MICRON TECHNOLOGY, INC. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes for the year endedSeptember 3, 2020 . All period references are to our fiscal periods unless otherwise indicated. Our fiscal year is the 52 or 53-week period ending on the Thursday closest toAugust 31 . Fiscal 2020 contains 53 weeks and our fiscal 2019 and 2018 each contain 52 weeks. Our fourth quarter of fiscal 2020 contained 14 weeks. All tabular dollar amounts are in millions, except per share amounts.
For an overview of our business, see "Part I - Item 1. Business - Overview."
Impact of COVID-19 on Our Business
Events surrounding the ongoing COVID-19 outbreak have resulted in a reduction in
economic activity across the globe, which has affected demand for certain of our
products. While we have observed demand increases in some areas of our business
that support a stay-at-home economy, such as products used in data center
infrastructure, notebook computers, and similar applications, we have also
observed demand decreases in other categories such as smartphones, consumer
electronics, automotive, desktop PCs, and enterprise markets. The ultimate
extent to which COVID-19 will impact demand for our products depends on future
developments, which are highly uncertain and very difficult to predict,
including new information that may emerge concerning the severity of the
coronavirus and actions to contain and treat its impacts.
[[Image Removed: mu-20200903_g5.jpg]] 34
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While all our global sites are currently operating with close to full staff and
at normal capacity levels, our facilities could be required to temporarily
curtail production levels or temporarily cease operations based on government
mandates. We may be required to, or deem it to be in the best interest of our
employees, customers, partners, suppliers, and stakeholders, to alter our
business operations in order to maintain a healthy and safe environment. It is
not clear what potential effects any such alterations or modifications may have
on our business, including effects on our customers, employees, and prospects,
or on our financial results. We are following government policies and
recommendations designed to slow the spread of COVID-19 and remain committed to
the health and safety of our team members, contractors, suppliers, customers,
distributors, and communities.
Our efforts to respond to the COVID-19 outbreak include the following:
•We have put health screenings in place, required physical distancing, established team separation protocols, and made equipment upgrades at our facilities. We are also prohibiting visitors, have significantly decreased business travel, and are generally requiring team members to work from home where possible. Where work from home is not possible, all on-site team members must pass thermal scanning equipment to ensure they do not have an elevated body temperature and must wear a mask at all times. •To respond to changing market conditions, we have shifted some supply from markets which have experienced declines in demand, such as smartphones, consumer electronics, desktop PCs, automotive, and enterprise to markets that have experienced demand increases, such as data center, cloud server, notebooks, and gaming. •We have evaluated our supply chain and communicated with our suppliers to identify supply gaps and taken steps to ensure continuity. In some cases, we have added alternative suppliers and increased our on-hand inventory of raw materials needed in our operations. •We have added assembly and test capacity to provide redundant manufacturing capability through our network of captive operations and external partners. •We are evaluating all our construction projects across our global manufacturing operations and enacting protocols to enhance the safety of our team members, suppliers, and contractors. •We have developed strategies and are implementing measures to respond to a variety of potential economic scenarios, such as limitations on new hiring and business travel and reductions of discretionary spending. •We are working with government authorities in the jurisdictions where we operate, and continuing to monitor our operations in an effort to ensure we follow government requirements, relevant regulations, industry standards, and best practices to help safeguard our team members, while safely continuing operations at our sites across the globe. We believe these actions are appropriate and prudent to safeguard our team members, contractors, suppliers, customers, and communities, while allowing us to safely continue operations, but we cannot predict how the steps we, our team members, government entities, suppliers, or customers take in response to the COVID-19 outbreak will ultimately impact our business, outlook, or results of operations. 35 | 2020 10-K
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Results of Operations Consolidated Results For the year ended 2020 2019 2018 Revenue$ 21,435 100 %$ 23,406 100 %$ 30,391 100 % Cost of goods sold 14,883 69 % 12,704 54 % 12,500 41 % Gross margin 6,552 31 % 10,702 46 % 17,891 59 % Research and development 2,600 12 % 2,441 10 % 2,141 7 % Selling, general, and administrative 881 4 % 836 4 % 813 3 % Other operating (income) expense, net 68 - % 49 - % (57) - % Operating income 3,003 14 %
