Micron Technology, Inc. FY2018 Form 10-K Summary
Business context and reporting period
Micron designs and manufactures DRAM, NAND, NOR Flash, 3D XPoint memory, SSDs, modules, wafers, and managed NAND solutions under the Micron, Crucial, and Ballistix brands. Its four reportable segments are Compute and Networking, Mobile, Storage, and Embedded. The filing covers the 52-week fiscal year ended August 30, 2018, with comparisons to fiscal 2017 and 2016. The filing also provides unaudited fourth-quarter results for the quarter ended August 30, 2018.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $30.391 billion | $20.322 billion | +50% |
| Gross margin | $17.891 billion; 59% | $8.436 billion; 42% | Margin +17 percentage points |
| Operating income | $14.994 billion; 49% of sales | $5.868 billion; 29% of sales | +156% |
| Net income attributable to Micron | $14.135 billion | $5.089 billion | +178% |
| Diluted EPS | $11.51 | $4.41 | +161% |
| Cash flow from operations | $17.400 billion | $8.153 billion | +113% |
| Capital expenditures, net of partner contributions | $7.99 billion | $4.73 billion | +69% |
| Cash and marketable investments | $7.275 billion | $6.045 billion | +20% |
| Total debt carrying value | $4.636 billion | $11.134 billion | Down $6.498 billion |
Fourth-quarter FY2018 revenue was $8.440 billion, gross margin was $5.151 billion, operating income was $4.377 billion, net income attributable to Micron was $4.325 billion, and diluted EPS was $3.56.
FY2018 segment revenue was $15.252 billion for CNBU, $6.579 billion for MBU, $5.022 billion for SBU, and $3.479 billion for EBU. DRAM revenue was $21.232 billion and trade NAND revenue was $7.843 billion.
Material changes versus the prior comparable period
- Revenue growth was driven by strong DRAM demand and pricing, higher sales volumes, and increased shipments of advanced 1Xnm DRAM and 64-layer 3D NAND products.
- DRAM sales increased 64%, reflecting approximately 35% higher average selling prices and approximately 20% higher sales volumes.
- Trade NAND sales increased 26%, primarily from approximately 40% higher sales volumes, despite an approximately 11% decline in NAND average selling prices.
- CNBU revenue increased 77%, MBU revenue increased 49%, SBU revenue increased 11%, and EBU revenue increased 29%.
- SSD revenue increased 72% within SBU, while component and wafer sales declined as Micron shifted toward SSDs and mobile managed NAND.
- Net debt declined materially as Micron used $9.42 billion for debt prepayments, repurchases, and note conversions, partly offset by $1.01 billion of Intel-provided IMFT member debt.
- Property, plant, and equipment increased to $23.672 billion from $19.431 billion, reflecting elevated investment in capacity and technology transitions.
- R&D expense increased 17% to $2.141 billion, while SG&A increased 9% to $813 million.
Guidance, outlook, commentary, risks, and unusual items
- Management estimated FY2019 net capital expenditures at approximately $10.5 billion, plus or minus 5%, net of expected partner contributions. Approximately $1.8 billion of property, plant, and equipment commitments were outstanding at year-end.
- Management expected cash, operating cash flow, and available financing to meet requirements for at least the next 12 months. The company had an undrawn $2.0 billion revolving credit facility expiring in July 2023.
- Micron expected its effective tax rate to increase to the low-teens percentage in FY2019, depending on taxable income and geographic mix. FY2018 tax results included provisional Tax Cuts and Jobs Act effects, including a $1.03 billion repatriation-tax provision and a $1.34 billion U.S. valuation-allowance release. Singapore tax incentives reduced FY2018 tax expense by $1.96 billion.
- Micron and Intel continued joint development through the third generation of 3D NAND and second-generation 3D XPoint, both expected to be completed in the second half of calendar 2019. They agreed to independently develop subsequent generations of 3D NAND, and Micron announced it would not jointly develop later generations of 3D XPoint with Intel. Related cost-sharing reimbursements were expected to decrease in early FY2019.
- Micron authorized discretionary repurchases of up to $10 billion beginning in 2019. Subsequent to year-end, it repurchased $1.65 billion of stock through October 12, 2018, including a $1.0 billion accelerated share repurchase.
- Key risks include sharp volatility in memory average selling prices, excess industry capacity, intense competition, technology-transition and manufacturing-yield risks, substantial capital requirements, customer concentration, supply-chain constraints, tariffs and trade restrictions, foreign-exchange exposure, cybersecurity, and reliance on joint ventures and strategic partners.
- Legal and regulatory matters include Chinese patent litigation and a preliminary injunction affecting products representing slightly more than 1% of annualized revenue, U.S. and Canadian DRAM antitrust class actions, a Chinese market-regulator investigation into potential DRAM collusion, and the unresolved Qimonda litigation concerning Inotera shares and related intellectual-property rights. The filing states that potential losses cannot be estimated for these matters.
- Approximately one-half of net sales came from the top ten customers; Kingston represented 10% of FY2018 revenue. China accounted for $17.357 billion of customer ship-to revenue, or approximately 57% of total sales.
- Micron paid no cash dividends and stated that it did not intend to pay dividends for the foreseeable future.
Important facts for investors to verify
- Whether DRAM and NAND pricing, demand, and industry supply remain favorable enough to support the FY2018 gross margin profile.
- Actual FY2019 capital expenditures, technology-transition timing, and partner funding compared with the $10.5 billion estimate.
- The effect of the transition to the new revenue-recognition standard, including the expected recognition of deferred distributor revenue; deferred distributor income was $232 million at year-end.
- Cash availability and restrictions on approximately $1.67 billion held by the MMJ Group, including restrictions arising from Japanese reorganization proceedings.
- Debt maturities, convertible-note settlement requirements, and the impact of continued stock repurchases on liquidity and share count.
- Developments in Chinese patent injunctions, DRAM antitrust proceedings, the SAMR investigation, and the Qimonda litigation.
- Execution of the Intel relationship, including IMFT buy-sell rights, the $1.01 billion of IMFT member debt, and the shift in joint-development arrangements.
- Completion and subsequent adjustment of provisional Tax Act accounting and the sustainability of government tax incentives.