to procure components to repair equipment essential for our manufacturing processes could also be negatively impacted by various restrictions or disruptions in supply chains, among other items. The disruption of our supply of materials, components, or services, or the extension of our lead times could have a material adverse effect on our business, results of operations, or financial condition.
Similarly, if our customers experience disruptions to their supplies, materials, components, or services, or the extension of their lead times, they may reduce, cancel, or alter the timing of their purchases with us. For example, recently some PC customers adjusted their memory and storage purchases due to shortages of non-memory components that are needed to complete PC builds. In addition, recently several automotive manufacturers have experienced shortages of non-memory semiconductor-based components from other suppliers, forcing a curtailment of their production lines and a reduction in memory and storage purchases from us. Reduction, cancellation, or alteration of the timing of customer purchases could have a material adverse effect on our business, results of operations, or financial condition.
Our operations are dependent on our ability to procure advanced semiconductor manufacturing equipment that enables the transition to lower cost manufacturing processes. For certain key types of equipment, including photolithography tools, we are sometimes dependent on a single supplier. From time to time, we have experienced difficulties in obtaining some equipment on a timely basis due to suppliers’ limited capacity. Our inability to obtain equipment on a timely basis could adversely affect our ability to transition to next generation manufacturing processes and reduce our costs. Delays in obtaining equipment could also impede our ability to ramp production at new facilities and could increase our overall costs of a ramp. Our inability to obtain advanced semiconductor manufacturing equipment in a timely manner could have a material adverse effect on our business, results of operations, or financial condition.
Our construction projects to expand production and R&D capacity are highly dependent on available sources of labor, materials, equipment, and services. Increasing demand, supply constraints, inflation, and other market conditions could result in increasing shortages and higher costs for these items. Difficulties in obtaining these resources could result in significant delays in completion of our construction projects and cost increases, which could have a material adverse effect on our business, results of operations, or financial condition.
Our inability to source materials, supplies, capital equipment, or third-party services could affect our overall production output and our ability to fulfill customer demand. Significant or prolonged shortages of our products could halt customer manufacturing and damage our relationships with these customers. Any damage to our customer relationships as a result of a shortage of our products could have a material adverse effect on our business, results of operations, or financial condition.
New product and market development may be unsuccessful.
We are developing new products, including system-level memory and storage products and solutions, which complement our traditional products or leverage their underlying design or process technology. We have made significant investments in product and process technology and anticipate expending significant resources for new semiconductor product and system-level solution development over the next several years. Additionally, we are increasingly differentiating our products and solutions to meet the specific demands of our customers, which increases our reliance on our customers’ ability to accurately forecast the needs and preferences of their customers. As a result, our product demand forecasts may be impacted significantly by the strategic actions of our customers.
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In addition, our ability to successfully introduce new products often requires us to make product specification decisions multiple years in advance of when new products enter the market.
It is important that we deliver products in a timely manner with increasingly advanced performance characteristics at the time our customers are designing and evaluating samples for their products. If we do not meet their product design schedules, our customers may exclude us from further consideration as a supplier for those products. The process to develop new products requires us to demonstrate advanced functionality, performance, and performance,reliability, often well in advance of a planned ramp of production, in order to secure design wins with our customers. Many factors may negatively impact our ability to meet anticipated timelines and/or expected or required quality standards with respect to the development of certain of our products. Such factors have included, and may include in the future, the effects of the public health crisis caused by the COVID-19 pandemic and the measures being taken to limit COVID-19’s spread. In addition, some of our components have long lead-times, requiring us to place orders up to a year in advance of anticipated demand. Such long lead-times increase the risk of excess inventory or loss of sales in the event our forecasts vary substantially from actual demand. There can be no assurance of the following:that:
•that our product development efforts will be successful;
•that we will be able to cost-effectively manufacture new products;
•that we will be able to successfully market these products;
that •we will be able to establish or maintain key relationships with customers, or that we will not be prohibited from working with certain customers, for specific chip set or design requirements;
•we will accurately predict and design products that meet our customers' specifications;
•we will be able to introduce new products into the market and qualify them with our customers on a timely basis; or
•that margins generated from sales of these products will allow us to recover costs of development efforts.
Our unsuccessful efforts to develop new products and solutions could have a material adverse effect on our business, results of operations, or financial condition.
Our joint ventures and strategic relationships involve numerous risks.
We have entered into strategic relationships, including our IMFT joint venture with Intel, to manufacture products and develop new manufacturing process technologies and products. These joint ventures and strategic relationships are subject to various risks that could adversely affect the value of our investments and our results of operations. These risks include the following:
our interests could diverge from our partners' interests or we may not be able to agree with our partners on ongoing manufacturing and operational activities, or on the amount, timing, or nature of further investments in our joint ventures;
our joint venture partners' products may compete with our products;
we may experience difficulties in transferring technology to joint ventures;
we may experience difficulties and delays in ramping production at joint ventures;
our control over the operations of our joint ventures is limited;
due to financial constraints, our joint venture partners may be unable to meet their commitments to us or our joint ventures and may pose credit risks for our transactions with them;
due to differing business models or long-term business goals, we and our partners may not participate to the same extent on funding capital investments in our joint ventures;
cash flows may be inadequate to fund increased capital requirements of our joint ventures;
we may experience difficulties or delays in collecting amounts due to us from our joint ventures and partners;
the terms of our partnering arrangements may turn out to be unfavorable; and
changes in tax, legal, or regulatory requirements may necessitate changes in the agreements with our partners.
Our joint ventures and strategic relationships, if unsuccessful, could have a material adverse effect on our business, results of operations, or financial condition.
A significant concentration of our net sales is to a select number of customers.
In each of the last three years, approximately one-half of our total net sales were to our top ten customers. A disruption in our relationship with any of these customers could adversely affect our business. We could experience fluctuations in our customer base or the mix of revenue by customer as markets and strategies evolve. In addition, any consolidation of our customers could reduce the number of customers to whom our products could be sold. Our inability to meet our customers' requirements or to qualify our products with them could adversely impact our sales. The loss of one or more of our major customers or any significant reduction in orders from, or a shift in product mix by, these customers could have a material adverse effect on our business, results of operations, or financial condition.
Increases in sales of system solutions may increase our dependency upon specific customers and our costs to develop, qualify, and qualifymanufacture our system solutions.
Our development of system-level memory and storage products is dependent, in part, upon successfully identifying and meeting our customers'customers’ specifications offor those products. Developing and manufacturing system-level products with specifications unique to a customer increases our reliance upon that customer for purchasing our products inat sufficient volume, quantity,volumes and prices in a timely manner. If we fail to identify or develop products on a timely basis, or at all, that comply with our customers'customers’ specifications or achieve design wins with our customers, we may experience a significant adverse impact on our salesrevenue and margins. Even if our products meet customer specifications, our sales of system-level solutions are dependent upon our customers choosing our products over those of our competitors and purchasing our products at sufficient volumes and prices. Our competitors'competitors’ products may be less costly, provide better performance, or include additional features when compared to our products. Our long-term ability to sell system-level memory and storage products is reliant upon our customer'scustomers’ ability to create, market, and sell their products containing our system-level solutions at sufficient volumes and prices in a timely manner. If we fail to successfully develop and market system-level products, our business, results of operations, or financial condition may be materially adversely affected.
Manufacturing system-level solutions, such as SSDs and managed NAND, typically results in higher per-unit manufacturing costs as compared to other products. Even if we are successful in selling system-level solutions to our customers in sufficient volume, we may be unable to generate sufficient profit if our per-unit manufacturing costs exceed our per-unit selling prices. Manufacturing system-level solutions to customer specifications requires a longer development cycle, as compared to discrete products, to design, test, and qualify, which may increase our costs. Additionally, someSome of our system solutions are increasingly dependent on sophisticated firmware that may require significant customization to meet customer specifications, which increases our costs and time to market. Additionally, we may need to update our controller and hardware design as well as our firmware or develop new firmware as a result of new product introductions or changes
in customer specifications and/or industry standards, which increases our costs. System complexities and extended warranties for system-level products could also increase our warranty costs. Our failure to cost-effectively manufacture system-level solutions and/or controller, hardware design, and firmware in a timely manner may result in reduced demand for our system-level products and could have a material adverse effect on our business, results of operations, or financial condition.
Products that fail to meet specifications, are defective, or that are otherwise incompatible with end uses could impose significant costs on us.
