Micron Technology, Inc. — Fiscal 2017 Form 10-K Summary
Business context and reporting period
Micron designs and manufactures DRAM, NAND, NOR Flash, 3D XPoint memory, SSDs, modules, and related storage solutions. Reportable segments are Compute and Networking, Storage, Mobile, and Embedded. The filing covers the 52-week fiscal year ended August 31, 2017; the filing also provides unaudited quarterly data, including fiscal fourth-quarter results.
Micron acquired the remaining 67% of Inotera on December 6, 2016 for approximately $4.1 billion and began consolidating its results. The acquisition materially affects year-over-year comparability.
Financial performance and condition
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $20.322 billion | $12.399 billion | +64% |
| Gross margin | $8.436 billion; 41.5% | $2.505 billion; 20.2% | Margin expanded approximately 21 percentage points |
| Operating income | $5.868 billion; 28.9% | $168 million; 1.4% | Material improvement |
| Net income attributable to Micron | $5.089 billion | $(276) million | Returned to profitability |
| Diluted EPS | $4.41 | $(0.27) | Material improvement |
| Operating cash flow | $8.153 billion | $3.168 billion | +157% |
| Capital expenditures | $4.734 billion | $5.817 billion | Lower reported cash spending |
| Cash and marketable investments | $6.045 billion | $4.812 billion | +26% |
| Debt carrying value | $11.134 billion | $9.910 billion | Higher, primarily from acquisition and capital financing |
Fiscal fourth-quarter 2017 revenue was $6.138 billion, gross margin was $3.112 billion, operating income was $2.502 billion, net income attributable to Micron was $2.368 billion, and diluted EPS was $1.99.
DRAM represented 64% of fiscal 2017 sales and generated $12.963 billion of revenue. Trade NAND represented 31% and generated $6.228 billion. DRAM sales increased 80%, supported by a 19% increase in average selling prices and a 52% increase in gigabits sold. Trade NAND sales increased 50%, reflecting a 65% increase in gigabits sold despite a 9% decline in average selling prices.
Segment revenue and operating income were: CNBU revenue $8.624 billion and operating income $3.755 billion; SBU revenue $4.514 billion and operating income $552 million; MBU revenue $4.424 billion and operating income $927 million; and EBU revenue $2.695 billion and operating income $975 million.
At August 31, 2017, total assets were $35.336 billion, total current assets were $12.457 billion, total current liabilities were $5.334 billion, and total equity was $19.470 billion. Net property, plant, and equipment increased to $19.431 billion from $14.686 billion.
Material changes versus the prior comparable period
- Strong memory-market conditions increased volumes and pricing, particularly in enterprise, cloud, mobile, client, graphics, and SSD applications.
- DRAM average selling prices increased 19%, while Trade NAND average selling prices declined 9%; manufacturing cost per gigabit fell 21% for DRAM and 26% for Trade NAND.
- Gross margin expanded substantially because of favorable pricing, product mix, manufacturing cost reductions, and technology improvements.
- Inotera was consolidated for most of fiscal 2017, increasing manufacturing capacity and changing the cost and revenue base. The acquisition also produced a $71 million non-operating gain on remeasurement of Micron’s previously held interest.
- Micron increased R&D expense 13% to $1.824 billion and reported $18 million of restructuring and asset-impairment charges, compared with $67 million in fiscal 2016.
- Micron sold its Akita assembly and test facility, its 40% interest in Tera Probe, assets associated with a Singapore 200mm fabrication facility, and assets related to the Lexar brand. The company recorded $15 million of gains and expects an additional gain of approximately $100 million in 2019 upon completion of the Singapore facility sale.
- Micron increased debt through the 2021 MSTW Term Loan and 2021 MSAC Term Loan, while also repurchasing or redeeming debt with aggregate cash payments of approximately $1.63 billion.
Guidance, outlook, commentary, and risks
- Management estimated fiscal 2018 net property, plant, and equipment expenditures at approximately $7.5 billion, plus or minus 5%, net of expected partner contributions. Approximately $1.1 billion of property, plant, and equipment commitments were outstanding at August 31, 2017.
- Management expected cash, investments, operating cash flow, and available financing to satisfy requirements for at least the next 12 months. The company had an undrawn revolving credit facility of up to $750 million, subject to borrowing conditions.
- Micron expected continued growth in DDR4, 3D NAND, client and cloud SSDs, and 3D XPoint products. The company began ramping 64-layer 3D NAND and expected to introduce proprietary SSD controllers in 2018.
- In October 2017, after fiscal year-end, Micron issued 34 million shares for net proceeds of $1.36 billion and announced redemptions of its 2023 Secured Notes and 2023 Notes. The company expected approximately $170 million of non-operating losses from these redemptions in the first quarter of fiscal 2018.
- Key risks include severe cyclicality and volatility in DRAM and NAND pricing, increased industry capacity and competition, technology-transition execution, manufacturing disruptions, dependence on major customers and suppliers, substantial capital requirements, foreign-currency exposure, and reliance on joint ventures.
- Debt carrying value was $11.13 billion, with approximately $17.195 billion of contractual obligations, including debt, leases, purchase commitments, and other long-term liabilities. Variable-rate debt was approximately $4.2 billion; a 1% increase in variable interest rates was estimated to increase annual interest expense by approximately $43 million.
- Approximately 86% of fiscal 2017 sales were to customers outside the United States. China accounted for $10.388 billion of sales, and sales to Kingston represented 10% of total sales. The filing states that approximately one-half of sales in each of the last three years were to the ten largest customers.
- Pending matters include patent-infringement litigation and a Qimonda lawsuit challenging Micron’s acquisition of Inotera shares. Management could not estimate the possible loss in these matters; an adverse resolution could result in monetary damages, loss of Inotera shares, or termination of a patent cross-license.
- MMJ remains subject to Japanese court and trustee oversight while its reorganization proceedings continue, with final creditor payments scheduled for December 2019, subject to possible delay.
Most important facts for investors to verify
- Whether DRAM and NAND pricing, supply growth, and demand remain favorable after the unusually strong fiscal 2017 cycle.
- The sustainability of the 41.5% consolidated gross margin after accounting for pricing, mix, technology transitions, and the fiscal 2017 depreciation benefit from extending DRAM equipment lives.
- Actual fiscal 2018 capital expenditures versus the approximately $7.5 billion estimate and the resulting effect on free cash flow and leverage.
- Post-year-end debt redemptions, equity issuance, conversion settlements, and the expected approximately $170 million fiscal 2018 non-operating loss.
- Integration and operating performance of Inotera, including the effect on capacity, costs, goodwill, and internal controls; Inotera was excluded from the fiscal 2017 internal-control assessment during integration.
- Progress and economics of 3D NAND, proprietary SSD controllers, 3D XPoint, and other technology transitions.
- Developments in the Qimonda litigation, patent cases, MMJ reorganization, joint-venture rights, and debt covenant compliance.
- The effect of international cash restrictions, tax incentives, deferred tax assets, and foreign-currency movements on available liquidity and cash taxes.