7,376 32 % 14,994 49 %
Interest income (expense), net (80) - % 77 - % (222) (1) % Other non-operating income (expense), net 60 - % (405) (2) % (465) (2) % Income tax (provision) benefit (280) (1) % (693) (3) % (168) (1) % Equity in net income (loss) of equity method investees 7 - % 3 - % (1) - % Net income attributable to noncontrolling interests (23) - % (45) - % (3) - % Net income attributable to Micron$ 2,687 13 % $
6,313 27 %
Total Revenue: Total revenue for 2020 decreased 8% as compared to 2019 primarily due to a decline in DRAM sales partially offset by an increase in NAND sales. Sales of DRAM products for 2020 decreased 14% as compared to 2019 as average selling prices declined in the mid-30% range due to challenging market conditions, partially offset by growth in bit shipments in the low-30% range driven by cloud server, enterprise server, and mobile markets. Sales of NAND products for 2020 increased 14% as compared to 2019 primarily due to increases in bit shipments in the mid-20% range driven by sales of SSDs to data center customers and sales of managed NAND products, partially offset by a high-single digit percent decline in average selling prices.The U.S. Bureau of Industry and Security ("BIS") enacted broad trade restrictions with respect toHuawei (which represented approximately 10% of our revenue in the fourth quarter of 2020 and 12% in 2019) that took effect onSeptember 15, 2020 and currently prevent us from shipping products toHuawei . We cannot predict the duration these restrictions will remain in place and whether the BIS will grant us licenses to ship products toHuawei . We may not be able to replace the lost revenue opportunities associated with such restrictions. Total revenue for 2019 decreased 23% as compared to 2018 primarily due to pricing declines resulting from the challenging memory market environment in 2019. Sales of DRAM products for 2019 decreased 28% as compared to 2018 primarily due to declines in average selling prices of approximately 30% resulting from supply and demand imbalances, customer inventory corrections, and CPU shortages. Sales of NAND products for 2019 decreased 12% as compared to 2018 primarily due to declines in average selling prices in the mid-40% range resulting from supply and demand imbalances, which were partially offset by significant increases in sales volumes. In addition, demand for our NAND products was adversely affected by the transition from SATA SSDs to NVMe SSDs. The higher NAND sales volumes in 2019 were driven by increases in sales of high-value mobile managed NAND products as well as discrete NAND products enabled by our execution in ramping 64- and 96-layerTLC 3D NAND. Overall Gross Margin: Our overall gross margin percentage decreased to 31% for 2020 from 46% for 2019, primarily due to declines in average selling prices, partially offset by the effect of decreases in non-cash depreciation expense from the revision in estimated useful lives of equipment in our NAND wafer fabrication facilities described below, cost reductions resulting from strong execution in delivering products featuring advanced technologies, and continuous improvement initiatives to reduce production costs. Our gross margins included the impact of underutilization costs at MTU of$557 million for 2020,$384 million for 2019, and$262 million for 2018. We expect underutilization costs at MTU to gradually decline through 2021 as we redeploy equipment and continue to right-size our capacity. [[Image Removed: mu-20200903_g5.jpg]] 36 -------------------------------------------------------------------------------- Our overall gross margin percentage decreased to 46% for 2019 from 59% for 2018 primarily due to declines in average selling prices partially offset by cost reductions resulting from strong execution in delivering products featuring advanced technologies and from continuous improvement initiatives to reduce production costs. We periodically assess the estimated useful lives of our property, plant, and equipment. Based on our assessment of planned technology node transitions, capital spending, and re-use rates, we revised the estimated useful lives of the existing equipment in our NAND wafer fabrication facilities and our research and development facilities from five years to seven years as of the beginning of the first quarter of 2020. The revision in estimated useful lives reduced NAND manufacturing depreciation expense by approximately$565 million in 2020, of which approximately$165 million remained capitalized in inventory as of the end of 2020. Adjusting for the effect of the reduced amount of depreciation expense remaining in inventory, the revision in estimated useful lives benefited cost of goods sold by approximately$400 million for 2020. Revenue by Business Unit For the year ended 2020 2019 2018 CNBU$ 9,184 43 %$ 9,968 43 %$ 15,252 50 % MBU 5,702 27 % 6,403 27 % 6,579 22 % SBU 3,765 18 % 3,826 16 % 5,022 17 % EBU 2,759 13 % 3,137 13 % 3,479 11 % All Other 25 - % 72 - % 59 - %$ 21,435 $ 23,406 $ 30,391
Percentages of total revenue may not total 100% due to rounding.