Products that do not meet specifications or that contain, or are perceived by our customers to contain, defects or that are otherwise incompatible with end uses could impose significant costs on us or otherwise materially adversely affect our business, results of operations, or financial condition. From time to time, we experience problems with nonconforming, defective, or incompatible products after we have shipped such products. In recent periods, we have further diversified and expanded our product offerings, which could potentially increase the chance that one or more of our products could fail to meet specifications in a particular application. AsOur products and solutions may be deemed fully or partially responsible for functionality in our customers’ products and may result in sharing or shifting of product or financial liability from our customers to us for costs incurred by the end user as a result weof our customers’ products failing to perform as specified. In addition, if our products and solutions perform critical functions in our customers’ products or are used in high-risk consumer end products, such as autonomous driver assistance programs, home and enterprise security, smoke and noxious gas detectors, medical monitoring equipment, or wearables for child and elderly safety, our potential liability may increase. We could be adversely affected in several ways, including the following:
•we may be required or agree to compensate customers for costs incurred or damages caused by defective or incompatible products and to replace products;
•we could incur a decrease in revenue or adjustment to pricing commensurate with the reimbursement of such costs or alleged damages; and
•we may encounter adverse publicity, which could cause a decrease in sales of our products or harm our reputation or relationships with existing or potential customers.
Any of the foregoing items could have a material adverse effect on our business, results of operations, or financial condition.
We may be unable to protect our intellectual property or retain key employees who are knowledgeable of and develop our intellectual property.
We maintain a system of controls over our intellectual property, including U.S. and foreign patents, trademarks, copyrights, trade secret laws, licensing arrangements, confidentiality procedures, non-disclosure agreements with employees, consultants, and vendors, and a general system of internal controls. Despite our system of controls over our intellectual property, it may be possible for our current or future competitors to obtain, copy, use, or disclose, illegally or otherwise, our product and process technology. The laws of some foreign countries may not protect our intellectual property to the same degree as do U.S. laws and our confidentiality, non-disclosure, and non-compete agreements may be unenforceable or difficult and costly to enforce.
Additionally, our ability to maintain and develop intellectual property is dependent upon our ability to attract, develop, and retain highly skilled employees. Global competition for such skilled employees in our industry is intense. Due to the volatile nature of our industry and our operating results, a decline in our operating results and/or stock price may adversely affect our ability to retain key employees whose compensation is dependent, in part, upon the market price of our common stock, achieving certain performance metrics, levels of company profitability, or other financial or company-wide performance. If our competitors or future entrants into our industry are successful in hiring our employees, they may directly benefit from the knowledge these employees gained while they were under our employment.
Our inability to protect our intellectual property or retain key employees who are knowledgeable of and develop our intellectual property could have a material adverse effect on our business, results of operations, or financial condition.
Claims that our products or manufacturing processes infringe or otherwise violate the intellectual property rights of others, or failure to obtain or renew license agreements covering such intellectual property, could materially adversely affect our business, results of operations, or financial condition.
As is typical in the semiconductor and other high technology industries, from time to time others have asserted, and may in the future assert, that our products or manufacturing processes infringe upon, misappropriate, misuse, or otherwise violate their intellectual property rights. We are unable to predict the outcome of these assertions made against us. Any of these types of claims, regardless of the merits, could subject us to significant costs to defend or resolve such claims and may consume a substantial portion of management's time and attention. As a result of these claims, we may be required to:
pay significant monetary damages, fines, royalties, or penalties;
enter into license or settlement agreements covering such intellectual property rights;
make material changes to or redesign our products and/or manufacturing processes; and/or
cease manufacturing, having made, selling, offering for sale, importing, marketing, or using products and/or manufacturing processes in certain jurisdictions.
We may not be able to take any of the actions described above on commercially reasonable terms and any of the foregoing results could have a material adverse effect on our business, results of operations, or financial condition. (See also "Part I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Contingencies.")
We have a number of intellectual property license agreements. Some of these license agreements require us to make one-time or periodic payments. We may need to obtain additional licenses or renew existing license agreements in the future. We are unable to predict whether these license agreements can be obtained or renewed on terms acceptable to us. The failure to obtain or renew licenses as necessary could have a material adverse effect on our business, results of operations, or financial condition.
If our manufacturing process is disrupted by operational issues, natural disasters, or other events, our business, results of operations, or financial condition could be materially adversely affected.
We and our subcontractors manufacture products using highly complex processes that require technologically advanced equipment and continuous modification to improve yields and performance. Difficulties in the manufacturing process or the effects from a shift in product mix can reduce yields or disrupt production and may increase our per gigabit manufacturing costs. We and our subcontractors maintain operations and continuously implement new product and process technology at our manufacturing operations,facilities, which are widely dispersed in multiple locations in several countries including the United States, Singapore, Taiwan, Japan, Malaysia, and China. Additionally,As a result of the necessary interdependence within our control over operationsnetwork of manufacturing facilities, an operational disruption at IMFT is limited byone of our agreements with Intel. or a subcontractor’s facilities may have a disproportionate impact on our ability to produce many of our products.
From time to time, wethere have experiencedbeen disruptions in our manufacturing processoperations as a result of power outages, improperly functioning equipment, disruptions in supply of raw materials or components, or equipment failures,failures. We have manufacturing and other operations in locations subject to natural occurrences and possible climate changes, such as severe and variable weather and geological events, including droughts, earthquakes, tsunamis, or other environmental events. occurrences, such as the drought that occurred in Taiwan in 2021, that could disrupt operations, resulting in increased costs, or disruptions to our or our suppliers’ or customers’ manufacturing operations. In addition, our suppliers and customers also have operations in such locations. Other events, including political or public health crises, such as an outbreak of contagious diseases like COVID-19, SARS-CoV, avian and swine influenza, measles, or Ebola, may also affect our production capabilities or that of our suppliers, including as a result of quarantines, closures of production facilities, lack of supplies, or delays caused by restrictions on travel or shipping. For example, since the start of the COVID-19 pandemic, some of our facilities and some of our subcontractors’ facilities at times have been required to operate at reduced staffing and capacity levels due to COVID-19 quarantines and other public health protocols, which temporarily reduced output levels from those facilities. In addition, climate change may pose physical risks to our manufacturing facilities or our suppliers’ facilities, including increased extreme weather events that could result in supply delays or disruptions. The events noted above have occurred from time to time and may occur in the future. As a result, in addition to disruptions to operations, our insurance premiums may increase or we may not be able to fully recover any sustained losses through insurance.
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If production at a fabrication facility is disrupted for any reason, manufacturing yields may be adversely affected, or we may be unable to meet our customers'customers’ requirements and they may purchase products from other suppliers. This could result in a significant increase in manufacturing costs, loss of revenues,revenue, or damage to customer relationships, any of which could have a material adverse effect on our business, results of operations, or financial condition.
The acquisition of our ownership interest in Inotera from Qimonda has been challenged by the administrator of the insolvency proceedings for Qimonda.
On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda's insolvency proceedings, filed suit against Micron and Micron Semiconductor B.V., our Netherlands subsidiary ("Micron B.V."), in the District Court of Munich, Civil Chamber. The complaint seeks to void, under Section 133 of the German Insolvency Act, a share purchase agreement between Micron B.V. and Qimonda signed in fall 2008, pursuant to which Micron B.V. purchased substantially all of Qimonda's shares of Inotera (the "Inotera Shares"), representing approximately 18% of Inotera's outstanding shares as of March 1, 2018, and seeks an order requiring us to re-transfer those shares to the Qimonda estate. The complaint also seeks, among other things, to recover damages for the alleged value of the joint venture relationship with Inotera and to terminate, under Sections 103 or 133 of the German Insolvency Code, a patent cross-license between us and Qimonda entered into at the same time as the share purchase agreement.
Following a series of hearings with pleadings, arguments, and witnesses on behalf of the Qimonda estate, on March 13, 2014, the court issued judgments: (1) ordering Micron B.V. to pay approximately $1 million in respect of certain Inotera Shares sold in connection with the original share purchase; (2) ordering Micron B.V. to disclose certain information with respect to any Inotera Shares sold by it to third parties; (3) ordering Micron B.V. to disclose the benefits derived by it from ownership of the Inotera Shares, including in particular, any profits distributed on the Inotera Shares and all other benefits; (4) denying Qimonda’s claims against Micron for any damages relating to the joint venture relationship with Inotera; and (5) determining that Qimonda's obligations under the patent cross-license agreement are canceled. In addition, the Court issued interlocutory judgments ordering, among other things: (1) that Micron B.V. transfer to the Qimonda estate the Inotera Shares still owned by Micron B.V. and pay to the Qimonda estate compensation in an amount to be specified for any Inotera Shares sold to third parties; and (2) that Micron B.V. pay the Qimonda estate as compensation an amount to be specified for benefits derived by Micron B.V. from ownership of the Inotera Shares. The interlocutory judgments have no immediate, enforceable effect on us, and, accordingly, we expect to be able to continue to operate with full control of the Inotera Shares subject to further developments in the case. We have filed a notice of appeal, and the parties have submitted briefs to the appeals court.
We are unable to predict the outcome of the matter and, therefore, cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera Shares or monetary damages, unspecified damages based on the
benefits derived by Micron B.V. from the ownership of the Inotera Shares, and/or the termination of the patent cross-license, which could have a material adverse effect on our business, results of operations, or financial condition.
We may incur additional restructuring charges in future periods.
