Micron Technology, Inc. — Fiscal 2018 Third-Quarter Form 10-Q
Business context and reporting period
Micron develops and manufactures DRAM, NAND, NOR Flash, 3D XPoint memory, SSDs, and related storage solutions under the Micron, Crucial, and Ballistix brands. The filing covers the unaudited quarter and nine months ended May 31, 2018. Comparisons are primarily with the quarter and nine months ended June 1, 2017.
Key financial metrics
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Net sales | $7.797 billion | $5.566 billion | $21.951 billion | $14.184 billion |
| Gross margin | $4.723 billion; 61% | $2.609 billion; 47% | $12.740 billion; 58% | $5.324 billion; 38% |
| Operating income | $3.953 billion; 51% margin | $1.963 billion; 35% margin | $10.617 billion; 48% margin | $3.366 billion; 24% margin |
| Net income attributable to Micron | $3.823 billion | $1.647 billion | $9.810 billion | $2.721 billion |
| Diluted EPS | $3.10 | $1.40 | $7.96 | $2.38 |
| Net cash from operating activities | Not separately provided | Not separately provided | $12.245 billion | $4.950 billion |
Q3 net income attributable to Micron represented approximately 49% of sales, compared with approximately 30% in the prior-year quarter. Net interest expense was $44 million in Q3, versus $143 million in Q3 FY2017.
As of May 31, 2018, cash and equivalents were $6.808 billion, marketable investments were $750 million, and total cash and marketable investments were $7.558 billion. Total debt carrying value was $7.344 billion, consisting of $1.454 billion current debt and $5.890 billion long-term debt. The company had an undrawn $750 million revolving credit facility, subject to eligible-receivables requirements.
Nine-month capital expenditures were $6.628 billion. Management estimated approximately $8 billion of 2018 property, plant, and equipment expenditures, net of partner contributions. Cash and equivalents, cash flows from operations, and available financing were expected to be sufficient to meet requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Q3 sales increased 40%, and nine-month sales increased 55%, driven by strong demand and pricing across cloud server, enterprise server, mobile, client, and other primary markets.
- DRAM sales rose to $5.541 billion in Q3, or 71% of sales, from $3.559 billion, or 64%, in the prior-year quarter. DRAM average selling prices increased in the mid-to-upper single-digit range sequentially and in the mid-30% range year over year.
- Trade NAND sales increased sequentially but declined 13% year over year because lower component NAND pricing offset volume growth. SSD sales increased 37% year over year in Q3, supported by demand for TLC 3D NAND products.
- Gross margin expanded to 61% from 47%, primarily from favorable market conditions, product mix, 1X nm DRAM and TLC 3D NAND execution, and manufacturing cost reductions.
- Q3 operating income increased 101% year over year, while R&D expense increased 39% to $603 million. Higher R&D reflected development and pre-qualification wafers, compensation, and payroll costs.
- Nine-month operating cash flow increased to $12.245 billion from $4.950 billion. The company used $6.087 billion in investing activities and $4.443 billion in financing activities, including substantial debt reduction.
- During the first nine months, Micron paid $6.153 billion to prepay, repurchase, or settle conversions of debt with an aggregate principal amount of $4.728 billion. Total debt declined from $11.134 billion at August 31, 2017 to $7.344 billion at May 31, 2018.
Guidance, outlook, commentary, risks, and unusual items
- Management cited continued strong market conditions and expected approximately $8 billion of 2018 capital expenditures, although actual spending could vary with market conditions.
- Micron commenced construction of additional clean-room space in Singapore. The first phase was expected to be completed by summer 2019, with initial wafer output expected in the fourth calendar quarter of 2019.
- Micron and Intel expected to complete joint development through the third generation of 3D NAND, expected in 2019, while independently developing subsequent generations.
- The company authorized discretionary repurchases of up to $10 billion of common stock beginning in 2019; the authorization does not obligate Micron to repurchase shares.
- Tax accounting under the 2017 Tax Act remained provisional. The nine-month results included a $1.113 billion estimated repatriation-tax provision, a $1.337 billion release of U.S. valuation allowances, and a $133 million deferred-tax remeasurement provision. Management indicated that the effective tax rate could rise to the low teens beginning in 2019, depending on profitability.
- Q3 results included $168 million of losses from debt prepayments, repurchases, and conversions and $119 million of losses from changes in the fair value of convertible-note settlement obligations.
- Convertible notes had conversion values exceeding principal by $3.21 billion at May 31, 2018. Potential Q3-calendar-quarter settlement exposure was presented as $669 million of minimum cash required or $4.707 billion if settled entirely in cash, assuming all relevant holders converted.
- Material contingencies include Chinese patent-infringement litigation brought by Fujian Jinhua and UMC, a pending Qimonda dispute involving Inotera shares and related licensing rights, and U.S. and Canadian purported class actions alleging DRAM price fixing. The company could not estimate the possible loss for these matters.
- Principal business risks include memory and storage price volatility, intense competition and potential industry oversupply, manufacturing and technology-transition execution, dependence on key customers and joint ventures, foreign-exchange exposure, restricted access to certain foreign cash, litigation and intellectual-property claims, and conditional government incentives.
Important facts for investors to verify
- Whether DRAM pricing and supply-demand conditions remain favorable and whether NAND pricing pressure worsens.
- Progress and spending discipline on 1X nm DRAM, TLC 3D NAND, 3D XPoint, and the Singapore clean-room expansion.
- Actual 2018 capital expenditures versus the approximately $8 billion estimate and the effect on free cash flow.
- Completion and cash impact of the planned debt prepayments, convertible-note settlements, and the July 2018 $836 million MSTW term-loan prepayment.
- Final accounting for the Tax Act, future effective tax rates, and the availability of foreign cash subject to legal or contractual restrictions.
- Developments and potential injunctions, damages, or licensing costs in the Chinese patent cases, Qimonda litigation, and DRAM pricing litigation.
- Whether the $10 billion repurchase authorization is executed and how repurchases compare with debt reduction, capital expenditures, and other liquidity needs.