Micron Technology, Inc. — Fiscal 2018 Second-Quarter 10-Q Summary
Reporting period: Quarter and six months ended March 1, 2018. Fiscal 2018 is a 52-week year. Micron develops and manufactures DRAM, NAND, NOR Flash, 3D XPoint memory, SSDs, and related memory and storage solutions through its CNBU, MBU, SBU, and EBU segments.
Financial performance and position
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $7.351 billion | $4.648 billion | $14.154 billion | $8.618 billion |
| Gross margin | 58% | 37% | 57% | 32% |
| Operating income | $3.567 billion | $1.044 billion | $6.664 billion | $1.403 billion |
| Operating margin | 49% | 22% | 47% | 16% |
| Net income attributable to Micron | $3.309 billion | $894 million | $5.987 billion | $1.074 billion |
| Diluted EPS | $2.67 | $0.77 | $4.86 | $0.95 |
| Net cash from operating activities | Not separately provided | Not separately provided | $7.984 billion | $2.543 billion |
- Q2 revenue increased 58% year over year; six-month revenue increased 64%.
- DRAM generated $5.213 billion, or 71% of Q2 revenue, compared with $2.960 billion, or 64%, in the prior-year quarter. Trade NAND generated $1.805 billion, or 25% of revenue.
- Q2 gross margin expanded primarily because of strong DRAM pricing, favorable demand, product mix, and manufacturing cost reductions. Trade NAND pricing declined, but SSD growth and cost reductions supported improved profitability versus the prior year.
- Q2 operating expenses were $196 million of SG&A and $523 million of R&D. Six-month SG&A was $387 million and R&D was $971 million.
- As of March 1, 2018, cash and equivalents were $7.828 billion, marketable investments totaled $734 million, and total cash and marketable investments were $8.562 billion.
- Total debt carrying value was $9.316 billion, consisting of $1.514 billion current debt and $7.802 billion long-term debt. Debt declined from $11.134 billion at August 31, 2017.
- Net cash increased $2.725 billion during the first six months, ending at $7.941 billion including restricted cash. Investing used $3.843 billion, primarily for $4.217 billion of capital expenditures; financing used $1.420 billion.
Material changes versus the prior comparable periods
- CNBU Q2 revenue rose to $3.691 billion from $1.917 billion, and operating income rose to $2.329 billion from $736 million, driven by cloud-server and client demand, higher DRAM pricing, and volume growth.
- MBU Q2 revenue increased to $1.566 billion from $1.082 billion, while operating income increased to $689 million from $170 million, supported by mobile DRAM demand, low-power DRAM acceptance, pricing, and cost reductions.
- SBU Q2 revenue increased to $1.254 billion from $1.041 billion. SSD revenue increased 22% sequentially and 81% year over year, but NAND component pricing declined and reduced sequential performance.
- EBU Q2 revenue increased to $829 million from $590 million, with operating income increasing to $363 million from $193 million.
- Management reported DRAM average selling prices increased in the low-double-digit range sequentially and in the low-40% range year over year. Trade NAND average selling prices declined in the mid-teens range sequentially and in the high-single-digit range year over year.
- Micron repurchased or settled $2.420 billion principal amount of debt during the first six months, paying $2.930 billion in cash and recording a $218 million loss on debt repurchases and conversions.
- In October 2017, Micron issued 34 million common shares for net proceeds of $1.36 billion.
- Operating cash flow increased substantially from the prior year, while the prior-year investing period included $2.634 billion for the Inotera acquisition; 2018 investing was instead dominated by capital expenditures.
Guidance, outlook, commentary, risks, and unusual items
- Micron estimated 2018 property, plant, and equipment expenditures at approximately $7.5 billion, plus or minus 5%, net of partner contributions. Capital-expenditure commitments were approximately $1.6 billion as of March 1, 2018.
- Management expected cash, investments, operating cash flow, and available financing to satisfy requirements for at least the next 12 months. An undrawn revolving credit facility provided up to $750 million based on eligible receivables.
- Management cited strong DRAM demand across server, mobile, client, enterprise, and cloud markets, while noting NAND pricing pressure. IMFT discontinued NAND production in the first quarter and was focused entirely on 3D XPoint production; less-than-full-capacity 3D XPoint production adversely affected SBU margins.
- Micron and Intel agreed to continue joint NAND development through third-generation 3D NAND, expected in 2019, but will independently develop subsequent generations.
- The Tax Cuts and Jobs Act produced provisional effects, including a $1.335 billion repatriation-tax provision, a $133 million deferred-tax remeasurement provision, and a $1.337 billion valuation-allowance release. These estimates remained subject to revision. Management indicated the tax rate could rise to the low-teens percentage beginning in 2019, depending on profitability.
- Singapore and other tax incentives reduced the Q2 tax provision by $436 million, benefiting diluted EPS by $0.35. The incentives are conditional and may be reduced, terminated, or clawed back.
- Material contingencies include patent litigation in China involving Fujian Jinhua and UMC, with requested damages of 98 million and 90 million Chinese yuan, respectively, plus potential injunctions and destruction of products or equipment. Micron stated that potential losses could not be estimated.
- The Qimonda insolvency litigation could result in loss of approximately 18% of Inotera shares, monetary damages, or termination of a patent cross-license. The outcome and potential loss remain uncertain.
- Key industry risks include volatile DRAM and NAND pricing, oversupply, intense competition, manufacturing disruptions, technology-transition execution, reliance on joint ventures and major customers, foreign-exchange exposure, intellectual-property claims, and restricted access to cash held by certain foreign subsidiaries and IMFT.
Important facts for investors to verify
- Whether DRAM pricing and margins remain sustainable as industry capacity and competitor output change.
- Progress and economics of the 3D NAND, SSD, and 3D XPoint product ramps, including IMFT capacity utilization.
- Actual 2018 capital expenditures versus the approximately $7.5 billion estimate and the effect on free cash flow.
- Final accounting for the Tax Cuts and Jobs Act, including the repatriation tax, deferred-tax valuation allowance, and future foreign minimum tax effects.
- Debt maturities, convertible-note settlements, dilution, and Micron’s ability to fund debt reduction while maintaining high capital investment.
- Developments in the Qimonda matter and the Chinese patent litigation, including any injunctions, settlements, or material reserves.
- Availability of cash held by MMJ, MSTW, MTTW, and IMFT, which was subject to legal, covenant, or joint-venture restrictions.