In separate transactions in 2017, we sold our assembly and test facility located in Akita, Japan and our 40% ownership interest in Tera Probe; assets associated with our 200mm fabrication facility in Singapore; and assets related to our Lexar brand. In 2016, we initiated a restructure plan in response to business conditions and the need to accelerate focus on our key priorities. The plan included the elimination of certain projects and programs, the permanent closure of a number of open headcount requisitions, workforce reductions in certain areas of our business, and other non-headcount related spending reductions. As a result of these and other actions, we incurred charges of $18 million, $67 million, and $3 million for 2017, 2016, and 2015, respectively.
We may not realize expected savings or other benefits from our restructure activities and may incur additional restructure charges or other losses in future periods associated with other initiatives. In connection with any restructure initiatives, we could incur restructure charges, loss of production output, loss of key personnel, disruptions in our operations, and difficulties in the timely delivery of products, which could have a material adverse effect on our business, results of operations, or financial condition.
Breaches of our security systems or products, or those of our customers, suppliers, or business partners, could expose us to losses.
We maintain a system of controls over the physical security of our facilities. We also manage and store various proprietary information and sensitive or confidential data relating to our operations. In addition, we process, store, and transmit large amounts of data relating to our customers and employees, including sensitive personal information. Unauthorized persons or employees may gain access to our facilities or network systems to steal trade secrets or other proprietary information, compromise confidential information, create system disruptions, or cause shutdowns. TheseThrough cyberattacks of varying degrees on technology infrastructure and systems, unauthorized parties may also be ableobtain access to developcomputer systems, networks, and deploy viruses,data, including cloud-based platforms. The technology infrastructure and systems of our suppliers, vendors, service providers, cloud solution providers, and partners have in the past experienced, and may in the future experience, such attacks, which could impact our operations. Cyberattacks can include ransomware, computer denial-of-service attacks, worms, supply chain attacks, social engineering, and other malicious software programs or other attacks, including those using techniques that disrupt our operationschange frequently or may be disguised or difficult to detect, or designed to remain dormant until a triggering event, impersonation of authorized users, and efforts to discover and exploit any design flaws, “bugs,” security vulnerabilities, as well as intentional or unintentional acts by employees or other insiders with access privileges. Globally, cyberattacks are increasing in number and the attackers are increasingly organized and well-financed, or supported by state actors, and are developing increasingly sophisticated systems to not only attack, but also to evade detection. In addition, geopolitical tensions or conflicts, such as Russia’s invasion of Ukraine, may create security vulnerabilities.a heightened risk of cyberattacks. Breaches of our physical security, and attacks on our network systems, or breaches or attacks on our customers, suppliers, or business partners who have confidential or sensitive information regarding us and our customers and suppliers, could result in significant losses and damage our reputation with customers and suppliers and may expose us to litigation if the confidential information of our customers, suppliers, or employees is compromised.
Our products are also targets for cyberattacks, including those products utilized in cloud-based environments. While some of our products contain encryption or security algorithms to protect third-party content or user-generated data stored on our products, these products could still be hacked or the encryption schemes could be compromised, whichbreached, or circumvented by motivated and sophisticated attackers. Further, our products contain sophisticated hardware and firmware and applications that may contain security vulnerabilities or defects in design or manufacture, including “bugs” and other problems that could interfere with the intended operation of our products. To the extent our products are hacked, or the encryption schemes are compromised or breached, this could harm our business by requiring us to employ additional resources to fix the errors or defects, exposing us to litigation, claims, and harm to our reputation.
Any of the foregoing cybersecurity risks could have a material adverse effect on our business, results of operations, or financial condition.
ChangesWe must attract, retain, and motivate highly skilled employees.
To remain competitive, we must attract, retain, and motivate executives and other highly skilled, diverse employees, as well as effectively manage or plan for succession for key employees. Competition for experienced employees in foreign currency exchange rates could materially adversely affectour industry continues to be intense. Hiring and retaining qualified executives, engineers, technical staff, sales representatives, and other employees is critical to our business. If other employers are perceived as offering a greater degree of workplace flexibility, greater compensation, or other employment benefits to employees than us, we may experience difficulty in attracting, retaining, and motivating the employees needed for our business results of operations, or financial condition.
Acrossoperations. If our global operations, significant transactionstotal compensation programs and balances are denominated in currencies other than the U.S. dollar (our reporting currency), primarily the euro, Singapore dollar, New Taiwan dollar,workplace culture cease to be viewed as competitive and yen. We recorded net losses from changes in currency exchange rates of $36 million for the first six months of 2018, $74 million for 2017, and $24 million for 2016. Based on our foreign currency balances of monetary assets and liabilities, as of March 1, 2018, we estimate that a 10% adverse change in exchange rates versus the U.S. dollar would result in losses of approximately $414 million. Although we hedge our primary exposures to changes in currency exchange rates from our monetary assets and liabilities, the effectiveness of these hedges is dependent uponinclusive, our ability to accurately forecastattract, retain, and motivate employees could be compromised.
Like many others in our monetary assetsindustry, we are experiencing an increase in undesired attrition and liabilities. In addition,increasing compensation costs due to a variety of factors that are influencing a very tight labor market and competition for talent across our industry. To the extent we experience significant attrition and are unable to timely replace employees, we could experience a loss of critical skills and reduced employee morale, potentially resulting in business disruptions or increased expenses to address any disruptions. Additionally, changes to immigration policies in the numerous countries in which we operate, including the United States, as well as restrictions on global travel as a result of local or global public health crises requiring quarantines, lockdowns, or other precautions to limit exposure to infectious diseases, may limit our ability to hire and/or retain talent in, or transfer talent to, specific locations.
Our inability to attract, retain, and motivate executives and other employees or effectively manage or plan for succession of key roles may inhibit our ability to maintain or expand our business operations.
Our incentives from various governments are conditional upon achieving or maintaining certain performance obligations and are subject to reduction, termination, or clawback.
We have received, and may in the future continue to receive, benefits and incentives from national, state, and local governments in various regions of the world designed to encourage us to establish, maintain, or increase investment, workforce, or production in those regions. These incentives may take various forms, including grants, loan subsidies, and tax arrangements, and typically require us to perform or maintain certain levels of investment, capital spending, employment, technology deployment, or research and development activities to qualify for such incentives. We may be unable to obtain significant future incentives to continue to fund a portion of our manufacturingcapital expenditures and operating costs, are denominatedwithout which our cost structure would be adversely impacted. We also cannot guarantee that we will successfully achieve performance obligations required to qualify for these incentives or that the granting agencies will provide such funding. These incentive arrangements typically provide the granting agencies with rights to audit our compliance with their terms and obligations. Such audits could result in foreign currencies. Exchange rates for somemodifications to, or termination of, these currencies against the U.S. dollar, particularly the yen, have been volatile in recent periods. If these currencies strengthen against the U.S. dollar, our manufacturing costsapplicable incentive program. The incentives we receive could significantly increase. Exchange rates for the U.S. dollar that adversely change against our foreign currency exposuresbe subject to reduction, termination, or clawback, and any decrease or clawback of government incentives could have a material adverse effect on our business, results of operations, or financial condition.
We may make future acquisitions and/or alliances, which involve numerous risks.
Acquisitions and the formation or operation of alliances, such as joint ventures and other partnering arrangements, involve numerous risks, including the following:
•integrating the operations, technologies, and products of acquired or newly formed entities into our operations;
•increasing capital expenditures to upgrade and maintain facilities;
•increased debt levels;
•the assumption of unknown or underestimated liabilities;
•the use of cash to finance a transaction, which may reduce the availability of cash to fund working capital, capital expenditures, R&D expenditures, and other business activities;
•diverting management'smanagement’s attention from daily operations;
•managing larger or more complex operations and facilities and employees in separate and diverse geographic areas;
•hiring and retaining key employees;
•requirements imposed by governmentalgovernment authorities in connection with the regulatory review of a transaction, which may include, among other things, divestitures or restrictions on the conduct of our business or the acquired business;
•inability to realize synergies or other expected benefits;
•failure to maintain customer, vendor, and other relationships;
•inadequacy or ineffectiveness of an acquired company'scompany’s internal financial controls, disclosure controls and procedures, compliance programs, and/or environmental, health and safety, anti-corruption, human resource, or other policies or practices; and
•impairment of acquired intangible assets, goodwill, or other assets as a result of changing business conditions, technological advancements, or worse-than-expected performance of the acquired business.
In previous years, supply47
The global memory and storage industry has experienced consolidation and may continue to consolidate. We engage, from time to time, in discussions regarding potential acquisitions and similar opportunities. To the extent we are successful in completing any such transactions, we could be subject to some or all of the risks described above, including the risks pertaining to funding, assumption of liabilities, integration challenges, and increases in debt that may accompany such transactions. Acquisitions of, or alliances with, technology companies are inherently risky and may not be successful and could have a material adverse effect on our business, results of operations, or financial condition.
The limited availability of raw materials, supplies,We may incur restructure charges in future periods and may not realize expected savings or capital equipment could materially adversely affect our business, results of operations, or financial condition.other benefits from restructure activities.