Changes in revenue for each business unit for 2020 as compared to 2019 were as follows:
•CNBU revenue decreased 8% primarily due to DRAM price declines driven by imbalances in supply and demand, partially offset by bit sales growth across key markets, particularly in cloud server and graphics markets. In addition, in the second quarter of 2020, we determined that the 3D XPoint technology and product roadmap are more closely aligned with our CNBU strategy than our SBU strategy and 3D XPoint became an integral part of CNBU. Accordingly, we began to report all 3D XPoint activities within CNBU from that date. •MBU revenue decreased 11% primarily due to price declines, partially offset by bit sales growth for high-value mobile MCP products. •SBU revenue decreased 2% primarily due to the decline in 3D XPoint revenue in SBU after the first quarter of 2020 as noted above and NAND selling price declines, partially offset by bit sales growth for SSDs. SBU revenue included products manufactured and sold to Intel under a long-term supply agreement at prices approximating cost, which included 3D XPoint memory and NAND, aggregating$124 million ,$682 million , and$541 million , for 2020, 2019, and 2018, respectively. •EBU revenue decreased 12% primarily due to price declines resulting from the impact of the global COVID-19 pandemic on automotive, industrial, and consumer segments partially offset by bit sales growth from transitions to an increasing mix of high-density DRAM and NAND products.
Changes in revenue for each business unit for 2019 as compared to 2018 were as follows:
•CNBU revenue decreased 35% due to challenging market conditions in 2019, which led to price declines. •MBU revenue decreased 3% primarily due to price declines offset by strong execution in developing and qualifying mobile managed NAND products and continued content growth in smartphones, which combined to drive a significant increase in shipment volumes. •SBU revenue decreased 24% primarily due to price declines, partially offset by significant growth in shipment volumes as a result of strong execution in ramping 64-layer and 96-layer TLC NAND products. •EBU revenue decreased 10% primarily due to lower sales to consumer markets as a result of weak demand and pricing, partially offset by increases in sales to automotive and industrial markets. 37 | 2020 10-K --------------------------------------------------------------------------------
Operating Income (Loss) by Business Unit
For the year ended 2020 2019 2018
CNBU $ 2,010 22 % $ 4,645 47 % $ 9,773 64 %
MBU 1,074 19 % 2,606 41 % 3,033 46 %
SBU 36 1 % (386) (10) % 964 19 %
EBU 301 11 % 923 29 % 1,473 42 %
All Other (2) (8) % 13 18 % - - %
$ 3,419 $ 7,801 $ 15,243 Percentages reflect operating income (loss) as a percentage of revenue for each business unit.
Changes in operating income or loss for each business unit for 2020 as compared to 2019 were as follows:
•CNBU operating income decreased primarily due to declines in DRAM pricing and MTU underutilization costs in 2020 related to 3D XPoint. •MBU operating income decreased primarily due to declines in low-power DRAM and NAND pricing, partially offset by increases in sales of high-value MCP products and manufacturing cost reductions. •SBU operating margin improved primarily due to lower 3D XPoint underutilization costs, manufacturing cost reductions, increases in sales volumes, and improved product mix, partially offset by declines in selling prices. •EBU operating income decreased as a result of declines in pricing, partially offset by increases in sales volumes to the automotive and industrial markets.
Changes in operating income or loss for each business unit for 2019 as compared to 2018 were as follows:
•CNBU operating income decreased primarily due to declines in pricing and higher R&D costs, partially offset by manufacturing cost reductions. •MBU operating income decreased primarily due to declines in pricing partially offset by increases in sales of high-value managed NAND products and manufacturing cost reductions. •SBU operating margin declined primarily due to declines in pricing, which were partially offset by manufacturing cost reductions and increases in sales volumes. SBU operating results for 2019 and 2018 were adversely impacted by the underutilization costs at IMFT. •EBU operating income decreased as a result of declines in pricing and higher R&D costs partially offset by manufacturing cost reductions and increases in sales volumes.
