Micron Technology, Inc. — Fiscal 2020 First-Quarter Form 10-Q
Business Context and Reporting Period
Micron is a global memory and storage semiconductor company offering DRAM, NAND, 3D XPoint memory, NOR, SSDs and related solutions under the Micron, Crucial and Ballistix brands. The filing covers the 13-week quarter ended November 28, 2019; the comparable prior-year quarter ended November 29, 2018 also contained 13 weeks.
On October 31, 2019, Micron acquired Intel’s remaining interest in IM Flash Technologies, now MTU, and related member debt for $1.25 billion, making MTU wholly owned.
Financial Performance and Key Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $5.144 billion | $7.913 billion | Down 35% |
| Gross profit | $1.366 billion | $4.615 billion | Down 70% |
| Gross margin | 27% | 58% | Down 31 percentage points |
| Operating income | $518 million | $3.759 billion | Down 86% |
| Net income attributable to Micron | $491 million | $3.293 billion | Down 85% |
| Diluted EPS | $0.43 | $2.81 | Down 85% |
| Cash flow from operations | $2.011 billion | $4.810 billion | Down 58% |
Compared with the immediately preceding quarter, revenue increased 6% from $4.870 billion, while gross margin declined from 29% and operating income declined from $650 million. DRAM revenue was $3.469 billion, NAND revenue was $1.422 billion and other technology revenue was $253 million.
Revenue increased sequentially because DRAM bit shipments rose approximately 10% and NAND shipments increased in the mid-teens percentage range. However, DRAM average selling prices declined in the upper-single-digit percentage range sequentially. Year over year, DRAM average selling prices declined in the low-50-percent range and NAND average selling prices declined in the mid-30-percent range.
- CNBU revenue was $1.979 billion and operating income was $401 million.
- MBU revenue was $1.457 billion and operating income was $295 million.
- SBU revenue was $968 million and reported an operating loss of $217 million.
- EBU revenue was $734 million and operating income was $113 million.
Gross margin included approximately $125 million of MTU underutilization costs. The filing states these costs were expected to increase as production volumes declined.
Balance Sheet, Cash Flow, Debt and Liquidity
| Balance-sheet item | November 28, 2019 | August 29, 2019 |
|---|---|---|
| Cash and equivalents | $6.969 billion | $7.152 billion |
| Cash and marketable investments | $8.187 billion | $9.119 billion |
| Current assets | $16.167 billion | $16.503 billion |
| Total debt carrying value | $5.650 billion | $5.851 billion |
| Total assets | $49.649 billion | $48.887 billion |
| Micron shareholders’ equity | $36.500 billion | $35.881 billion |
Operating cash flow was $2.011 billion. Capital expenditures were $1.943 billion, resulting in approximately $68 million of operating cash flow in excess of capital expenditures before other investing and financing items. Investing cash flow was negative $1.189 billion, and financing cash flow was negative $992 million. Cash, cash equivalents and restricted cash declined by $184 million during the quarter.
Micron drew $1.25 billion under its 2024 Term Loan A, prepaid $519 million principal of the 2025 Notes, repaid or settled other debt and convertible notes, and paid $744 million to acquire Intel’s IMFT noncontrolling interest. The company had no borrowings under its $2.50 billion revolving credit facility, which matures in July 2023.
Management stated that cash and investments, operating cash flow and available financing were expected to be sufficient to meet requirements for at least the next 12 months. Approximately $3.2 billion of cash and investments was held by foreign subsidiaries, including $463 million held by MMJ that was subject to restrictions related to Japanese reorganization proceedings.
Material Changes Versus Comparable Period
- Revenue declined 35%, primarily because of substantial memory price declines caused by supply-demand imbalances.
- Gross margin fell to 27% from 58%, and operating margin fell to 10% from 48%.
- DRAM revenue decreased 41% year over year, while NAND revenue decreased 14%; shipment growth only partly offset pricing pressure.
- Operating cash flow declined by $2.799 billion year over year.
- Capital expenditures declined from $2.700 billion to $1.943 billion, while financing activity included the MTU acquisition and new term debt.
- Micron repurchased approximately 1 million shares for $50 million, compared with 42 million shares for $1.836 billion in the prior-year quarter. Approximately $7.288 billion remained available under the authorized repurchase program at November 28, 2019.
- Micron adopted ASC 842 lease accounting, recognizing approximately $567 million of operating lease liabilities and right-of-use assets, plus $66 million reclassified to right-of-use assets.
Guidance, Outlook, Commentary and Risks
Micron estimated fiscal 2020 capital expenditures of approximately $7 billion to $8 billion, net of partner contributions, subject to market conditions. It had approximately $3.1 billion of property, plant and equipment purchase commitments, including approximately $2.5 billion expected to be paid within one year.
Management expected MTU underutilization costs to average approximately $150 million per quarter in the first half of fiscal 2020. The company also revised useful lives for certain NAND and R&D equipment from five years to seven years. This change reduced first-quarter noncash depreciation expense; management reported an estimated $74 million benefit to operating income and net income and a $0.07 diluted EPS benefit, while the MD&A separately described an approximately $150 million reduction in NAND-related depreciation, including amounts affecting inventory.
Key risks include continued volatility or deterioration in DRAM and NAND pricing, industry oversupply, manufacturing underutilization, execution and integration risks associated with MTU, substantial capital requirements, debt service and convertible-note settlement obligations, foreign-exchange exposure, tariffs and other trade restrictions, and customer concentration. Huawei represented 12% of fiscal 2019 revenue; U.S. Entity List restrictions had previously suspended shipments, although Micron resumed shipments of certain products after receiving licenses.
Material contingencies include Chinese patent litigation and injunctions affecting certain products, U.S. and Canadian antitrust litigation and a Chinese regulatory investigation, the Qimonda insolvency matter, shareholder derivative litigation, and other intellectual-property claims. Micron stated that it could not predict the outcomes or estimate possible losses. The Fuzhou Court injunction affected products representing slightly more than 1% of annualized revenue.
Investor Verification Checklist
- Verify the sustainability of NAND pricing improvement and the extent of further DRAM price declines.
- Track MTU utilization, the expected $150 million quarterly underutilization burden, and the financial impact of Intel’s reduced wafer supply through April 2020.
- Reconcile the reported depreciation-life extension benefits with underlying manufacturing costs, inventory valuation and future depreciation expense.
- Assess whether the $7 billion to $8 billion capital-spending plan is consistent with operating cash generation and market demand.
- Review debt maturities, covenant ratios, variable-rate exposure and potential cash or share settlements of convertible notes.
- Monitor Huawei licensing and trade restrictions, customer concentration, and any resulting inventory or receivable exposure.
- Follow developments in Chinese patent injunctions, antitrust proceedings, SAMR’s investigation, and the Qimonda litigation, for which no loss range was provided.