Our operations require raw materials, and in certain cases, third party services, that meet exacting standards. We generally have multiple sources of supply for our raw materials and services. However, only a limited number of suppliers are capable of delivering certain raw materials and services that meet our standards. In some cases, materials, components, or services are provided by a single supplier. Various factors could reduce the availability of raw materials or components such as chemicals, silicon wafers, gases, photoresist, controllers, substrates, lead frames, printed circuit boards, sub-assemblies, targets, and reticle glass blanks. Shortages may occur, fromFrom time to time, we have, and may in the future.future, enter into restructure initiatives in order to, among other items, streamline our operations, respond to changes in business conditions, our markets, or product offerings, or to centralize certain key functions. We and/may not realize expected savings or other benefits from our suppliers could be affected by lawsrestructure activities and regulations enactedmay incur additional restructure charges or other losses in response to concerns regarding climate change, which could increasefuture periods associated with other initiatives. For example, we recognized significant restructure charges in connection with the cost and limit the supplysale of our raw materials.Lehi facility. See “Part I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Lehi, Utah Fab and 3D XPoint.” In addition,connection with any restructure initiatives, we could incur restructure charges, loss of production output, loss of key personnel, disruptions in transportation lines could delay our receipt of raw materials. Lead times for the supply of raw materials have been extendedoperations, and difficulties in the past. The disruptiontimely delivery of our supply of raw materials or services or the extension of our lead timesproducts, which could have a material adverse effect on our business, results of operations, or financial condition.
Our operations are dependentCompliance with responsible sourcing requirements and any related regulations could increase our operating costs, or limit the supply and increase the cost of certain materials, supplies, and services, and if we fail to comply, customers may reduce purchases from us or disqualify us as a supplier.
We and many of our customers have adopted responsible sourcing programs that require us to meet certain environmental, social, and governance criteria, and to periodically report on our abilityperformance against these requirements, including that we source the materials, supplies, and services we use and incorporate into the products we sell as prescribed by these programs. Many customer programs require us to procure advanced semiconductor manufacturing equipment that enables the transitionremove a supplier within a prescribed period if such supplier ceases to lower cost manufacturing processes. For certain key typescomply with prescribed criteria, and our supply chain may at any time contain suppliers at risk of equipment, including photolithography tools,being removed due to non-compliance with responsible sourcing requirements. Some of our customers may elect to disqualify us as a supplier (resulting in a permanent or temporary loss of sales to such customer) or reduce purchases from us if we are sometimes dependentunable to verify that our performance or products (including the underlying supply chain) meet the specifications of our customers’ responsible sourcing programs on a single supplier.continuous basis. Meeting responsible sourcing requirements may increase operating requirements and costs or limit the sourcing and availability of some of the materials, supplies, and services we use, particularly when the availability of such materials, supplies, and services is concentrated to a limited number of suppliers. From time to time we have experienced difficultiesremove suppliers or require our suppliers to remove suppliers from their supply chains based on our responsible sourcing requirements or customer requirements, and we or our suppliers may be unable to replace such removed suppliers in obtaining some equipment on a timely basis dueor cost effective manner. Any inability to suppliers' limited capacity.replace removed suppliers in a timely or cost effective manner may affect our ability and/or the cost to obtain sufficient quantities of materials, supplies, and services necessary for the manufacture of our products. Our inability to obtain equipment on a timely basis could adversely affect our ability to transition to next generation manufacturing processes and reduce our costs. Delays in obtaining equipment could also impede our ability to ramp production at new facilities and could increase our overall costs of a ramp. Our inability to obtain advanced semiconductor manufacturing equipmentreplace suppliers we have removed in a timely or cost effective manner or comply with customers’ responsible sourcing requirements or with any related regulations could have a material adverse effect on our business, results of operations, or financial condition.
A downturn in the worldwide economy may harm our business.
Downturns in the worldwide economy, due to inflation, geopolitics, public health crises, or other factors, have harmed our business in the past and future downturns could also adversely affect our business. Adverse economic conditions affect demand for devices that incorporate our products, such as personal computers, smartphones, automobiles, and servers. Reduced demand for these or other products could result in significant decreases in our average selling prices and product sales. In addition, to the extent our customers or distributors have elevated inventory levels, we may experience a decrease in short-term and/or long-term demand and/or pricing for our products.
A deterioration of conditions in worldwide credit markets could limit our ability to obtain external financing to fund our operations and capital expenditures. In addition, we may experience losses on our holdings of cash and investments due to failures of financial institutions and other parties. Difficult economic conditions may also result in a higher rate of losses on our accounts receivable due to credit defaults. As a result, downturns in the worldwide economy could have a material adverse effect on our business, results of operations, or financial condition.
Risks Related to Intellectual Property and Litigation
We may be unable to protect our intellectual property or retain key employees who are knowledgeable of and develop our intellectual property.
We maintain a system of controls over our intellectual property, including U.S. and foreign patents, trademarks, copyrights, trade secrets, licensing arrangements, confidentiality procedures, non-disclosure agreements with employees, consultants, and vendors, and a general system of internal controls. Despite our system of controls over our intellectual property, it may be possible for our current or future competitors to obtain, copy, use, or disclose, illegally or otherwise, our product and process technology or other proprietary information. The laws of some foreign countries may not protect our intellectual property to the same degree as do U.S. laws, and our confidentiality, non-disclosure, and non-compete agreements may be unenforceable or difficult and costly to enforce.
Additionally, our ability to maintain and develop intellectual property is dependent upon our ability to attract, develop, and retain highly skilled employees. Global competition for such skilled employees in our industry is intense. A decline in our operating results and/or stock price may adversely affect our ability to retain key employees whose compensation is dependent, in part, upon the market price of our common stock, achieving certain performance metrics, levels of company profitability, or other financial or company-wide performance. If our competitors or future entrants into our industry are successful in hiring our employees, they may directly benefit from the knowledge these employees gained while they were under our employment.
Our inability to protect our intellectual property or retain key employees who are knowledgeable of and develop our intellectual property could have a material adverse effect on our business, results of operations, or financial condition.
Legal proceedings and claims could have a material adverse effect on our business, results of operations, or financial condition.
From time to time we are subject to various legal proceedings and claims that arise out of the ordinary conduct of our business or otherwise, both domestically and internationally. See “Part I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Contingencies.” Any claim, with or without merit, could result in significant legal fees that could negatively impact our financial results, disrupt our operations, and require significant attention from our management. We may be associated with and subject to litigation, claims, or arbitration disputes arising from, or as a result of:
•our relationships with vendors or customers, supply agreements, or contractual obligations with our subcontractors or business partners;
•the actions of our vendors, subcontractors, or business partners;
•our indemnification obligations, including obligations to defend our customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, trademarks, copyrights, or trade secrets; and
•the terms of our product warranties or from product liability claims.
As we continue to focus on developing system solutions with manufacturers of consumer products, including autonomous driving, augmented reality, and others, we may be exposed to greater potential for personal liability claims against us as a result of consumers’ use of those products. We, our officers, or our directors could also be subject to claims of alleged violations of securities laws. There can be no assurance that we are adequately insured to protect against all claims and potential liabilities, and we may elect to self-insure with respect to certain matters. Exposures to various legal proceedings and claims could lead to significant costs and expenses as we defend claims, are required to pay damage awards, or enter into settlement agreements, any of which could have a material adverse effect on our business, results of operations, or financial condition.
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We are subject to allegations of anticompetitive conduct.
On April 27, 2018, a complaint was filed against Micron and other DRAM suppliers in the U.S. District Court for the Northern District of California. Subsequently, two substantially identical cases were filed in the same court. The lawsuits purported to be on behalf of a nationwide class of indirect purchasers of DRAM products. On September 3, 2019, the District Court granted Micron’s motion to dismiss and allowed the plaintiffs the opportunity to file a consolidated, amended complaint. On October 28, 2019, the plaintiffs filed a consolidated, amended complaint that purported to be on behalf of a nationwide class of indirect purchasers of DRAM products. The amended complaint asserted claims based on alleged price-fixing of DRAM products under federal and state law during the period from June 1, 2016 to at least February 1, 2018, and sought treble monetary damages, costs, interest, attorneys’ fees, and other injunctive and equitable relief. On December 21, 2020, the District Court dismissed the plaintiffs’ claims and entered judgment against them. On January 19, 2021, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. On March 7, 2022, the Court of Appeals affirmed the District Court’s ruling dismissing the plaintiffs’ claims. On May 3, 2021, several plaintiffs filed a substantially identical complaint in the U.S. District Court for the Northern District of California purportedly on behalf of a nationwide class of indirect purchasers of DRAM products. On July 19, 2021, the District Court dismissed the May 3, 2021 complaint pursuant to an agreement between the plaintiffs and Micron providing that the plaintiffs could refile the complaint if the District Court’s December 21, 2020 dismissal order had not been affirmed on appeal.