Operating Expenses and Other
Research and Development: R&D expenses vary primarily with the number of development and pre-qualification wafers processed, amounts reimbursed under R&D cost-sharing agreements, the cost of advanced equipment dedicated to new product and process development, and personnel costs. Because of the lead times necessary to manufacture our products, we typically begin to process wafers before completion of performance and reliability testing. Development of a product is deemed complete when it is qualified through reviews and tests for performance and reliability. R&D expenses can vary significantly depending on the timing of product qualification. R&D expenses for 2020 were 7% higher as compared to 2019 primarily due to increases in volumes of development and pre-qualification wafers, a reduction of R&D reimbursements from our partners, increases in employee compensation, and increases in subcontractor expense, partially offset by lower depreciation expense from the revision of the estimated useful lives of equipment. R&D expenses were reduced by$110 million in 2020 due to the revision of the estimated useful lives of equipment. R&D expenses for 2019 were 14% higher as compared to 2018 primarily due to decreases in reimbursements from our R&D cost-sharing arrangements, increases in depreciation expense as a result of increases in capital spending, and increases in employee compensation. [[Image Removed: mu-20200903_g5.jpg]] 38 -------------------------------------------------------------------------------- We shared the cost of certain product and process development activities with development partners, including agreements to jointly develop NAND and 3D XPoint technologies with Intel. We substantially completed our cost-sharing agreements with Intel to develop 3D NAND and 3D XPoint technology in 2019 and 2020, respectively. Our R&D expenses were reduced by$60 million for 2019 and$201 million for 2018 from reimbursements under these arrangements. Reimbursements were not significant in 2020. Selling, General, and Administrative: SG&A expenses for 2020 were 5% higher as compared to 2019 due to increases in employee compensation and legal costs, partially offset by a reduction in consulting fees. SG&A expenses for 2019 were 3% higher as compared to 2018 primarily due to increases in legal costs and consulting fees, partially offset by a reduction in employee compensation and sales commissions.
Income Taxes: Our income tax (provision) benefit consisted of the following: For the year ended
2020 2019 2018
Income tax (provision) benefit, excluding items below
(530)
(163) (173) (68) Repatriation Tax, net of adjustments related to uncertain tax positions
-
10 (1,030)
Release of the valuation allowance on net deferred tax
assets of our
-
- 1,337
Remeasurement of deferred tax assets and liabilities
reflecting lower
- - (133)
$ (280) $ (693) $ (168)
Effective tax rate 9.4 % 9.8 % 1.2 %
Our income tax provision decreased in 2020 as compared to 2019 primarily as a
result of reductions in our profit before tax. Our effective tax rate increased
in 2019 as compared to 2018 primarily as a result of the Foreign Minimum Tax. In
December 2017 , the United States enacted the Tax Cuts and Jobs Act (the "Tax
Act"), which imposed a one-time transition tax in 2018 (the "Repatriation Tax")
and, beginning in 2019, created a new minimum tax on certain foreign earnings
(the "Foreign Minimum Tax"). We recognize the Foreign Minimum Tax in the period
the tax is incurred.
We operate in a number of jurisdictions outside the United States , including
Singapore , where we have tax incentive arrangements. These incentives expire, in
whole or in part, at various dates through 2034 and are conditional, in part,
upon meeting certain business operations and employment thresholds. The effect
of tax incentive arrangements reduced our tax provision by $215 million
(benefiting our diluted earnings per share by $0.19 ) for 2020, by $756 million
($0.66 per diluted share) for 2019, and by $1.96 billion ($1.59 per diluted
share) for 2018.
(See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Income Taxes.")
Other: Interest expense for 2020 increased 52% as compared to 2019 primarily due to an increase in the average level of outstanding debt obligations in 2020 as compared to 2019 and to a reduction in the amount of interest expense capitalized in 2020 as compared to 2019 resulting from lower levels of capital projects in process. Interest income for 2020 decreased 44% as compared to 2019 as a result of decreases in interest rates, partially offset by higher average levels of cash and investment balances. Interest expense for 2019 decreased 63% as compared to 2018 primarily due to prepayments, repurchases, and conversions of debt and to an increase in the amount of interest expense capitalized from higher levels of capital spending, partially offset by increases in debt obligations. Interest income for 2019 increased 71% as compared to 2018 primarily due to increases in interest rates. 39 | 2020 10-K -------------------------------------------------------------------------------- Further discussion of other operating and non-operating income and expenses can be found in the following notes contained in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements": •Equity Plans •Research and Development •Other Operating Income (Expense), Net •Other Non-Operating Income (Expense), Net
