MICRON TECHNOLOGY INC quarterly report, Q2 FY2023

Micron Technology, Inc. — Fiscal 2023 Second-Quarter Form 10-Q

Reporting period: Quarter and six months ended March 2, 2023; comparative periods ended March 3, 2022. The interim financial statements are unaudited and prepared under U.S. GAAP. Micron develops and manufactures DRAM, NAND, and NOR memory and storage products.

Financial performance and position

Metric	Q2 FY2023	Q2 FY2022	Six months FY2023	Six months FY2022
Revenue	$3.693 billion	$7.786 billion	$7.778 billion	$15.473 billion
Gross margin	$(1.206) billion; negative 33%	$3.676 billion; 47%	$(313) million; negative 4%	$7.241 billion; 47%
Operating income (loss)	$(2.303) billion	$2.546 billion	$(2.512) billion	$5.177 billion
Net income (loss)	$(2.312) billion	$2.263 billion	$(2.507) billion	$4.569 billion
Diluted EPS	$(2.12)	$2.00	$(2.30)	$4.04
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$1.286 billion	$7.566 billion
Capital expenditures	Not separately provided for the quarter	Not separately provided for the quarter	$4.654 billion	$5.876 billion

Revenue mix: Q2 revenue comprised $2.722 billion of DRAM, $885 million of NAND, and $86 million of other products. Six-month revenue by market was approximately 25% automotive, industrial, and consumer; 20% enterprise and cloud server; 20% client and graphics; 20% mobile; and 15% SSDs and other storage.

Balance sheet at March 2, 2023: Cash and equivalents were $9.798 billion, marketable investments were $2.232 billion, and total cash, cash equivalents, and restricted cash were $9.887 billion. Total assets were $66.520 billion. Inventories were $8.129 billion, up from $6.663 billion at September 1, 2022. Debt carrying value was $12.274 billion, including $237 million current debt and $12.037 billion long-term debt. Shareholders’ equity was $47.257 billion.

Liquidity: Cash and marketable investments totaled $12.03 billion, and the $2.50 billion revolving credit facility was undrawn. Management stated that cash, investments, operating cash flow, and available financing should be sufficient for requirements through at least the next 12 months and the foreseeable future.

Material changes versus prior periods

Q2 revenue declined 53% year over year and 10% sequentially. Six-month revenue declined 50% year over year.
DRAM Q2 sales declined 52% year over year, primarily from a high-40s-percent decline in average selling prices and low-teens-percent lower bit shipments. NAND sales declined 55%, primarily from a high-40s-percent price decline and mid-teens-percent lower bit shipments.
Compared with Q1 FY2023, DRAM average selling prices declined approximately 20%, while bit shipments increased in the mid-teens-percent range. NAND average selling prices declined in the mid-20s-percent range, partly offset by mid-to-high-single-digit bit-shipment growth.
Micron recorded a $1.430 billion inventory write-down in Q2, primarily relating to work in process and finished goods. This charge was the principal driver of the negative gross margin.
Operating expenses included $86 million of restructuring and asset-impairment charges in Q2, versus $5 million in the prior-year quarter. Research and development expense was $788 million and SG&A was $231 million.
Operating results deteriorated across most business units. Q2 operating income (loss) was $(35) million for CNBU, $(344) million for MBU, $88 million for EBU, and $(357) million for SBU.
Six-month operating cash flow fell to $1.286 billion from $7.566 billion, while capital expenditures remained substantial at $4.654 billion.
Micron raised approximately $5.2 billion of debt during the first six months through term loans and senior notes. Debt carrying value increased from $6.906 billion at September 1, 2022 to $12.274 billion at March 2, 2023.

Guidance, outlook, commentary, and unusual items

Management said the memory and storage downturn intensified from Q4 2022 through the first six months of FY2023 because of weak end-market demand and customer inventory corrections. Industry profitability was expected to remain challenged throughout calendar 2023.
Micron projected approximately $500 million of additional inventory write-downs in Q3 FY2023. The estimate could change significantly with pricing expectations, and further write-downs could occur if conditions persist.
Wafer-start reductions generated $27 million of underutilization costs in Q2. Management estimated approximately $300 million of additional underutilization costs in the second half of 2023.
The 2023 Restructure Plan targets headcount reduction approaching 15% by the end of calendar 2023. Expected total costs were approximately $160 million, including approximately $60 million of additional second-half charges, with expected quarterly savings of approximately $130 million beginning in Q4 FY2023.
Management estimated FY2023 capital expenditures of approximately $7.0 billion, net of partner contributions, subject to market conditions. Property, plant, and equipment purchase obligations totaled approximately $3.14 billion, including $2.26 billion expected within one year.
Micron expects to construct leading-edge DRAM fabs in Boise, Idaho, and Clay, New York, contingent in part on government grants and investment tax credits. Boise production is targeted for calendar 2025; New York production is expected to ramp in the latter half of the decade.
Subsequent to quarter-end, Micron amended term-loan and revolving-credit covenants. During Q4 FY2023 and each quarter of 2024, the company may generally be required to maintain a net leverage ratio no greater than 3.25 to 1.00 or, for up to three of five quarters, minimum liquidity of at least $5.0 billion.
Micron received $120 million in Q2 from settlement of an insurance claim, including $114 million recognized as revenue. It also expected approximately $110 million from a separate insurance settlement, including approximately $70 million of business-interruption proceeds to be recognized in revenue.
The company declared a quarterly dividend of $0.115 per share and did not repurchase shares in Q2. Through March 2, 2023, $6.89 billion had been repurchased under the $10 billion authorization, leaving $3.11 billion available.

Key risks and contingencies

Memory pricing, demand, and inventory levels are highly cyclical. A 5% variance in estimated selling prices would have changed estimated inventory net realizable value by approximately $600 million at March 2, 2023.
Underutilized manufacturing capacity, fixed costs, additional inventory charges, supply-chain disruptions, and technology-transition risks could further pressure gross margins and cash flow.
Debt increased materially, including floating-rate exposure. A hypothetical 1% increase in floating-rate debt rates would increase annual interest expense by approximately $53 million based on March 2, 2023 exposure.
Government incentives supporting capital projects are conditional and may be delayed, reduced, terminated, or subject to clawback. The U.S. fab plans depend partly on CHIPS Act support.
Micron faces patent, antitrust, securities, and other litigation, including claims involving products that represent substantially all of its revenue. The company cannot predict outcomes or reasonably estimate potential losses; adverse outcomes could require damages, licenses, product changes, or sales restrictions.
International operations expose Micron to geopolitical tensions, export controls, trade restrictions, Taiwan-related risks, foreign-exchange fluctuations, and supply-chain concentration.

Investor verification priorities

Verify whether projected Q3 inventory write-downs of approximately $500 million and second-half underutilization costs of approximately $300 million were realized or revised.
Track DRAM and NAND average selling prices, bit shipments, customer inventories, and the timing of any industry recovery.
Assess whether the restructuring delivers approximately $130 million of quarterly savings beginning in Q4 FY2023 and whether additional charges arise.
Reconcile capital expenditures, operating cash flow, free cash flow, and debt maturities against the $7.0 billion FY2023 capital-spending plan.
Review compliance with amended leverage and liquidity covenants, particularly as operating losses and debt service continue.
Monitor government funding and tax incentives for the Boise and New York fabs, as well as litigation developments that could affect products, manufacturing, or market access.