On June 26, 2018, a complaint was filed against Micron and other DRAM suppliers in the U.S. District Court for the Northern District of California. Subsequently, four substantially identical cases were filed in the same court. On October 28, 2019, the plaintiffs filed a consolidated, amended complaint. The consolidated complaint purported to be on behalf of a nationwide class of direct purchasers of DRAM products. The consolidated complaint asserted claims based on alleged price-fixing of DRAM products under federal and state law during the period from June 1, 2016 through at least February 1, 2018, and sought treble monetary damages, costs, interest, attorneys’ fees, and other injunctive and equitable relief.On December 21, 2020, the District Court granted Micron’s motion to dismiss and granted the plaintiffs permission to file a further amended complaint. On January 11, 2021, the plaintiffs filed a further amended complaint asserting substantially the same claims and seeking the same relief. On September 3, 2021, the District Court granted Micron’s motion to dismiss the further amended complaint with prejudice. On October 1, 2021, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit.
Additionally, six cases have been filed in the following Canadian courts: Superior Court of Quebec, the Federal Court of Canada, the Ontario Superior Court of Justice, and the Supreme Court of British Columbia. The substantive allegations in these cases are similar to those asserted in the cases filed in the United States.
On May 15, 2018, the Chinese State Administration for Market Regulation (“SAMR”) notified Micron that it was investigating potential collusion and other anticompetitive conduct by DRAM suppliers in China. On May 31, 2018, SAMR made unannounced visits to our sales offices in Beijing, Shanghai, and Shenzhen to seek certain information as part of its investigation. We are cooperating with SAMR in its investigation.
We are unable to predict the outcome of these matters and therefore cannot estimate the range of possible loss. The final resolution of these matters could result in significant liability and could have a material adverse effect on our business, results of operations, or financial condition.
Claims that our products or manufacturing processes infringe or otherwise violate the intellectual property rights of others, or failure to obtain or renew license agreements covering such intellectual property, could materially adversely affect our business, results of operations, or financial condition.
As is typical in the semiconductor and other high technology industries, from time to time others have asserted, and may in the future assert, that our products or manufacturing processes infringe upon, misappropriate, misuse, or otherwise violate their intellectual property rights. We are unable to predict the outcome of these assertions made against us. Any of these types of claims, regardless of the merits, could subject us to significant costs to defend or resolve such claims and may consume a substantial portion of management’s time and attention. As a result of these claims, we may be required to:
•pay significant monetary damages, fines, royalties, or penalties;
•enter into license or settlement agreements covering such intellectual property rights;
•make material changes to or redesign our products and/or manufacturing processes; and/or
•cease manufacturing, having made, selling, offering for sale, importing, marketing, or using products and/or manufacturing processes in certain jurisdictions.
We may not be able to take any of the actions described above on commercially reasonable terms and any of the foregoing results could have a material adverse effect on our business, results of operations, or financial condition. See “Part I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Contingencies.”
We have a number of intellectual property license agreements. Some of these license agreements require us to make one-time or periodic payments. We may need to obtain additional licenses or renew existing license agreements in the future. We are unable to predict whether these license agreements can be obtained or renewed on terms acceptable to us. The failure to obtain or renew licenses as necessary could have a material adverse effect on our business, results of operations, or financial condition.
We have been served with complaints in Chinese courts alleging patent infringement.
We have been served with complaints in Chinese courts alleging that we infringe certain Chinese patents by manufacturing and selling certain products in China. The complaints seek orders requiring us to destroy inventory of the accused products and equipment for manufacturing the accused products in China; to stop manufacturing, using, selling, and offering for sale the accused products in China; and to pay damages plus court fees.
We are unable to predict the outcome of these assertions of infringement made against us and cannot make a reasonable estimate of the potential loss or range of possible losses. A determination that our products or manufacturing processes infringe the intellectual property rights of others or entering into a license agreement covering such intellectual property could result in significant liability and/or require us to make material changes to our operations in China, products, and/or manufacturing processes. Any of the foregoing could have a material adverse effect on our business, results of operations, or financial condition. See “Part I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Contingencies.”
The acquisition of our ownership interest in Inotera from Qimonda AG (“Qimonda”) has been challenged by the administrator of the insolvency proceedings for Qimonda.
In January 2011, Dr. Michael Jaffé, administrator for Qimonda’s insolvency proceedings, filed suit against Micron and Micron Semiconductor B.V. (“Micron B.V.”), in the District Court of Munich, Civil Chamber. The complaint seeks to void a share purchase agreement between Micron B.V. and Qimonda signed in 2008, pursuant to which Micron B.V. purchased substantially all of Qimonda’s shares of Inotera, representing approximately 18% of Inotera’s outstanding shares at that time, and seeks an order requiring us to re-transfer those shares to the Qimonda estate. The complaint also seeks, among other things, to recover damages for the alleged value of the joint venture relationship with Inotera and to terminate a patent cross-license between us and Qimonda entered into at the same time as the share purchase agreement. See “Part I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Contingencies” for further information regarding the matter.
We are unable to predict the outcome of the matter and cannot make a reasonable estimate of the potential loss or range of possible losses. The final resolution of this lawsuit could result in the loss of the Inotera shares or monetary damages, unspecified damages based on the benefits derived by Micron B.V. from the ownership of the Inotera shares, and/or the termination of the patent cross-license, which could have a material adverse effect on our business, results of operations, or financial condition.
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Risks Related to Laws and Regulations
Increases in tariffs or other trade restrictions or taxes on our or our customers’ products or equipment and supplies could have an adverse impact on our operations.
We sell a significant majorityIn 2021, 89% of our revenue was from products into countriesshipped to customer locations outside the United States and weStates. We also purchase a significant portion of equipment and supplies from suppliers outside the United States. Additionally, a significant portion of our facilities are located outside the United States, including in Taiwan, Singapore, Japan, Malaysia, and China.
The United States and other countries have levied tariffs and taxes on certain goods. General trade tensions between the United States and China have been escalating, with U.S. tariffs on Chinese goods and retaliatory Chinese tariffs on U.S. goods. Some of our products are included in these tariffs. Higher duties on existing tariffs and further rounds of tariffs have been announced or threatened by U.S. and Chinese leaders. Additionally, the United States has threatened to impose tariffs on goods imported from other countries, which could also impact certain of our customers’ or our operations. If the United States were to impose current or additional tariffs on components that we or our suppliers source, our cost for such components would increase. We may also incur increases in manufacturing costs and supply chain risks due to our efforts to mitigate the impact of tariffs on our customers and our operations. Additionally, tariffs on our customers’ products could impact their sales of such end products, resulting in lower demand for our products.
We cannot predict what further actions may ultimately be taken with respect to tariffs or trade relations between the United States and other countries, what products may be subject to such actions, or what actions may be taken by other countries in retaliation. Further changes in trade policy, tariffs, additional taxes, restrictions on exports or other trade barriers, or restrictions on supplies, equipment, and raw materials including rare earth minerals, may limit our ability to produce products, increase our selling and/or manufacturing costs, decrease margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary equipment and supplies, which could have a material adverse effect on our business, results of operations, or financial conditions.condition.
A downturnTrade regulations have restricted our ability to sell our products to several customers, could restrict our ability to sell our products to other customers or in the worldwide economycertain markets, or could otherwise restrict our ability to conduct operations.
International trade disputes have led, and may harmcontinue to lead, to new and increasing trade barriers and other protectionist measures that can increase our business.
Downturns in the worldwide economy have harmedmanufacturing costs, make our business in the past and future downturns could also adversely affect our business. Adverse economic conditions affectproducts less competitive, reduce demand for devices that incorporate our products, such as personal computers, mobile devices, SSDs, and servers. Reduced demand for these products could result in significant decreases in our average selling prices and product sales. A deterioration of current conditions in worldwide credit markets could limit our ability to obtain external financingsell to fundcertain customers or markets, limit our operationsability to procure components or raw materials, impede or slow the movement of our goods across borders, impede our ability to perform R&D activities, or otherwise restrict our ability to conduct operations. Increasing protectionism, economic nationalism, and capital expenditures.national security concerns may lead to further changes in trade policy, domestic sourcing initiatives, or other formal and informal measures that could make it more difficult to sell our products in, or restrict our access to, some markets and/or customers.
Escalating tensions between the United States and China have led to increased trade restrictions and have affected customer ordering patterns. For example, the U.S. Bureau of Industry and Security (“BIS”) enacted broad trade restrictions with respect to Huawei that prevent us and many other companies from shipping products to Huawei. We cannot predict whether the BIS or other U.S. or foreign government entities will enact similar restrictions with respect to other customers, markets, or products. We may not be able to replace the lost revenue opportunities associated with such restrictions.
The United States has also imposed other restrictions on the export of U.S. regulated products and technology to certain Chinese technology companies, including certain of our customers. These restrictions reduced our sales to those customers, and continuing or future restrictions could adversely affect our financial results, result in reputational harm to us due to our relationship with such companies, or lead such companies to develop or adopt technologies that compete with our products. It is difficult to predict what further trade-related actions governments may take, and we may be unable to quickly and effectively react to such actions. For example, U.S. legislation has expanded the power of the U.S. Department of Commerce to restrict the export of “emerging and foundational technologies” yet to be identified, which could impact our current or future products.