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from operations and financing obtained from capital markets and financial institutions. Cash generated from operations is highly dependent on selling prices for our products, which can vary significantly from period to period. We are continuously evaluating alternatives for efficiently funding our capital expenditures and ongoing operations. We expect, from time to time, to engage in a variety of financing transactions for such purposes, including the issuance of securities. As ofSeptember 3, 2020 ,$2.50 billion was available to draw under our Revolving Credit Facility. We expect that our cash and investments, cash flows from operations, and available financing will be sufficient to meet our requirements at least through the next 12 months. To develop new product and process technology, support future growth, achieve operating efficiencies, and maintain product quality, we must continue to invest in manufacturing technologies, facilities and equipment, and R&D. We estimate capital expenditures in 2021 for property, plant, and equipment, net of partner contributions, to be approximately$9 billion , focused on technology transitions and product enablement, and expect the timing of our capital expenditures to be more heavily weighted toward the first half of 2021. Actual amounts for 2021 will vary depending on market conditions. As ofSeptember 3, 2020 , we had purchase obligations of approximately$2.95 billion for the acquisition of property, plant, and equipment, of which approximately$2.76 billion is expected to be paid within one year. Our Board of Directors has authorized the discretionary repurchase of up to$10 billion of our outstanding common stock through open-market purchases, block trades, privately-negotiated transactions, derivative transactions, and/or pursuant to a Rule 10b5-1 trading plan. The repurchase authorization has no expiration date, does not obligate us to acquire any common stock, and is subject to market conditions and our ongoing determination of the best use of available cash. ThroughSeptember 3, 2020 , we had repurchased an aggregate of$2.84 billion of the authorized amount. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Equity." Cash and marketable investments totaled$9.19 billion as ofSeptember 3, 2020 and$9.12 billion as ofAugust 29, 2019 . Our investments consist primarily of bank deposits, money market funds, and liquid investment-grade, fixed-income securities, which are diversified among industries and individual issuers. To mitigate credit risk, we invest through high-credit-quality financial institutions and by policy generally limit the concentration of credit exposure by restricting the amount of investments with any single obligor. As ofSeptember 3, 2020 ,$3.30 billion of our cash and marketable investments was held by our foreign subsidiaries. Cash Flows: For the year ended 2020 2019 2018 Net cash provided by operating activities$ 8,306 $ 13,189 $ 17,400 Net cash provided by (used for) investing activities (7,589) (10,085) (8,216) Net cash provided by (used for) financing activities (317) (2,438) (7,776) Effect of changes in currency exchange rates on cash, cash equivalents, and restricted cash 11 26 (37) Net increase in cash, cash equivalents, and restricted cash$ 411 $ 692 $ 1,371 Operating Activities: Cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation expense, amortization of intangible assets, and stock-based compensation, and the effects of changes in operating assets and liabilities. The decrease in cash provided by operating activities for 2020 and 2019 was primarily due to lower net income compared with the prior period and changes in working capital. [[Image Removed: mu-20200903_g5.jpg]] 40 -------------------------------------------------------------------------------- Investing Activities: For 2020, net cash used for investing activities consisted primarily of$7.91 billion of expenditures for property, plant, and equipment (net of partner contributions), partially offset by$415 million of net inflows from sales, maturities, and purchases of available-for-sale securities. For 2019, net cash used for investing activities consisted primarily of$9.03 billion of expenditures for property, plant, and equipment (net of partner contributions) and$1.17 billion of net outflows from sales, maturities, and purchases of available-for-sale securities.
For 2018, net cash used for investing activities consisted primarily of
Financing Activities: For 2020, net cash used for financing activities consisted primarily of$4.37 billion of cash payments to reduce our debt, including$2.50 billion to pay down borrowings under our Revolving Credit Facility,$621 million for IMFT Member Debt repayments,$534 million to prepay our 2025 Notes,$266 million to settle conversions of notes, and$248 million for scheduled repayment of finance leases;$744 million for the acquisition of Intel's noncontrolling interest in IMFT; and$176 million for the acquisition of 3.6 million shares of our common stock under our$10 billion share repurchase authorization. Cash used for financing activities was partially offset by proceeds of$2.50 billion from our Revolving Credit Facility,$1.25 billion from the 2023 Notes, and$1.25 billion from the 2024 Term Loan A. For 2019, net cash used for financing activities consisted primarily of$2.66 billion for the acquisition of 67 million shares of treasury stock under our$10 billion share repurchase authorization and cash payments to reduce our debt, including$1.65 billion to settle conversions of notes,$728 million to prepay the 2022 Term Loan B,$316 million for IMFT Member Debt repayments, and$643 million for scheduled repayment of other notes and capital leases. Cash used for financing activities was partially offset by net proceeds of$3.53 billion from the aggregate issuance of the 2024 Notes, 2026 Notes, 2027 Notes, 2029 Notes, and 2030 Notes. For 2018, net cash used for financing activities consisted primarily of cash payments to reduce our debt, including$9.42 billion to prepay or repurchase debt and settle conversions of notes and$774 million for scheduled repayment of other notes and capital leases. Cash used for financing activities was partially offset by net proceeds of$1.36 billion from the issuance of 34 million shares of our common stock for$41.00 per share in a public offering and$1.01 billion of proceeds from IMFT Member Debt.
