MICRON TECHNOLOGY INC quarterly report, Q2 FY2020

Micron Technology, Inc. — Fiscal 2020 Q2 Form 10-Q

Reporting period: Quarter and six months ended February 27, 2020; comparative periods ended February 28, 2019. Micron designs and manufactures DRAM, NAND, 3D XPoint, NOR, SSD, and related memory and storage products for mobile, data center, client, consumer, industrial, automotive, networking, and other markets.

Financial performance and position

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Revenue	$4.797 billion	$5.835 billion	$9.941 billion	$13.748 billion
Gross margin	$1.355 billion; 28%	$2.864 billion; 49%	$2.721 billion; 27%	$7.479 billion; 54%
Operating income	$440 million; 9%	$1.957 billion; 34%	$958 million; 10%	$5.716 billion; 42%
Net income attributable to Micron	$405 million	$1.619 billion	$896 million	$4.912 billion
Diluted EPS	$0.36	$1.42	$0.79	$4.24

Revenue declined 18% year over year in Q2 and 28% for the first six months. DRAM revenue fell 26% in Q2 and 35% year to date, primarily from average selling price declines of approximately 40% to 50%, partly offset by mid-20% bit shipment growth.
NAND revenue increased 9% year over year in Q2, driven by low-20% bit shipment growth, partly offset by an approximately 10% average selling price decline. Six-month NAND revenue decreased 4%.
Q2 gross margin improved modestly from 27% in Q1 2020 because of stronger NAND pricing, but remained well below the prior-year 49%. MTU underutilization costs were approximately $142 million in Q2 and $125 million in Q1.
Q2 operating expenses included $223 million of SG&A and $681 million of R&D. R&D increased 13% year over year for the quarter.
Cash provided by operating activities was $4.012 billion for the first six months, versus $8.245 billion in the prior-year period. Capital expenditures were $3.999 billion, and net cash used in investing activities was $2.899 billion.
Cash, cash equivalents, and marketable investments totaled $8.067 billion at February 27, 2020, compared with $9.119 billion at August 29, 2019. Cash, cash equivalents, and restricted cash ended at $7.171 billion.
Total debt had a carrying value of approximately $5.425 billion, including $237 million current debt and $5.188 billion long-term debt. On March 13, 2020, after quarter-end, Micron drew the full $2.50 billion revolving credit facility.
Total assets were $49.648 billion and Micron shareholders’ equity was $37.023 billion at February 27, 2020. Inventory increased to $5.208 billion from $5.118 billion at fiscal year-end.

Material changes and unusual items

On October 31, 2019, Micron acquired Intel’s 49% noncontrolling interest in IMFT, now MTU, and related IMFT Member Debt for $1.25 billion. MTU became wholly owned. The transaction eliminated the $889 million noncontrolling interest and contributed to underutilization charges.
Micron issued $1.25 billion under its 2024 Term Loan A and used cash for debt repayments, including $534 million to prepay the 2025 Notes, $621 million of IMFT Member Debt, and $198 million to settle convertible-note conversions.
Micron revised the estimated useful lives of certain NAND fabrication and R&D equipment from five to seven years. The change reduced Q2 cost of goods sold by approximately $95 million and benefited Q2 operating income and net income by approximately $125 million, or $0.11 diluted EPS, on a company-wide basis.
Q2 included $10 million of restructuring and asset impairment expense. The filing also reports a $72 million non-operating gain from extinguishing IMFT Member Debt during the first six months.
Share repurchases were substantially reduced: 0.8 million shares for $44 million in Q2 and 1.9 million shares for $94 million in the first six months, compared with 20.2 million shares for $702 million and 62.6 million shares for $2.51 billion in the comparable 2019 periods. Cumulative repurchases under the authorization totaled $2.76 billion through February 27, 2020.
Micron adopted ASC 842 lease accounting in fiscal 2020, recognizing approximately $567 million of operating lease liabilities and right-of-use assets, plus $66 million reclassified to right-of-use assets.

Liquidity, outlook, and risks

Management expected cash, investments, operating cash flow, and available financing to be sufficient for requirements for at least the next 12 months as of the filing date. This assessment preceded the subsequent $2.50 billion revolving-facility draw.
Fiscal 2020 capital expenditures were estimated at $7 billion to $8 billion, net of partner contributions. Property, plant, and equipment purchase commitments were approximately $3.21 billion, including approximately $2.65 billion expected within one year.
Management expected MTU underutilization charges to average approximately $150 million per quarter in the second half of fiscal 2020.
COVID-19 impacts were described as uncertain. Micron observed increased demand for server DRAM, NAND, networking infrastructure, gaming, and related applications, but anticipated weaker demand for smartphones, automobiles, and PCs. Potential effects included production, supply-chain, customer qualification, pricing, credit, and financing disruptions.
Key structural risks include significant memory-price volatility, industry oversupply, intense competition, high fixed manufacturing costs, technology-transition execution, customer concentration, international operations, tariffs and export restrictions, and dependence on specialized suppliers and equipment.
Huawei represented 12% of 2019 revenue. U.S. Entity List restrictions led to a suspension of shipments in 2019; Micron later resumed certain shipments after receiving licenses, but restrictions remained for some products and markets.
Legal contingencies include patent litigation in the United States and China, alleged DRAM price-fixing matters in the United States and Canada, a Chinese antitrust investigation, the Qimonda/Inotera insolvency dispute, and other claims. Micron stated that it could not estimate the range of possible loss for the principal matters.
A Chinese preliminary injunction affected certain DRAM modules and SSDs representing slightly more than 1% of annualized revenue. The company was complying while seeking reconsideration or a stay.

Most important facts to verify

Whether COVID-19 materially affected fiscal Q3 and subsequent demand, production, supply chains, pricing, and capital spending.
The effect of the March 13, 2020 $2.50 billion revolver draw on leverage, interest expense, liquidity, and covenant compliance.
Whether MTU underutilization charges and the expected $150 million quarterly run rate persisted or increased.
Whether DRAM and NAND average selling prices, bit shipments, and gross margins improved or deteriorated after February 27, 2020.
The sustainability of earnings after excluding the equipment-life benefit and other unusual items.
The status and potential financial or operational impact of Chinese patent injunctions, antitrust matters, the Qimonda dispute, and other unresolved litigation.
Whether the $7 billion to $8 billion fiscal 2020 capital expenditure plan remained appropriate given weaker demand and reduced operating cash flow.