Micron Technology, Inc. — Fiscal 2019 First-Quarter Form 10-Q
Business context and reporting period
Micron develops and manufactures DRAM, NAND, NOR Flash, and 3D XPoint memory and storage products serving cloud, data center, networking, mobile, automotive, industrial, and consumer markets. The filing covers the unaudited quarter ended November 29, 2018, compared primarily with the quarter ended November 30, 2017 and, where stated, the fourth quarter of fiscal 2018.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $7.913 billion | $6.803 billion | +16% |
| Gross profit | $4.615 billion | $3.747 billion | +23% |
| Gross margin | 58% | 55% | +3 percentage points |
| Operating income | $3.759 billion | $3.097 billion | +21% |
| Net income attributable to Micron | $3.293 billion | $2.678 billion | +23% |
| Diluted EPS | $2.81 | $2.19 | +28% |
| Cash flow from operations | $4.810 billion | $3.636 billion | +32% |
- Revenue mix was $5.373 billion from DRAM, $2.179 billion from NAND, and $361 million from other products, primarily 3D XPoint and NOR.
- Business-unit revenue was $3.604 billion for CNBU, $2.212 billion for MBU, $1.143 billion for SBU, and $933 million for EBU. MBU revenue increased 62% year over year, while SBU revenue declined 17%.
- Operating margins by business unit were 61% for CNBU, 54% for MBU, 7% for SBU, and 41% for EBU.
- The effective tax rate was 12.6%. Singapore and other tax incentives reduced the tax provision by $427 million, or $0.36 per diluted share. The provision also included $47 million related to the U.S. Repatriation Tax.
- Cash, cash equivalents, and marketable investments totaled $7.128 billion at November 29, 2018, including $4.447 billion of cash and equivalents.
- Total debt carrying value was $4.132 billion, consisting of $398 million current debt and $3.734 billion long-term debt. The company had an undrawn revolving credit facility increased to $2.5 billion, expiring in July 2023.
- Capital expenditures were $2.700 billion on a gross basis, or approximately $2.46 billion net of partner contributions. Property, plant, and equipment totaled $24.807 billion.
- Cash flow was pressured by $4.427 billion of investing outflows and $2.435 billion of financing outflows, including $1.836 billion for share repurchases. Cash, cash equivalents, and restricted cash declined by $2.062 billion during the quarter.
Material changes versus comparable periods
- Compared with Q1 FY2018, revenue, gross margin, operating income, net income, diluted EPS, and operating cash flow all increased, primarily from stronger demand, higher DRAM pricing, technology transitions, and manufacturing cost reductions.
- DRAM revenue increased 18% year over year, while NAND revenue increased 15%; NAND shipment volumes rose approximately 70%, offset in part by an approximately 30% decline in average selling prices.
- Compared with Q4 FY2018, revenue decreased 6% to $7.913 billion and gross margin declined from 61% to 58%. Management attributed the sequential decline to customer inventory corrections, CPU shortages, less favorable pricing, and a manufacturing issue at a supplier.
- Sequential DRAM revenue declined 9%, while NAND revenue declined 3%. Mobile managed NAND shipment volumes increased more than 50%, but pricing declines reduced NAND revenue and margins.
- Research and development expense increased 36% year over year to $611 million. Partner reimbursements declined to $30 million from $56 million as joint development activities with Intel were reduced.
- Micron adopted ASC 606 and ASU 2016-16 in the quarter. Without the ASC 606 adoption effects, reported revenue would have been $7.818 billion and net income attributable to Micron would have been $3.244 billion.
- Micron repurchased 42 million shares for approximately $1.80 billion during the quarter. The remaining authorization was approximately $8.196 billion at November 29, 2018.
Guidance, outlook, commentary, and unusual items
- Management expected fiscal 2019 capital expenditures of approximately $9.0 billion to $9.5 billion, net of partner contributions, subject to market conditions. Property, plant, and equipment commitments were approximately $2.8 billion, substantially payable within one year.
- Micron stated that cash, investments, operating cash flow, and available financing were expected to be sufficient to meet requirements for at least the next 12 months.
- Micron announced its intent to acquire Intel’s interest in IMFT. The company expected to pay approximately $1.5 billion in cash at closing and eliminate Intel’s noncontrolling interest and approximately $1.0 billion of IMFT member debt. Intel could select a closing date between six months and one year after exercise of the option.
- IMFT had discontinued NAND production and was focused on 3D XPoint. Joint development with Intel of the second generation of 3D XPoint and the third generation of 3D NAND was expected to conclude in the second half of 2019; Micron stated it would independently develop subsequent generations.
- Other operating expense included $33 million of restructuring and asset impairments, including $16 million for centralization activities and $16 million of property, plant, and equipment impairments.
- Material contingencies included Chinese patent litigation and a preliminary injunction affecting certain DRAM modules and SSDs representing slightly more than 1% of annualized revenue; U.S. and Canadian DRAM antitrust class actions; a Chinese State Administration for Market Regulation investigation; and Qimonda litigation concerning approximately 18% of Inotera shares. The company could not estimate potential losses for these matters.
- Revenue from Huawei represented 13% of quarterly revenue. No other customer exceeded 10%.
- Principal operating risks included memory-price volatility, excess industry capacity, customer inventory corrections, technology-transition execution, supply-chain and manufacturing disruptions, trade restrictions and tariffs, foreign-exchange exposure, dependence on tax incentives, litigation, and the high level of planned capital spending.
Investor verification items
- Verify whether DRAM and NAND pricing trends, customer inventory corrections, and CPU shortages continue to pressure revenue and gross margin.
- Track quarterly capital spending against the $9.0 billion to $9.5 billion fiscal 2019 estimate and assess resulting free cash flow.
- Confirm the timing, cash consideration, financing, and operating implications of acquiring Intel’s IMFT interest.
- Review convertible-note conversion activity and potential cash or share settlement obligations; the filing identified potential settlement exposure of up to $2.108 billion if specified notes were settled entirely in cash.
- Monitor the impact of ASC 606 adoption and the company’s estimates for customer rebates, price protection, and returns.
- Assess developments in Chinese patent injunctions, antitrust investigations and litigation, the Qimonda appeal, and the potential financial or operational consequences.
- Evaluate the concentration of liquidity in restricted or otherwise unavailable foreign subsidiary and joint-venture cash, including $306 million held by MMJ and $169 million held by IMFT.