Trade disputes and protectionist measures, or continued uncertainty about such matters, could result in declining consumer confidence and slowing economic growth or recession, and could cause our customers to reduce, cancel, or alter the timing of their purchases with us. Sustained trade tensions could lead to long-term changes in global trade and technology supply chains, which could adversely affect our business and growth prospects. Trade restrictions that may be imposed by the United States, China, or other countries may impact our business in ways we cannot reasonably quantify, including that some of our customers’ products which incorporate our solutions may also be impacted. In addition, further increases in trade restrictions or barriers may negatively impact our revenue, and any licenses we may experience losses on
our holdings of cash and investments due to failures of financial institutions and other parties. Difficult economic conditions may also result in a higher rate of losses on our accounts receivables due to credit defaults. As a result, a downturnhave received or could receive in the worldwide economyfuture could be rendered ineffective. Any such changes may have a materialan adverse effect on our business, results of operations, or financial condition.
Our results of operations could be affected by natural disasters and other events in the locations in which we or our customers or suppliers operate.
We have manufacturing and other operations in locationsThe technology industry is subject to natural occurrences such as severe weatherintense media, political, and geological events, such as earthquakes or tsunamis, that could disrupt operations. In addition,regulatory scrutiny, which can increase our suppliersexposure to government investigations, legal actions, and customers alsopenalties. Although we have operations in such locations. A natural disaster, fire, explosion, or other event that results in a prolonged disruption to our operations, or the operations of our customers or suppliers, could have a material adverse effect on our business, results of operations, or financial condition.
Our incentives from various governments are conditional upon achieving or maintaining certain performance obligationspolicies, controls, and are subject to reduction, termination, or clawback.
We have received, and may in the future continue to receive, benefits and incentives from national, state, and local governments in various regions of the worldprocedures designed to encourage us to establish, maintain, or increase investment, workforce, or production in those regions. These incentives may take various forms, including grants, loan subsidies, and tax arrangements, and typically require us to perform or maintain certain levels of investment, capital spending, employment, technology deployment, or research and development activities to qualify for such incentives. We cannot guarantee that we will successfully achieve performance obligations required to qualify for these incentives or that the granting agencies will provide such funding. These incentive arrangements typically provide the granting agencieshelp ensure compliance with rights to audit our performance with the terms and obligations. Such audits could result in modifications to, or termination of, the applicable incentive program. The incentives we receive could be subject to reduction, termination, or clawback, and any decrease or clawback of government incentives could have a material adverse effect on our business, results of operations, or financial condition.
The operations of MMJ are subject to continued oversight by the Japan Court during the pendency of the corporate reorganization proceedings.
Because MMJ's plan of reorganization provides for ongoing payments to creditors following the closing of our acquisition of MMJ, the reorganization proceedings in Japan (the "Japan Proceedings") are continuing and MMJ remains subject to the oversight of the Japan Court and of the trustees (including a trustee designated by us, who we refer to as the business trustee, and a trustee designated by the Japan Court, who we refer to as the legal trustee), pending completion of the reorganization proceedings. The business trustee is responsible for overseeing the operation of the business of MMJ, other than oversight in relation to acts that need to be carried out in connection with the Japan Proceedings, which are the responsibility of the legal trustee. MMJ's reorganization proceedings in Japan, and oversight of the Japan Court, will continue until the final creditor payment is made under MMJ's plan of reorganization, which is scheduled to occur in December 2019, but may occur on a later date to the extent any claims of creditors remain unfixed on the final scheduled installment payment date. MMJ may petition the Japan Court for an early termination of the reorganization proceedings once two-thirds of all payments under the plan of reorganization are made. Although such early terminations are customarily granted,laws, there can be no assurance that the Japan Courtour employees, contractors, suppliers, or agents will grant anynot violate such petitionlaws or our policies. Violations of trade laws, restrictions, or regulations can result in this particular case.
During the pendency of the reorganization proceedings in Japan, MMJ is obligated to provide periodic financial reports to the Japan Court and may be required to obtain the consent of the Japan Court prior to taking a number of significant actions relating to its businesses, including transferringfines; criminal sanctions against us or disposing of,our officers, directors, or acquiring, certain material assets, incurring or guaranteeing material indebtedness, settling material disputes, or entering into certain material agreements. The consent of the legal trustee may also be required for matters that would likely have a material impactemployees; prohibitions on the operations or assets of MMJ or for transfers of material assets, to the extent the matters or transfers would reasonably be expected to materially and adversely affect execution of MMJ's plan of reorganization. Accordingly, during the pendency of the reorganization proceedings in Japan, our ability to operate MMJ as partconduct of our global business orbusiness; and damage to cause MMJ to take certain actions that we deem advisable for its business could be adversely affected if the Japan Court or the legal trustee is unwilling to consent to various actions that we may wish to take with respect to MMJ.our reputation.
The operations of MMJ being subject to the continued oversight by the Japan Court during the pendency of the corporate reorganization proceedings could have a material adverse effect on our business, results of operations, or financial condition.
We may incur additional tax expense or become subject to additional tax exposure.
We operate in a number of locationsjurisdictions outside the United States, including Singapore, where we have tax incentive arrangements that are conditional, in part, upon meeting certain business operations and employment thresholds. Our domestic and international taxes are dependent upon the geographic mix of our earnings among these jurisdictions. Our provision for income taxes and cash tax liabilities in the future could be adversely affected by numerous factors, including mandatory capitalization of R&D expenses beginning in 2023, challenges by tax authorities to our tax positions and intercompany transfer pricing agreements, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities,arrangements, failure to meet performance obligations with respect to tax incentive agreements, expanding our operations in various countries, and changes in tax laws and regulations. WeAdditionally, we file income tax returns with the U.S. federal government, various U.S. states, and various other jurisdictions throughout the world. Our U.S. federalworld and statecertain tax returns may remain open to examination for 2013 through 2017. In addition, tax returns that remain open to examination in Japan and Taiwan range from the years 2012 to 2017, and in Singapore from 2013 to 2017.several years. The results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on our provision for income taxes and cash tax liability. The foregoing items could have a material adverse effect on our business, results of operations, or financial condition.
A change in tax laws in key jurisdictions could materially increase our tax expense.
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act lowers the U.S. corporateWe are subject to income tax rate from 35% to 21% and significantly affects how income from our foreign operations are taxedtaxes in the United States. AsStates and many foreign jurisdictions. Changes to income tax laws and regulations, or the interpretation of such laws, in any of the jurisdictions in which we operate could significantly increase our effective tax rate and ultimately reduce our cash flows from operating activities and otherwise have a material adverse effect on our financial condition. For example, our effective tax rate increased from 1.2% for 2018 to 9.8% for 2019 primarily as a result of tax reform by the United States. Additionally, various levels of government are increasingly focused on tax reform and other legislative actions to increase tax revenue. The United States government is considering various tax reform proposals that, if enacted, contain provisions that could increase our fiscal year-end,tax expense. Further changes in the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal ratelaws of 25.7% for 2018, and 21% for subsequent years. Based on the information available, we recorded provisional amounts under SAB 118; however, we are continuing to gather additional information and analyze authoritative guidance to finalize the computation of the Repatriation Tax. The final tax impacts may differ from our provisional estimates due to, among other things, the issuance of additional regulatory and legislative guidance. Asforeign jurisdictions could arise as a result of the Tax Act, ourbase erosion and profit shifting project undertaken by the Organisation for Economic Co-operation and Development, which represents a coalition of member countries and recommended changes to numerous long-standing tax rate may increase up to the low teens percentage depending on future profitability.
We may not utilize all of our net deferred tax assets.
We have substantial deferred tax assets, which include, among others, net operating loss and credit carryforwards. As of August 31, 2017, ourprinciples. If implemented by taxing authorities, such changes, as well as changes in U.S. federal and state net operating loss carryforwards, including uncertain tax benefits, were $3.88 billionlaws or in taxing jurisdictions’ administrative interpretations, decisions, policies, and $1.95 billion, respectively, which, if not utilized, will expire at various dates from 2028 through 2037 and 2018 through 2037, respectively. As of August 31, 2017, our foreign net operating loss carryforwards were $6.30 billion, which will, if not utilized, substantially all expire at various dates from 2019 through 2026. As of August 31, 2017, we had gross deferred tax assets of $3.78 billion and valuation allowances of $2.32 billion against our deferred tax assets. As of March 1, 2018, after recording the provisional estimated impact of the Tax Act, which includes the utilization of a substantial portion of our U.S. deferred tax assets, we had net deferred tax assets of $1.95 billion and valuation allowances of $943 million against our deferred tax assets. Utilization of all of our net operating loss and credit carryforwards would increase the amount of our annual cash taxes reducing the overall amount of cash available to be used in other areas of the business andpositions, could have a material adverse effect on our business, results of operations, or financial condition.
