Micron Technology, Inc. Fiscal 2019 Form 10-K Summary
Business context and reporting period
Micron develops and manufactures DRAM, NAND, 3D XPoint, NOR, managed NAND, SSDs, modules, and related memory and storage solutions for mobile, data center, client, consumer, automotive, industrial, graphics, and networking markets. The filing covers the 52-week fiscal year ended August 29, 2019. Fiscal fourth-quarter revenue was $4.87 billion, compared with $8.44 billion in the fourth quarter of fiscal 2018.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $23.406 billion | $30.391 billion |
| Gross margin | $10.702 billion; 46% margin | $17.891 billion; 59% margin |
| Operating income | $7.376 billion; 32% margin | $14.994 billion; 49% margin |
| Net income attributable to Micron | $6.313 billion | $14.135 billion |
| Diluted EPS | $5.51 | $11.51 |
| Cash flow from operations | $13.189 billion | $17.400 billion |
| Capital expenditures, net of partner contributions | $9.03 billion | $7.99 billion |
| Cash and marketable investments | $9.12 billion | $7.28 billion |
| Debt carrying value | $5.85 billion | $4.64 billion |
Revenue by business unit was $9.968 billion for Compute and Networking, $6.403 billion for Mobile, $3.826 billion for Storage, and $3.137 billion for Embedded. Storage reported a $386 million operating loss, primarily reflecting pricing pressure and IMFT underutilization.
Material changes versus the prior comparable period
- Revenue declined 23%, driven primarily by memory-market pricing pressure. DRAM average selling prices fell approximately 30%, while NAND average selling prices declined in the mid-40% range.
- Gross margin fell to 46% from 59%, as pricing declines exceeded manufacturing cost reductions. IMFT underutilization reduced gross margin by approximately $100 million per quarter on average during fiscal 2019.
- Net income attributable to Micron fell 55%, and diluted EPS declined 52%.
- CNBU revenue decreased 35%, SBU revenue decreased 24%, EBU revenue decreased 10%, and MBU revenue decreased 3%.
- Operating cash flow decreased 24%, while capital expenditures increased. Inventory rose to $5.118 billion from $3.595 billion, including higher work-in-process and raw-material inventories.
- Micron repurchased 67 million shares for $2.66 billion under its $10 billion authorization.
- Micron issued $3.55 billion of debt, prepaid $728 million of the 2022 Term Loan B, repaid $316 million of IMFT member debt, and settled or repurchased convertible debt.
- Micron exercised its option to acquire Intel’s interest in IMFT. The transaction was scheduled to close October 31, 2019, with approximately $1.4 billion expected to be paid in the first quarter of fiscal 2020.
Guidance, outlook, management commentary, and risks
- Management estimated fiscal 2020 capital expenditures of approximately $7 billion to $8 billion, net of partner contributions, focused on technology transitions and product enablement.
- Management expected cash, operating cash flow, and available financing to satisfy requirements for at least the next 12 months. Undrawn credit facilities totaled $3.75 billion.
- Micron anticipated IMFT underutilization costs increasing to approximately $150 million per quarter beginning in the first quarter of fiscal 2020.
- Micron expected to change the depreciable life of NAND equipment from five to seven years beginning in fiscal 2020, reducing depreciation expense by approximately $80 million in the first quarter and approximately $100 million to $150 million per quarter for the remainder of fiscal 2020.
- Micron expected 2020 NAND bit-supply growth to be below industry demand because of the transition to replacement-gate technology. The company planned to use floating-gate inventory to support customer demand.
- Key technology developments included ramping 96-layer 3D NAND, progressing toward 128-layer replacement-gate NAND, and expanding 1Ynm and 1Znm DRAM production.
- Huawei represented 12% of fiscal 2019 revenue. Shipments were suspended following Huawei’s May 2019 addition to the U.S. Entity List; Micron later resumed shipping certain products it determined were not subject to the applicable export restrictions.
- Major risks include substantial DRAM and NAND price volatility, industry oversupply, manufacturing underutilization, high capital requirements, technology-transition execution, customer concentration, trade restrictions, supply-chain constraints, foreign operations, and competition from Samsung, SK Hynix, Intel, Western Digital, and others.
- Pending or unresolved matters include Chinese patent litigation, U.S. and Canadian antitrust claims, a Chinese antitrust investigation, shareholder derivative litigation, and the Qimonda challenge to Micron’s acquisition of Inotera shares. The filing states that potential losses generally could not be estimated.
- The company adopted ASC 606 in fiscal 2019. Adoption increased reported fiscal 2019 net income attributable to Micron by $16 million compared with amounts without the adoption effects. The company expected the 2020 lease standard adoption to add approximately $550 million of operating lease assets and liabilities to the balance sheet.
Important facts for investors to verify
- Whether DRAM and NAND pricing stabilizes and whether cost reductions offset future average-selling-price declines.
- The effect of completing the IMFT acquisition, including underutilization charges, Intel’s remaining supply commitments, and integration results.
- Actual fiscal 2020 capital expenditures and free cash flow after technology-transition spending.
- Inventory levels, inventory write-down sensitivity, and the company’s ability to monetize work-in-process and floating-gate NAND inventory.
- The duration and scope of Huawei and other export restrictions, including any effect on customer demand and stranded inventory.
- Execution of 128-layer replacement-gate NAND and 1Znm DRAM ramps, including timing of expected cost reductions.
- Outcomes and potential financial exposure from antitrust, patent, securities, shareholder derivative, and Qimonda proceedings.
- Debt maturities, convertible-note settlements, the approximately $1.4 billion IMFT-related payment, and remaining share-repurchase activity.