Micron Technology, Inc. — Fiscal 2019 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended May 30, 2019. Micron develops and manufactures DRAM, NAND, NOR Flash, 3D XPoint memory, SSDs, and related memory and storage solutions for data center, mobile, client, automotive, industrial, and other markets.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $4.788 billion | $7.797 billion | Down 39% |
| Gross profit | $1.828 billion | $4.723 billion | Down 61% |
| Gross margin | 38% | 61% | Down 23 percentage points |
| Operating income | $1.010 billion | $3.953 billion | Down 74% |
| Net income attributable to Micron | $840 million | $3.823 billion | Down 78% |
| Diluted EPS | $0.74 | $3.10 | Down 76% |
Revenue declined 18% sequentially from $5.835 billion in Q2 2019. Net income attributable to Micron represented approximately 18% of quarterly revenue, versus approximately 49% in the prior-year quarter. The principal driver was lower DRAM and NAND average selling prices amid industry supply-demand imbalance and customer inventory corrections.
| Product revenue | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| DRAM | $3.041 billion | $5.541 billion | Down 45% |
| NAND | $1.461 billion | $1.949 billion | Down 25% |
| Other, primarily 3D XPoint and NOR | $286 million | $307 million | Down 7% |
Business units: Q3 revenue was $2.079 billion for CNBU, $1.174 billion for MBU, $813 million for SBU, and $700 million for EBU. SBU reported a $198 million operating loss, compared with $156 million of operating income in Q3 2018; the segment was affected by pricing declines and underutilization costs associated with IMFT capacity.
Nine-Month Results
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Revenue | $18.536 billion | $21.951 billion | Down 16% |
| Gross profit | $9.307 billion | $12.740 billion | Down 27% |
| Gross margin | 50% | 58% | Down 8 percentage points |
| Operating income | $6.726 billion | $10.617 billion | Down 37% |
| Net income attributable to Micron | $5.752 billion | $9.810 billion | Down 41% |
| Diluted EPS | $5.01 | $7.96 | Down 37% |
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash flow from operations for the first nine months was $10.956 billion, compared with $12.245 billion in the prior-year period.
- Investing cash outflow was $8.985 billion, including $7.752 billion of capital expenditures and net purchases of available-for-sale securities.
- Financing cash outflow was $3.330 billion, including $2.727 billion for treasury stock purchases and $2.376 billion of debt repayments, partially offset by $1.800 billion of debt issuance.
- Cash, cash equivalents, and restricted cash declined to $5.234 billion from $6.587 billion at August 30, 2018. Cash and marketable investments totaled $7.856 billion at May 30, 2019.
- Debt carrying value was $4.909 billion, consisting of $1.346 billion current debt and $3.563 billion long-term debt. The company had no borrowings under its $2.5 billion revolving credit facility.
- Management expects 2019 capital expenditures of approximately $9 billion, net of partner contributions. Capital commitments for property, plant, and equipment were approximately $3.9 billion, including approximately $3.0 billion due within one year.
- Micron repurchased 67 million shares for approximately $2.66 billion during the first nine months and had approximately $7.34 billion remaining under its $10 billion authorization at May 30, 2019.
Material Changes and Unusual Items
- Huawei restrictions: Huawei represented 13% of revenue for the first nine months. The May 2019 addition of Huawei to the U.S. Entity List adversely affected Q3 DRAM and NAND sales. Micron suspended shipments, later determining that certain products were not subject to the applicable restrictions and resuming shipments of certain products in Q4 2019.
- IMFT acquisition: Micron exercised its option to acquire Intel’s 49% interest in IMFT. Closing was scheduled for October 31, 2019, with expected cash consideration of approximately $1.4 billion, including IMFT Member Debt. Intel also elected to receive supply from IMFT through April 2020 at approximately 50% of its prior six-month volume.
- Convertible debt settlement: Micron paid approximately $1.43 billion to settle substantially all 2043G convertible notes and recorded a Q3 loss of $316 million related to the transaction. The company issued $1.8 billion of 2024, 2026, and 2029 senior notes in February 2019.
- Tax items: Q3 income tax benefit was $135 million, producing an effective tax rate of negative 18.9%. Singapore and other tax incentives reduced the Q3 tax provision by $71 million, or approximately $0.06 per diluted share. The nine-month effective tax rate was 9.7%.
- Accounting adoption: ASC 606 revenue recognition and ASU 2016-16 were adopted in Q1 2019. ASC 606 increased reported Q3 revenue by $43 million and net income attributable to Micron by $33 million relative to amounts without adoption effects.
- Subsequent event: Micron finalized the sale of a 200mm Singapore fabrication facility after quarter-end and expected to recognize an approximately $120 million gain in Q4 2019.
Outlook, Commentary, and Risks
Management stated that cash, investments, operating cash flow, and available financing are expected to be sufficient to meet requirements for at least the next 12 months. However, operating cash flow remains highly sensitive to memory selling prices, shipment volumes, product mix, and manufacturing costs.
The near-term operating environment was characterized by broad memory-market supply growth, customer inventory corrections, CPU shortages, declining DRAM and NAND pricing, weak smartphone and consumer demand, and continued NAND industry transition from 2D to 3D technology. Management cited cost reductions and advanced technology execution as partial offsets.
Key contingencies include patent litigation and injunctions in China affecting products representing slightly more than 1% of annualized revenue, antitrust investigations and class actions concerning alleged DRAM price fixing, securities and derivative litigation, and the Qimonda claim concerning approximately 18% of Inotera’s outstanding shares. The company cannot estimate the possible loss for these matters.
Additional risks include trade restrictions and tariffs, dependence on international manufacturing and suppliers, technological execution and yield risk, inventory obsolescence, capital intensity, customer concentration, foreign-exchange exposure, government incentive conditions, and potential restrictions on cash held by foreign subsidiaries. Approximately $564 million of cash and marketable investments was held by the MMJ Group and was not generally available for other operations.
Facts Investors Should Verify
- Whether DRAM and NAND pricing stabilized or continued to decline after the reporting date, and the resulting effect on gross margin.
- The duration and scope of Huawei-related export restrictions, resumed shipments, receivable exposure, and potential inventory or customer concentration effects.
- Completion and integration of the IMFT acquisition, the approximately $1.4 billion cash payment, Intel’s supply election, and future IMFT utilization costs.
- Actual 2019 capital expenditures versus the approximately $9 billion estimate and the company’s ability to fund capital commitments while repurchasing shares.
- Cash conversion, inventory levels, and working-capital trends as revenue and pricing weakened.
- Potential cash or share settlement requirements for the 2032D and 2033F convertible notes, whose aggregate conversion value exceeded principal by approximately $443 million at May 30, 2019.
- Developments in Chinese patent injunctions, U.S. and Canadian antitrust matters, SAMR’s investigation, securities litigation, and the Qimonda proceeding.
- The sustainability of tax incentives and their effect on the effective tax rate and earnings per share.