See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Debt."
Potential Settlement Obligations of Convertible Notes: See "Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Debt - 2032D Convertible Senior Notes."
41 | 2020 10-K
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Contractual Obligations:
Payments Due by Period
Less than 1 More than 5
As of September 3, 2020 Total year 1-3 years 3-5 years years
Notes payable(1) $ 7,522 $ 417 $ 1,805 $ 1,972 $ 3,328
Finance lease obligations(1) 589 90 160 91 248
Operating lease obligations(2) 707 70 134 102 401
Purchase obligations(3) 5,987 4,398 871 128 590
Other long-term liabilities(4) 358 168 161 12 17
Total $ 15,163 $ 5,143 $ 3,131 $ 2,305 $ 4,584
(1)Amounts include principal and interest.
(2)Amounts include contractually obligated minimum lease payments for operating
leases having an initial noncancelable term in excess of one year.
(3)Purchase obligations include all commitments to purchase goods or services of
either a fixed or minimum quantity that meet any of the following criteria: (1)
they are noncancelable, (2) we would incur a penalty if the agreement was
canceled, or (3) we must make specified minimum payments even if we do not take
delivery of the contracted products or services. If the obligation to purchase
goods or services is noncancelable, the entire value of the contract was
included in the above table. If the obligation is cancelable, but we would incur
a penalty if canceled, only the dollar amount of the penalty was included as a
purchase obligation. Contracted minimum amounts specified in any take-or-pay
contracts were included in the above table as they represent the portion of each
contract that is a firm commitment. Purchase obligations also included $838
million for leases that have been executed but have not yet commenced. Such
amounts will be reclassified as lease obligations in the table above at the time
such assets become available for our use.
(4)Amounts represent future cash payments to satisfy other long-term liabilities
recorded on our consolidated balance sheet, including $168 million for the
current portion of these long-term liabilities. We are unable to reliably
estimate the timing of future certain payments related to uncertain tax
positions and deferred tax liabilities; therefore, the amount has been excluded
from the preceding table. However, other noncurrent liabilities recorded on our
consolidated balance sheet included these uncertain tax positions and deferred
tax liabilities.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity
with U.S. GAAP requires management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, expenses, and related
disclosures. Estimates and judgments are based on historical experience,
forecasted events, and various other assumptions that we believe to be
reasonable under the circumstances. Estimates and judgments may vary under
different assumptions or conditions. We evaluate our estimates and judgments on
an ongoing basis. Our management believes the accounting policies below are
critical in the portrayal of our financial condition and results of operations
and require management's most difficult, subjective, or complex judgments.
Business acquisitions: Accounting for acquisitions requires us to estimate the
fair value of consideration paid and the individual assets and liabilities
acquired, which involves a number of judgments, assumptions, and estimates that
could materially affect the amount and timing of costs recognized in subsequent
periods. Accounting for acquisitions can also involve significant judgment to
determine when control of the acquired entity is transferred. We typically
obtain independent third-party valuation studies to assist in determining fair
values, including assistance in determining future cash flows, discount rates,
and comparable market values. Items involving significant assumptions,
estimates, and judgments include the following:
•Debt, including discount rate and timing of payments;
•Deferred tax assets, including projections of future taxable income and tax
rates;
•Fair value of consideration paid or transferred;
•Intangible assets, including valuation methodology, estimations of future
revenue and costs, profit allocation rates attributable to the acquired
technology, and discount rates;
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•Inventory, including estimated future selling prices, timing of product sales,
and completion costs for work in process; and
•Property, plant, and equipment, including determination of values in a
continued-use model.
