MICRON TECHNOLOGY INC quarterly report, Q2 FY2019

Micron Technology, Inc. 10-Q Summary

Business Context and Reporting Period

Micron develops and manufactures DRAM, NAND, NOR Flash, and 3D XPoint memory and storage products for data center, networking, mobile, automotive, industrial, graphics, client, and consumer markets. This unaudited Form 10-Q covers the quarter and six months ended February 28, 2019, compared with the periods ended March 1, 2018. Micron’s fiscal year ends on the Thursday closest to August 31.

Key Financial Metrics

Metric	Q2 FY2019	Q2 FY2018	Six Months FY2019	Six Months FY2018
Revenue	$5.835 billion	$7.351 billion	$13.748 billion	$14.154 billion
Gross margin	49%	58%	54%	57%
Operating income	$1.957 billion	$3.567 billion	$5.716 billion	$6.664 billion
Operating margin	34%	49%	42%	47%
Net income attributable to Micron	$1.619 billion	$3.309 billion	$4.912 billion	$5.987 billion
Diluted EPS	$1.42	$2.67	$4.24	$4.86

Q2 revenue declined 21% year over year and 26% from Q1 FY2019. Six-month revenue declined 3% year over year.
DRAM revenue was $3.760 billion in Q2, down 28% year over year; NAND revenue was $1.776 billion, down 2% year over year.
Q2 operating expenses included $209 million of SG&A, $601 million of R&D, and $97 million of other operating expense, compared with $196 million, $523 million, and $(16) million, respectively, in the prior-year quarter.
Other operating expense included $51 million of restructuring and asset-impairment charges in Q2 and $84 million for the six-month period.
The Q2 effective tax rate was 14.7%, compared with 4.1% in the prior-year quarter. Singapore and other tax incentives reduced Q2 tax expense by $244 million, or $0.21 per diluted share.

Cash Flow, Liquidity, Debt, and Capital Resources

Cash provided by operating activities was $8.245 billion for the first six months of FY2019, compared with $7.984 billion in the prior-year period.
Investing cash flow was an outflow of $6.919 billion, including $5.349 billion of property, plant, and equipment expenditures and $2.566 billion of purchases of available-for-sale securities.
Financing cash flow was an outflow of $1.483 billion, including $2.568 billion for treasury-stock purchases, $705 million of debt repayments, and $1.800 billion of debt issuance proceeds.
Cash, cash equivalents, and restricted cash declined to $6.429 billion at February 28, 2019, from $6.587 billion at August 30, 2018. Cash and marketable investments totaled $9.147 billion.
Total debt carrying value was $6.238 billion, comprising $2.634 billion of current debt and $3.604 billion of long-term debt. The company had an undrawn $2.5 billion revolving credit facility expiring in July 2023.
Micron issued $600 million of 2024 Notes, $500 million of 2026 Notes, and $700 million of 2029 Notes in February 2019.
Micron repurchased 63 million shares for approximately $2.51 billion during the first six months under its $10 billion authorization; 21 million shares costing $702 million were repurchased in Q2.
Management estimated FY2019 capital expenditures at approximately $9 billion, net of partner contributions. Capital expenditure commitments were approximately $1.8 billion as of February 28, 2019.
Management stated that cash, investments, operating cash flow, and available financing were expected to satisfy requirements for at least the next 12 months.

Material Changes Versus Comparable Periods

Profitability weakened substantially as memory pricing declined faster than manufacturing-cost reductions. Q2 gross margin fell nine percentage points year over year and nine percentage points sequentially.
Q2 DRAM average selling prices declined in the low-20% range sequentially, while DRAM volumes declined by a low double-digit percentage. NAND pricing declined in the mid-20% range sequentially, although NAND shipment volumes increased.
CNBU Q2 revenue declined 35% year over year and operating income declined to $1.160 billion from $2.329 billion. MBU revenue increased 3% and operating income increased to $707 million from $689 million, supported by mobile managed NAND. SBU revenue declined in the high teens percentage range and recorded a $20 million operating loss, compared with $251 million of operating income in the prior-year quarter.
R&D expense increased 15% year over year in Q2 and 25% for the first six months, reflecting higher development-wafer volumes, depreciation, labor costs, and lower partner reimbursements.
Inventory increased to $4.390 billion from $3.595 billion at August 30, 2018, primarily due to higher work-in-process and raw-material inventories.
Micron adopted ASC 606 and ASU 2016-16 in the first quarter of FY2019. Without ASC 606, reported Q2 revenue would have been $5.815 billion and net income attributable to Micron would have been $1.620 billion, according to the filing’s reconciliation.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management attributed the downturn to customer inventory adjustments, CPU shortages, weaker premium-smartphone demand, seasonal softness, and broader market-price declines.
Micron exercised its option to acquire Intel’s interest in IMFT on January 14, 2019. The transaction is expected to require approximately $1.5 billion in cash for Intel’s interest and IMFT member debt, with closing permitted approximately six months to one year after exercise. IMFT member debt of approximately $1.0 billion was classified as current at quarter-end.
Micron and Intel expect to complete joint NAND and second-generation 3D XPoint development in the second half of 2019. Micron does not intend to jointly develop subsequent generations of 3D XPoint with Intel.
Micron notified holders that its 2043G convertible notes would be redeemed. Substantially all were converted, and Micron paid $1.43 billion on March 13, 2019; the company disclosed a $316 million loss recognized in Q3 FY2019.
Legal contingencies include patent litigation in the United States, Europe, and China; a Chinese preliminary injunction affecting products representing slightly more than 1% of annualized revenue; Qimonda litigation concerning Inotera shares; DRAM antitrust claims and a Chinese regulatory investigation; and securities and shareholder derivative litigation. The company cannot estimate the range of possible loss for these matters.
Key operating risks include volatile DRAM and NAND pricing, excess industry supply, intense competition, technology-transition execution, customer concentration, international trade restrictions, tariffs, foreign-exchange exposure, manufacturing disruptions, tax-incentive conditions, and the availability of external financing.
Huawei represented 13% of total revenue for the first six months of FY2019, creating customer and export-control concentration risk.

Investor Verification Checklist

Verify the sustainability of gross margins amid continuing DRAM and NAND pricing pressure and industry inventory corrections.
Assess FY2019 capital spending against the approximately $9 billion estimate and the expected returns from technology transitions.
Confirm the timing, cash cost, accounting treatment, and post-closing supply arrangements for the IMFT acquisition.
Monitor cash usage from share repurchases, capital expenditures, debt maturities, convertible-note settlements, and other strategic commitments.
Review the potential financial and operating effects of patent injunctions, antitrust investigations, securities litigation, and the Qimonda matter, for which no loss range was provided.
Evaluate exposure to Huawei and other international customers in light of export controls, tariffs, and broader U.S.-China trade restrictions.
Reconcile reported results for the effects of ASC 606, tax incentives, restructuring charges, and fair-value changes in convertible-note settlement obligations.