Micron Technology, Inc. — Fiscal 2020 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended May 28, 2020, compared with May 30, 2019. Fiscal 2020 contains 53 weeks, with a 14-week fourth quarter. Micron develops and manufactures DRAM, NAND, 3D XPoint, NOR, SSD, and other memory and storage products.
Key Financial Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Revenue | $5.438 billion | $4.788 billion | $15.379 billion | $18.536 billion |
| Gross margin | $1.763 billion; 32% | $1.828 billion; 38% | $4.484 billion; 29% | $9.307 billion; 50% |
| Operating income | $888 million; 16% | $1.010 billion; 21% | $1.846 billion; 12% | $6.726 billion; 36% |
| Net income attributable to Micron | $803 million | $840 million | $1.699 billion | $5.752 billion |
| Diluted EPS | $0.71 | $0.74 | $1.50 | $5.01 |
| Cash flow from operations | Not separately provided | Not separately provided | $6.035 billion | $10.956 billion |
- Q3 revenue increased 14% year over year and 13% sequentially, driven by stronger DRAM and NAND demand, particularly from data-center and networking customers.
- DRAM revenue was $3.587 billion in Q3, up 6% year over year; bit shipments increased in the upper-30% range, while average selling prices declined in the low-20% range.
- NAND revenue was $1.665 billion in Q3, up 51% year over year, reflecting low-30% shipment growth and mid-teen percentage pricing growth.
- Q3 net income margin attributable to Micron was approximately 15%; nine-month margin was approximately 11%.
- Cash, cash equivalents, and marketable investments totaled $9.235 billion at May 28, 2020, including $8.267 billion of cash and equivalents.
- Total debt carrying value was $6.686 billion, comprising $330 million current debt and $6.356 billion long-term debt. The $2.5 billion revolving credit facility was fully available at quarter-end.
- Nine-month capital expenditures were $5.943 billion on the cash-flow statement; management estimated full-year 2020 capital expenditures, net of partner contributions, at approximately $8 billion.
Material Changes Versus Comparable Periods
- Revenue grew in Q3 despite lower DRAM pricing, supported by shipment growth, improved NAND pricing, stronger SSD sales, and favorable data-center demand.
- Gross margin declined from 38% to 32% year over year, and nine-month gross margin fell from 50% to 29%, primarily because of DRAM price declines and prior-period supply-demand imbalances.
- Operating income declined 12% year over year in Q3 and 73% for the first nine months. Research and development expense increased 7% in Q3 and 8% for the nine-month period.
- Nine-month operating cash flow decreased $4.921 billion year over year, primarily because of lower net income and working-capital changes.
- Cash increased from $7.152 billion at August 29, 2019 to $8.267 billion at May 28, 2020. Total assets increased to $52.005 billion from $48.887 billion.
- Micron acquired Intel’s remaining interest in IM Flash Technologies on October 31, 2019 for $1.25 billion, making the entity, now MTU, wholly owned. MTU generated approximately $155 million of Q3 underutilization costs.
- Micron issued $1.25 billion of 2.497% senior notes due 2023 in April 2020. It also drew and repaid the full $2.5 billion revolving facility during the quarter.
Guidance, Outlook, Commentary, and Risks
- Management stated that cash, investments, operating cash flow, and available financing are expected to satisfy requirements for at least the next 12 months.
- COVID-19 increased demand for data-center infrastructure and notebooks but reduced demand in smartphones, consumer electronics, and automotive markets. All global sites were operational at the reporting date, although temporary production restrictions remained possible.
- Management shifted some supply toward data-center markets, increased raw-material inventory, added assembly and test capacity, and implemented health and operational-continuity protocols.
- Key outlook risks include continued volatility in DRAM and NAND average selling prices, industry oversupply, manufacturing underutilization, technology-transition execution, customer concentration, supply-chain disruption, and the uncertain duration and severity of COVID-19.
- Trade and export restrictions involving China and Huawei remain material. Huawei represented 12% of 2019 revenue, and additional restrictions could reduce demand or limit Micron’s ability to ship products.
- Patent infringement actions, antitrust litigation and regulatory investigations, the Qimonda insolvency matter, and other legal proceedings remain unresolved. The company cannot estimate the range of possible loss and states that adverse outcomes could materially affect results.
- The company recognized approximately $160 million of Q3 operating-income benefit from revised useful lives for certain NAND and R&D equipment. The change reduced depreciation expense and benefited nine-month operating income by approximately $360 million, net of inventory effects.
- Singapore and other government tax incentives reduced Q3 tax expense by approximately $70 million. These incentives are conditional and may be reduced, terminated, or clawed back.
- Micron adopted ASC 842 leases in fiscal 2020, recognizing approximately $567 million of operating lease assets and liabilities, without recasting prior periods.
Investor Verification Items
- Verify the sustainability of recent DRAM and NAND pricing, shipment growth, and data-center demand, particularly after COVID-19-related demand shifts.
- Assess whether MTU underutilization costs and other fixed-cost pressures decline or remain elevated.
- Reconcile the approximately $8 billion full-year capital-expenditure outlook with operating cash flow, debt maturities, and available liquidity.
- Monitor Huawei and broader U.S.-China export restrictions, including their effect on customer demand, inventory, and product qualification.
- Review the potential financial and operational effects of patent, antitrust, Qimonda, and other unresolved legal matters; the filing provides no clear aggregate loss estimate.
- Evaluate the extent to which reported earnings benefited from the equipment useful-life revision, tax incentives, and other unusual or nonrecurring items.
- Track conversion risk for the 2032D convertible notes: as of May 28, 2020, conversion value exceeded principal by approximately $488 million.
- Confirm the status of the authorized $10 billion share-repurchase program; $2.8 billion had been repurchased through May 28, 2020, leaving approximately $7.2 billion authorized.