Consolidation: We have interests in entities that are Variable Interest Entities
("VIEs"). Determining whether to consolidate a VIE requires judgment in
assessing whether an entity is a VIE and if we are the entity's primary
beneficiary. If we are the primary beneficiary of a VIE, we are required to
consolidate it. To determine if we are the primary beneficiary, we evaluate
whether we have the power to direct the activities that most significantly
impact the VIE's economic performance and the obligation to absorb losses or the
right to receive benefits of the VIE that could potentially be significant to
the VIE. Our evaluation includes identification of significant activities and an
assessment of our ability to direct those activities based on governance
provisions and arrangements to provide or receive product and process
technology, product supply, operations services, equity funding, financing, and
other applicable agreements and circumstances. Our assessments of whether we are
the primary beneficiary of our VIEs require significant assumptions and
judgments.
Contingencies: We are subject to the possibility of losses from various
contingencies. Significant judgment is necessary to estimate the probability and
amount of a loss, if any, from such contingencies. An accrual is made when it is
probable that a liability has been incurred or an asset has been impaired and
the amount of loss can be reasonably estimated. In accounting for the resolution
of contingencies, significant judgment may be necessary to estimate amounts
pertaining to periods prior to the resolution that are charged to operations in
the period of resolution and amounts related to future periods.
Goodwill and intangible assets: We test goodwill for impairment in our fourth
quarter each year, or more frequently if indicators of an impairment exist, to
determine whether it is more likely than not that the fair value of the
reporting unit with goodwill is less than its carrying value. For reporting
units for which this assessment concludes that it is more likely than not that
the fair value is more than its carrying value, goodwill is considered not
impaired and we are not required to perform the goodwill impairment test.
Qualitative factors considered in this assessment include industry and market
considerations, overall financial performance, and other relevant events and
factors affecting the fair value of the reporting unit. For reporting units for
which this assessment concludes that it is more likely than not that the fair
value is below the carrying value, goodwill is tested for impairment by
determining the fair value of each reporting unit and comparing it to the
carrying value of the net assets assigned to the reporting unit. If the fair
value of the reporting unit exceeds its carrying value, goodwill is considered
not impaired. If the carrying value of the reporting unit exceeds its fair
value, we would record an impairment loss up to the difference between the
carrying value and implied fair value.
Determining when to test for impairment, the reporting units, the assets and
liabilities of the reporting unit, and the fair value of the reporting unit
requires significant judgment and involves the use of significant estimates and
assumptions. These estimates and assumptions include revenue growth rates,
forecasted manufacturing costs, and other expenses and are developed as part of
our long-range planning process. The same estimates are used in business
planning, forecasting, and capital budgeting as part of our long-term
manufacturing capacity analysis. We test the reasonableness of the output of our
long-range planning process by calculating an implied value per share and
comparing that to current stock prices, analysts' consensus pricing, and
management's expectations. These estimates and assumptions are used to calculate
projected future cash flows for the reporting unit, which are discounted using a
risk-adjusted rate to estimate a fair value. The discount rate requires
determination of appropriate market comparables. We base fair value estimates on
assumptions we believe to be reasonable but that are unpredictable and
inherently uncertain. Actual future results may differ from those estimates.
We test other identified intangible assets with definite useful lives when
events and circumstances indicate the carrying value may not be recoverable by
comparing the carrying amount to the sum of undiscounted cash flows expected to
be generated by the asset. We test intangible assets with indefinite lives
annually for impairment using a fair value method such as discounted cash flows.
Estimating fair values involves significant assumptions, including future sales
prices, sales volumes, costs, and discount rates.
Income taxes: We are required to estimate our provision for income taxes and
amounts ultimately payable or recoverable in numerous tax jurisdictions around
the world. These estimates involve significant judgment and interpretations of
regulations and are inherently complex. Resolution of income tax treatments in
individual jurisdictions may not be known for many years after completion of the
applicable year. We are also required to evaluate the realizability of our
deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which
43 | 2020 10-K
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requires the assessment of our performance and other relevant factors.
Realization of deferred tax assets is dependent on our ability to generate
future taxable income. In recent periods, our results of operations have
benefited from increases in the amount of deferred taxes we expect to realize,
primarily from the levels of capital spending and increases in the amount of
taxable income we expect to realize in Japan and the United States . Our income
tax provision or benefit is dependent, in part, on our ability to forecast
future taxable income in these and other jurisdictions. Such forecasts are
inherently difficult and involve significant judgments including, among others,
projecting future average selling prices and sales volumes, manufacturing and
overhead costs, levels of capital spending, and other factors that significantly
impact our analyses of the amount of net deferred tax assets that are more
likely than not to be realized.