A change in ownership may limit our abilityWe and others are subject to utilize our net operating loss carryforwards.
On January 18, 2017, our shareholders approved a Section 382 Rights Agreement (the "Rights Agreement"), under which our shareholdersvariety of record as of the close of business on August 1, 2016 received one right for each share of common stock outstanding, which entitles certain shareholderslaws, regulations, or industry standards, including with respect to purchase additional shares of our common stock at a significant discount in the event of certain transactionsenvironmental, social, and governance considerations, that may result in an ownership change, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). In general, an ownership change will occur when the percentage of our ownership by one or more 5% shareholders has increased by more than 50% at any time during the prior three years. Rights will attach to all shares of the Company’s common stock issued prior to the earlier of the rights' distribution date or expiration date as set forth in the Rights Agreement. Pursuant to the Rights Agreement, if a shareholder (or group) acquires beneficial ownership of 4.99% or more of the outstanding shares of our common stock without prior approval of our Board or without meeting certain customary exceptions, the rights (other than rights held by the acquiring shareholder (or group) and certain related persons) would become exercisable. The Rights Agreement is intended to avoid an adverse ownership change, thereby preserving our current ability to utilize certain net operating loss and credit carryforwards; however, there is no assurance that the Rights Agreement will prevent all transfers that could result in such an ownership change.
If we experience a 50% or greater change in ownership involving shareholders owning 5% or more of our common stock, it could adversely impact our ability to utilize our existing net operating loss and credit carryforwards. The inability to utilize
existing net operating loss and credit carryforwards would significantly increase the amount of our annual cash taxes and reduce the overall amount of cash available to be used in other areas of the business which could have a material adverse effect on our business, results of operations, or financial condition.
Compliance with regulations regarding the use of conflict minerals could limit the supply and increase the cost of certain metals used in manufacturing our products.
Increased focus on environmental protection and social responsibility initiatives led to the passage of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") and its implementing SEC regulations. The Dodd-Frank Act imposes supply chain diligence and disclosure requirements for certain manufacturers of products containing specific minerals that may originate in or near the Democratic Republic of the Congo (the "DRC") and finance or benefit local armed groups. These "conflict minerals" are commonly found in materials used in the manufacture of semiconductors. The implementation of these new regulations may limit the sourcing and availability of some of these materials. This in turn may affect our ability to obtain materials necessary for the manufacture of our products in sufficient quantities and may affect related material pricing. Some of our customers may elect to disqualify us as a supplier or reduce purchases from us if we are unable to verify that our products are DRC conflict free. Our inability to comply with the regulations regarding the use of conflict minerals could have a material adverse effect on our business, results of operations, or financial condition.
We are subject to a variety of laws and regulations that may result in additional costs and liabilities.
The manufacturing of our products requires the use of facilities, equipment, and materials that are subject to a broad array of laws and regulations in numerous jurisdictions in which we operate. Additionally, we are subject to a variety of other laws and regulations relative to the construction, maintenance, and operations of our facilities. Any of thesechanges in laws, regulations, or regulationsindustry standards could cause us to incur additional direct costs, as well as increased indirect costs related to our relationships with our customers and suppliers, and otherwise harm our
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operations and financial condition. Any failure to comply with these laws, regulations, or regulationsindustry standards could adversely impact our reputation and our financial results. Additionally, we partner with other companies inengage various third parties as sales channel partners or to represent us or otherwise act on our joint ventures, whichbehalf who are also subject to a broad array of laws, regulations, and regulations.industry standards. Our ownership inengagement with these joint venturesthird parties may also expose us to risks associated with their respective compliance with these laws and regulations.
New environmental, social, and governance considerations, including those related to climate change and the potential resulting environmental impact, may result in new laws, regulations, or industry standards that may affect us, our suppliers, and our customers. Such laws, regulations, or industry standards could cause us to incur additional direct costs for compliance, as well as increased indirect costs resulting from our customers, suppliers, or both incurring additional compliance costs that are passed on to us. These costs may adversely impact our results of operations and financial condition.
As a result of thesethe items detailed in this risk factor, we could experience the following:
•suspension of production;production or sales of our products;
•remediation costs;
•alteration of our manufacturing processes;
•regulatory penalties, fines, and legal liabilities; and
•reputational challenges.
OurCompliance with, or our failure, or the failure of our joint ventures,third-party sales channel partners or agents, to comply with, these laws, and regulations, or industry standards could have a material adverse effect on our business, results of operations, or financial condition.
Risks Related to Capitalization and Financial Markets
We face risks associatedmay be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations, make scheduled debt payments, pay our dividend, and make adequate capital investments.
Our cash flows from operations depend primarily on the volume of semiconductor memory and storage products sold, average selling prices, and manufacturing costs. To develop new product and process technology, support future growth, achieve operating efficiencies, and maintain product quality, we must make significant capital investments in manufacturing technology, capital equipment, facilities, R&D, and product and process technology.
We estimate capital expenditures in 2022 for property, plant, and equipment, net of partner contributions, will be between approximately $11 billion and $12 billion. Investments in capital expenditures may not generate expected returns or cash flows. In addition, we invest our capital in areas that we believe best align with our international salesbusiness strategy and operationswill yield future profitability. Significant judgment is required to determine which capital investments will result in optimal returns, and we could invest in projects that are ultimately less profitable than those projects we do not select. Delays in completion and ramping of new production facilities, or failure to optimize our investment choices, could materially adversely affect our business, results of operations, or financial condition.
Sales to customers outside the United States approximated 86% of our consolidated net sales for 2017. In addition, a substantial portion of our manufacturing operations are located outside the United States. In particular, a significant portion of our manufacturing operations are concentrated in Singapore, Taiwan, Japan, and China. Our international sales and operations are subject to a variety of risks, including:
export and import duties, changes to import and export regulations, customs regulations and processes, and restrictions on the transfer of funds;
compliance with U.S. and international laws involving international operations, including the Foreign Corrupt Practices Act of 1977, as amended, export and import laws, and similar rules and regulations;
theft of intellectual property;
political and economic instability;
problems with the transportation or delivery of our products;
issues arising from cultural or language differences and labor unrest;
longer payment cycles and greater difficulty in collecting accounts receivable;
compliance with trade, technical standards, and other laws in a variety of jurisdictions;
contractual and regulatory limitations onsignificantly impact our ability to maintain flexibility withrealize expected returns on our staffing levels;
disruptions to our manufacturing operations as a result of actions imposed by foreign governments;
changes in economic policies of foreign governments; and
difficulties in staffing and managing international operations.
These factorscapital expenditures, which could have a material adverse effect on our business, results of operations, or financial condition.
In the past we have utilized external sources of financing when needed. As a result of our debt levels, expected debt amortization, and general economic conditions, it may be difficult for us to obtain financing on terms acceptable to us or at all. We have experienced volatility in our cash flows and operating results and may continue to experience such volatility in the future, which may negatively affect our credit rating. Our credit rating may also be affected by our liquidity, financial results, economic risk, or other factors, which may increase the cost of future borrowings and make it difficult for us to obtain financing on terms acceptable to us or at all. There can be no assurance that we will be able to generate sufficient cash flows, access capital or credit markets, or find other sources of financing to fund our operations, make debt payments, pay our quarterly dividend, and make adequate capital investments to remain competitive in terms of technology development and cost efficiency. Our inability to do any of the foregoing could have a material adverse effect on our business, results of operations, or financial condition.
Debt obligations could adversely affect our financial condition.
We have incurred in the past, and expect to incur in the future, debt to finance our capital investments, business acquisitions, and restructure of our capital structure. As of March 3, 2022 we had debt with a carrying value of $7.08 billion and $2.50 billion of our Revolving Credit Facility was available to us. Our debt obligations could adversely impact us as follows:
•require us to use a large portion of our cash flow to pay principal and interest on debt, which will reduce the amount of cash flow available to fund working capital, capital expenditures, acquisitions, R&D expenditures, payment of dividends, and other business activities;
•result in certain of our debt instruments being accelerated to be immediately due and payable or being deemed to be in default if certain terms of default are triggered, such as applicable cross payment default and/or cross-acceleration provisions;
•adversely impact our credit rating, which could increase future borrowing costs;
•limit our future ability to raise funds for capital expenditures, strategic acquisitions or business opportunities, R&D, and other general corporate requirements;
•restrict our ability to incur specified indebtedness, create or incur certain liens, and enter into sale-leaseback financing transactions;
•increase our vulnerability to adverse economic and semiconductor memory and storage industry conditions; and
•increase our exposure to interest rate risk from variable rate indebtedness.
Our ability to meet our payment obligations under our debt instruments depends on our ability to generate significant cash flows or obtain external financing in the future. This, to some extent, is subject to market, economic, financial, competitive, legislative, and regulatory factors as well as other factors that are beyond our control. There can be no assurance that our business will generate cash flow from operations, or that additional capital will be available to us, in amounts sufficient to enable us to meet our debt payment obligations and to fund other liquidity needs. Additionally, events and circumstances may occur which would cause us to not be able to satisfy applicable draw-down conditions and utilize our Revolving Credit Facility. If we are unable to generate sufficient cash flows to service our debt payment obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may be unable to meet our debt payment obligations, which could have a material adverse effect on our business, results of operations, or financial condition.
