Micron Technology, Inc. — Fiscal 2018 First-Quarter 10-Q
Reporting period: Quarter ended November 30, 2017; comparative quarter ended December 1, 2016. Micron develops and manufactures DRAM, NAND, NOR Flash, 3D XPoint memory, and related storage solutions for compute, networking, cloud, mobile, automotive, industrial, and consumer markets.
Financial Performance and Position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $6.803 billion | $3.970 billion | Up 71% |
| Gross margin | $3.747 billion; 55.1% | $1.011 billion; 25.5% | Up approximately 30 percentage points |
| Operating income | $3.097 billion | $359 million | Up $2.738 billion |
| Net income attributable to Micron | $2.678 billion | $180 million | Up $2.498 billion |
| Diluted EPS | $2.19 | $0.16 | Up $2.03 |
| Cash flow from operations | $3.636 billion | $1.138 billion | Up $2.498 billion |
| Capital expenditures | $1.956 billion | $1.264 billion | Up $692 million |
- Revenue increased 11% sequentially from $6.138 billion in Q4 FY2017, while gross margin increased from 51%.
- DRAM generated $4.562 billion, or 67% of revenue; Trade NAND generated $1.866 billion, or 27%.
- Segment revenue and operating income were: CNBU $3.212 billion and $1.914 billion; SBU $1.383 billion and $400 million; MBU $1.365 billion and $505 million; and EBU $830 million and $342 million.
- Operating performance benefited from strong DRAM pricing, higher volumes, manufacturing cost reductions, improved product mix, and growth in cloud, enterprise, mobile, client, graphics, and SSD markets.
- Other non-operating expense was $204 million, primarily a $195 million loss on debt repurchases and conversions. The effective tax rate was 4.1%; tax incentive arrangements reduced tax expense by $391 million, or $0.32 per diluted share.
- Cash, cash equivalents, and restricted cash increased to $6.130 billion from $5.216 billion at August 31, 2017. Cash and marketable investments totaled $6.488 billion.
- Debt carrying value was $9.045 billion, comprising $1.401 billion current debt and $7.644 billion long-term debt, down from $11.134 billion at August 31, 2017.
- Total assets were $37.191 billion and total equity was $23.393 billion at November 30, 2017.
Material Changes Versus Comparable Period
- Gross margin expanded substantially as favorable memory-market pricing and technology-driven cost reductions outweighed lower Trade NAND average selling prices.
- DRAM average selling prices increased in the upper-50% range and gigabits sold increased in the lower-20% range versus Q1 FY2017.
- Trade NAND gigabytes sold increased in the upper-40% range versus Q1 FY2017, while average selling prices were relatively unchanged.
- CNBU revenue increased 119%, SBU revenue 61%, MBU revenue 32%, and EBU revenue 44% year over year.
- Cash from operations more than tripled, while capital spending increased to support technology transitions and product enablement.
- Micron repurchased or converted $2.355 billion of debt principal for $2.635 billion of cash and equity-related consideration, including redemption of the 2023 Notes and 2023 Secured Notes.
- Micron issued 34 million common shares at $41.00 per share in October 2017, generating $1.36 billion of net proceeds.
- IMFT discontinued NAND production during the quarter and continued ramping 3D XPoint products.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated fiscal 2018 property, plant, and equipment expenditures at approximately $7.5 billion, plus or minus 5%, net of partner contributions. Commitments for property, plant, and equipment were approximately $1.3 billion, substantially payable within one year.
- Management expected cash, investments, operating cash flow, and available financing to meet requirements for at least the next 12 months. An undrawn revolving credit facility provided up to $750 million based on eligible receivables.
- Market conditions were described as strong across mobile, enterprise, cloud, client, graphics, and SSD markets. Management cited continued 1X-nanometer DRAM deployment, TLC 3D NAND growth, and planned proprietary SSD controller introductions in 2018.
- Memory and storage pricing is highly cyclical. Increased industry capacity or weaker demand could pressure average selling prices and margins.
- Significant risks include technology-transition and manufacturing-execution risk, dependence on advanced equipment and suppliers, customer concentration, joint-venture risks, foreign-exchange exposure, cybersecurity, international operations, and potential disruptions from natural disasters or facility events.
- Convertible notes had conversion value exceeding principal by $2.87 billion at November 30, 2017. Potential settlement obligations for certain notes through December 31, 2017 totaled up to $3.167 billion if settled entirely in cash.
- Material legal contingencies include patent-infringement claims and Qimonda litigation that could result in monetary damages, loss of Inotera shares, or termination of a patent cross-license. The filing states that potential losses cannot be estimated.
- Approximately $3.05 billion of cash and marketable investments was held by foreign subsidiaries whose earnings were considered indefinitely reinvested. Certain foreign cash balances were restricted by MMJ proceedings, debt covenants, or joint-venture agreements.
- U.S. tax reform was pending at the reporting date and could materially affect taxes, deferred tax assets, and near-term cash tax liabilities.
Investor Verification Points
- Verify whether DRAM pricing, NAND pricing, and industry supply-demand conditions remain supportive of the 55% gross-margin level.
- Reconcile planned fiscal 2018 capital spending of approximately $7.5 billion with operating cash flow, debt maturities, and available liquidity.
- Monitor convertible-note conversions, cash settlement requirements, share dilution, and the remaining debt-reduction strategy.
- Assess the accessibility of foreign-held cash, including amounts subject to MMJ, MSTW/MTTW, and IMFT restrictions.
- Track the financial and operational effects of IMFT’s NAND exit and 3D XPoint ramp.
- Review developments in the Qimonda and patent litigation, U.S. tax reform, and the adoption effects of upcoming accounting standards.