Inventories: Inventories are stated at the lower of average cost or net
realizable value. Cost includes depreciation, labor, material, and overhead
costs, including product and process technology costs. Determining net
realizable value of inventories involves significant judgments, including
projecting future average selling prices and future sales volumes. To project
average selling prices and sales volumes, we review recent sales volumes,
existing customer orders, current contract prices, industry analyses of supply
and demand, seasonal factors, general economic trends, and other
information. When these analyses reflect estimated net realizable values below
our manufacturing costs, we record a charge to cost of goods sold in advance of
when inventories are actually sold. Differences in forecasted average selling
prices used in calculating lower of cost or net realizable value adjustments can
result in significant changes in the estimated net realizable value of product
inventories and accordingly the amount of write-down recorded. For example, a 5%
variance in the estimated selling prices would have changed the estimated net
realizable value of our inventory by approximately $525 million as of
September 3, 2020 . Due to the volatile nature of the semiconductor memory and
storage markets, actual selling prices and volumes often vary significantly from
projected prices and volumes; as a result, the timing of when product costs are
charged to operations can vary significantly.
U.S. GAAP provides for products to be grouped into categories in order to
compare costs to net realizable values. The amount of any inventory write-down
can vary significantly depending on the determination of inventory categories.
We review the major characteristics of product type and markets in determining
the unit of account for which we perform the lower of average cost or net
realizable value analysis and categorize all inventories (including DRAM, NAND,
and other memory) as a single group.
Property, plant, and equipment: We periodically assess the estimated useful
lives of our property, plant, and equipment based on technology node
transitions, capital spending, and equipment re-use rates. Based on our
assessment of planned technology node transitions, capital spending, and re-use
rates, we revised the estimated useful lives of the existing equipment in our
NAND wafer fabrication facilities and our research and development ("R&D")
facilities from five years to seven years as of the beginning of the first
quarter of 2020. See "Item 8. Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Property, Plant, and Equipment."
We also review the carrying value of property, plant, and equipment for
impairment when events and circumstances indicate that the carrying value of an
asset or group of assets may not be recoverable from the estimated future cash
flows expected to result from its use and/or disposition. In cases where
undiscounted expected future cash flows are less than the carrying value, an
impairment loss is recognized equal to the amount by which the carrying value
exceeds the estimated fair value of the assets. The estimate of future cash
flows involves numerous assumptions which require significant judgment by us,
including, but not limited to, future use of the assets for our operations
versus sale or disposal of the assets, future selling prices for our products,
and future production and sales volumes. In addition, significant judgment is
required in determining the groups of assets for which impairment tests are
separately performed.
Research and development: Costs related to the conceptual formulation and design
of products and processes are expensed as R&D as incurred. Determining when
product development is complete requires significant judgment. We deem
development of a product complete once the product has been thoroughly reviewed
and tested for performance and reliability. Subsequent to product qualification,
product costs are included in cost of goods sold.
Revenue recognition: Revenue is primarily recognized at a point in time when
control of the promised goods is transferred to our customers in an amount that
reflects the consideration we expect to be entitled to in exchange for those
goods. Contracts with our customers are generally short-term in duration at
fixed, negotiated prices with payment generally due shortly after delivery. We
estimate a liability for returns using the expected value method
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based on historical rates of return. In addition, we generally offer price
protection to our distributors, which is a form of variable consideration that
decreases the transaction price. We use the expected value method, based on
historical price adjustments and current pricing trends, to estimate the amount
of revenue recognized from sales to distributors. Differences between the
estimated and actual amounts are recognized as adjustments to revenue.
Stock-based compensation: Stock-based compensation is estimated at the grant
date based on the fair value of the award and is recognized as expense using the
straight-line amortization method over the requisite service period. For
performance-based stock awards, the expense recognized is dependent on our
assessment of the likelihood of the performance measure being achieved. We
utilize forecasts of future performance to assess these probabilities and this
assessment requires significant judgment.
Determining the appropriate fair-value model and calculating the fair value of
stock-based awards at the grant date requires significant judgment, including
estimating stock price volatility and expected option life. We develop these
estimates based on historical data and market information which can change
significantly over time. A small change in the estimates used can result in a
relatively large change in the estimated valuation. We use the Black-Scholes
option valuation model to value employee stock options and awards granted under
our employee stock purchase plan. We estimate stock price volatility based on an
average of historical volatility and the implied volatility derived from traded
options on our stock.
Recently Adopted Accounting Standards
See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Recently Adopted Accounting Standards."
Recently Issued Accounting Standards
See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Recently Issued Accounting Standards."
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