Changes in foreign currency exchange rates could materially adversely affect our business, results of operations, or financial condition.
Across our global operations, significant transactions and balances are denominated in currencies other than the U.S. dollar (our reporting currency), primarily the euro, Malaysian ringgit, Singapore dollar, New Taiwan dollar, and yen. In addition, a significant portion of our manufacturing costs are denominated in foreign currencies. Exchange rates for some of these currencies against the U.S. dollar have been volatile and may be volatile in future periods. If these currencies strengthen against the U.S. dollar, our manufacturing costs could significantly increase. Exchange rates for the U.S. dollar that adversely change against our foreign currency exposures could have a material adverse effect on our business, results of operations, or financial condition.
We are subject to counterparty default risks.
We have numerous arrangements with financial institutions that subject us to counterparty default risks, including cash deposits, investments, capped call contracts on our common stock, and derivative instruments. Additionally, we are subject to counterparty default risk from our customers for amounts receivable from them. As a result, we are subject to the risk that the counterparty to one or more of these arrangements will default on its performance obligations. A counterparty may not comply with theirits contractual commitments which could then lead to theirits defaulting on theirits obligations with little or no notice to us, which could limit our ability to take action to mitigate our exposure. Additionally, our ability to mitigate our exposures may be constrained by the terms of our contractual arrangements or because market conditions prevent us from taking effective action. If one of our counterparties becomes insolvent or files for bankruptcy, our ability to recover any losses suffered as a result of that counterparty'scounterparty’s default may be limited by the liquidity of the counterparty or the applicable laws governing the bankruptcy proceedings. In the event of such default, we could incur significant losses, which could have a material adverse effect on our business, results of operations, or financial condition.
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The trading price of our common stock has been and may continue to be volatile.
Our common stock has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, we, the technology industry, and the stock market as a whole have on occasion experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to the specific operating performance of individual companies. The trading price of our common stock may fluctuate widely due to various factors, including, but not limited to, actual or anticipated fluctuations in our financial condition and operating results, changes in financial estimates by us or financial or other market estimates and ratings by securities and other analysts, changes in our capital structure, including issuance of additional debt or equity to the public, interest rate changes, regulatory changes, news regarding our products or products of our competitors, and broad market and industry fluctuations.
Our operating results have fluctuated in the past and will continue to do so, sometimes materially. Many of the matters discussed in this Risk Factors section could impact our operating results in any fiscal quarter or year. If our operating results fall below our forecasts and the expectations of public market analysts and investors, the trading price of our common stock may decline.
For these reasons, investors should not rely on recent or historical trends to predict future trading prices of our common stock, financial condition, results of operations, or cash flows. Investors in our common stock may not realize any return on their investment in us and may lose some or all of their investment. Volatility in the trading price of our common stock could also result in the filing of securities class action litigation matters, which could result in substantial costs and the diversion of management time and resources.
The amount and frequency of our share repurchases may fluctuate, and we cannot guarantee that we will fully consummate our share repurchase authorization, or that it will enhance long-term shareholder value. Share repurchases could also increase the volatility of the trading price of our stock and will diminish our cash reserves.
The amount, timing, and execution of our share repurchases pursuant to our share repurchase authorization may fluctuate based on our operating results, cash flows, and priorities for the use of cash for other purposes. For example, we repurchased 8.4 million shares for $667 million in the first six months of 2022, 15.6 million shares for $1.2 billion in 2021, 3.6 million shares for $176 million in 2020, and 66.4 million shares for $2.66 billion in 2019. These other purposes include, but are not limited to, operational spending, capital spending, acquisitions, and repayment of debt. Other factors, including changes in tax laws, could also impact our share repurchases. Although our Board of Directors has authorized share repurchases of up to $10 billion of our outstanding common stock, the authorization does not obligate us to repurchase any common stock.
We cannot guarantee that our share repurchase authorization will be fully consummated or that it will enhance long-term shareholder value. The repurchase authorization could affect the trading price of our stock and increase volatility, and any announcement of a pause in, or termination of, this program may result in a decrease in the trading price of our stock. In addition, this program will diminish our cash reserves.
There can be no assurance that we will continue to declare cash dividends in any particular amounts or at all.
Our Board of Directors has adopted a dividend policy pursuant to which we currently pay a cash dividend on our common shares on a quarterly basis. The declaration and payment of any dividend is subject to the approval of our Board of Directors and our dividend may be discontinued or reduced at any time. There can be no assurance that we will declare cash dividends in the future in any particular amounts, or at all.
Future dividends, if any, and their timing and amount, may be affected by, among other factors: our financial condition, results of operations, capital requirements, business conditions, debt service obligations, contractual restrictions, industry practice, legal requirements, regulatory constraints, and other factors that our Board of Directors may deem relevant. A reduction in or elimination of our dividend payments could have a negative effect on the trading price of our stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the second quarter ofIn May 2018, we share-settled allannounced that our Board of Directors authorized the discretionary repurchase of up to $10 billion of our remaining 2032Coutstanding common stock through open-market purchases, block trades, privately-negotiated transactions, derivative transactions, and/or pursuant to Rule 10b5-1 trading plans. The repurchase authorization has no expiration date, does not obligate us to acquire any common stock, and 2033E Capped Callsis subject to market conditions and a portionour ongoing determination of our 2032D Capped Calls and received 7,022,506 sharesthe best use of our common stock.available cash.
| | | | | | | | | | | | | | | | | | | | |
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under publicly announced plans or programs (in millions) |
| | | | | | |
| December 3, 2021 | – | January 6, 2022 | 821,264 | | $ | 87.67 | | 821,264 | | |
| January 7, 2022 | – | February 3, 2022 | 1,810,240 | | $ | 83.42 | | 1,810,240 | | |
| February 4, 2022 | – | March 3, 2022 | 2,178,014 | | $ | 84.84 | | 2,178,014 | | |
| | | 4,809,518 | | $ | 84.79 | | 4,809,518 | | $5,296 |
|
| | | | | | | | | | | | | |
| Period | | (a) Total number of shares purchased | | (b) Average price paid per share | | (c) Total number of shares (or units) purchased as part of publicly announced plans or programs | | (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under publicly announced plans or programs |
| December 1, 2017 | – | January 4, 2018 | | 4,710,314 |
| | $ | 45.68 |
| | | | |
| January 5, 2018 | – | February 1, 2018 | | — |
| | — |
| | | | |
| February 2, 2018 | – | March 1, 2018 | | 2,312,192 |
| | 42.47 |
| | | | |
| | | | | 7,022,506 |
| | 44.62 |
| |
| | |
Shares of common stock withheld as payment of withholding taxes and exercise prices in connection with the vesting or exercise of equity awards are also treated as common stock repurchases. Those withheld shares of common stock are not considered common stock repurchasesrequired to be disclosed under an authorized common stock repurchase planItem 703 of Regulation S-K and accordingly are excluded from the amounts in the table above.
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ITEM 6. ExhibitsEXHIBITS
| | | | | | | | | | | | | | | | | | | | |
| Exhibit Number | Description of Exhibit | Filed Herewith | Form | Period Ending | Exhibit/ Appendix | Filing Date |
| | | | | | |
| 31.1 | | X | | | | |
| 31.2 | | X | | | | |
| 32.1 | | X | | | | |
| 32.2 | | X | | | | |
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | | | | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | | | | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | | | | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | | | | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | | | | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | | | | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | | | | |
|
| | | | | | |
| Exhibit Number | Description of Exhibit | Filed Herewith | Form | Period Ending | Exhibit/ Appendix | Filing Date |
| 3.1 | | | 8-K | | 99.2 | 1/26/15 |
| 3.2 | | | 8-K | | 99.1 | 4/15/14 |
| 10.1 | | | DEF 14A | | B | 12/7/2017 |
| 10.75 | | | DEF 14A | | A | 12/7/2017 |
| 10.76 | | ü | | | | |
| 31.1 | | ü | | | | |
| 31.2 | | ü | | | | |
| 32.1 | | ü | | | | |
| 32.2 | | ü | | | | |
| 101.INS | XBRL Instance Document | ü | | | | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | ü | | | | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ü | | | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ü | | | | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ü | | | | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ü | | | | |
SIGNATURES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | |
| | Micron Technology, Inc. |
| | | (Registrant) |
| | | |
| | | |
| Date: | March 23, 201830, 2022 | By: | /s/ David A. ZinsnerSumit Sadana |
| | David A. Zinsner
Senior
| Sumit Sadana |
| | | Executive Vice President, Chief Business Officer and Interim Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| | | /s/ Scott Allen |
| | | Scott Allen |
| | | Corporate Vice President and Chief FinancialAccounting Officer |
| | | (Principal Financial and Accounting Officer) |
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