ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended September 1, 2022. 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 to August 31. Fiscal 2022 and 2021 contained 52 weeks and fiscal 2020 contained 53 weeks. Our fourth quarter of fiscal 2020 contained 14 weeks and all other fiscal quarters in the years presented contained 13 weeks. All tabular dollar amounts are in millions, except per share amounts.
For an overview of our business and certain related trends, see “Part I – Item 1. Business – Overview.”
Results of Operations
Consolidated Results
Restructure and asset impairments 48 — % 488 2 % 60 — %
Other operating (income) expense, net (34) — % 95 — % 8 — %
Interest income (expense), net (93) — % (146) (1) % (80) — %
Other non-operating income (expense), net (38) — % 81 — % 60 — %
Income tax (provision) benefit (888) (3) % (394) (1) % (280) (1) %
Equity in net income (loss) of equity method investees 4 — % 37 — % 7 — %
Net income attributable to noncontrolling interests — — % — — % (23) — %
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Total Revenue: Total revenue for 2022 increased 11% as compared to 2021 primarily due to increases in sales of both DRAM and NAND products.
•Sales of DRAM products increased 12% primarily due to increases in bit shipments of slightly over 10%.
•Sales of NAND products increased 11% primarily due to a high-single-digit percent increase in bit shipments and a low-single-digit percent increase in average selling prices.
In the fourth quarter of 2022, the memory and storage industry environment deteriorated sharply due to global and macroeconomic challenges combined with downward inventory adjustments by customers, leading to significant reductions in bit shipments and average selling prices for both DRAM and NAND resulting in a 23% decline in revenue as compared to the third quarter of 2022. For the first quarter of 2023, continuation of these challenging conditions and inventory adjustments by customers have resulted in further reductions in near-term demand for both DRAM and NAND and we expect bit shipments and pricing to decline as compared to the fourth quarter of 2022.
Total revenue for 2021 increased 29% as compared to 2020 primarily due to increases in sales of both DRAM and NAND products.
•Sales of DRAM products increased 38% primarily due to growth in bit shipments in the high-20% range and a high single-digit percent increase in average selling prices.
•Sales of NAND products increased 14% primarily due to increases in bit shipments in the high-20% range, partially offset by a decline in average selling prices of slightly over 10%.
Consolidated Gross Margin:Our consolidated gross margin percentage increased to 45% for 2022 from 38% for 2021, as a result of improvements in margins for both DRAM and NAND products, primarily due to reductions in manufacturing costs. Manufacturing cost reductions were driven by strong execution in ramping our 1α DRAM and 176-layer NAND technology nodes. Our consolidated gross margin percentage declined to 39% in the fourth quarter of 2022 from 47% in the third quarter of 2022 and we expect that in the first quarter of 2023 the percentage will decline further due to decreases in average selling prices as a result of the challenging industry environment for memory and storage products. To address our elevated inventory levels and reduce supply growth, in the first quarter of 2023, we are selectively reducing facility utilization in both DRAM and NAND. We also expect that inflationary pressure will continue to be a headwind to costs in the first quarter of 2023.
Our consolidated gross margin percentage increased to 38% for 2021 from 31% for 2020, primarily due to the increases in DRAM average selling prices and cost reductions resulting from strong execution in delivering products featuring advanced technologies, partially offset by declines in NAND average selling prices. Our gross margins included the impact of underutilization costs at MTU of $335 million for 2021 and $557 million for 2020. Underutilization costs at MTU declined in 2021 primarily due to the plan to sell MTU’s Lehi facility and classification of assets as held for sale at the end of the second quarter of 2021, which resulted in the cessation of depreciation on those assets. See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Lehi, Utah Fab and 3D XPoint.”
Effective as of the beginning of the second quarter of 2021, we changed our method of inventory costing from average cost to first-in, first-out (“FIFO”). Concurrently, as of the beginning of the second quarter of 2021, we modified our inventory cost absorption processes used to estimate inventory values, which affects the timing of when costs are recognized. These changes resulted in a one-time increase to cost of goods sold of approximately $293 million in 2021.
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Revenue by Business Unit
Percentages of total revenue may not total 100% due to rounding.
Changes in revenue for each business unit for 2022 as compared to 2021 were as follows:
•CNBU revenue increased 12% primarily due to increases in bit shipments to cloud, enterprise, and networking markets.
•MBU revenue was relatively unchanged as both DRAM and NAND revenue was relatively flat.
•EBU revenue increased 24% primarily due to strong demand growth in industrial and automotive markets.
•SBU revenue increased 15% primarily due to higher average selling prices and increases in shipments of SSD products.
Changes in revenue for each business unit for 2021 as compared to 2020 were as follows:
•CNBU revenue increased 34% primarily due to broad-based increases in bit shipments across markets and higher average selling prices for DRAM.
•MBU revenue increased 26% primarily due to increases in bit shipments for high-value mobile MCP products.
•EBU revenue increased 53% primarily due to increases in bit shipments driven by strong demand growth in automotive, industrial, and consumer markets and improved pricing in industrial and consumer markets.
•SBU revenue increased 6% as increases in bit shipments for NAND products outpaced declines in average selling prices.
Operating Income (Loss) by Business Unit
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 2022 as compared to 2021 were as follows:
•CNBU operating income increased primarily due to higher bit shipments and manufacturing cost reductions.
•MBU operating income was relatively unchanged as slight increases in gross margins were offset by higher operating expenses.
•EBU operating income increased primarily due to manufacturing cost reductions from an increasing mix of leading-edge bits, higher bit shipments, and improved DRAM pricing in industrial and consumer markets, partially offset by higher R&D expenses.
•SBU operating income increased primarily due to improved product mix driving increases in average selling prices, increases in SSD shipments, and manufacturing cost reductions, partially offset by higher R&D expenses.
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Changes in operating income or loss for each business unit for 2021 as compared to 2020 were as follows:
•CNBU operating income increased primarily due to increases in bit shipments, higher average selling prices, manufacturing cost reductions, and lower MTU underutilization costs.
•MBU operating income increased primarily due to increases in sales of high-value MCP products, manufacturing cost reductions for low-power DRAM, and increases in DRAM bit shipments.
•EBU operating income increased primarily due to improved pricing in industrial and consumer markets, cost reductions from an increasing mix of leading-edge bits, and higher bit shipments.
•SBU operating income increased primarily due to lower manufacturing costs and increases in bit shipments, partially offset by decreases in selling prices and higher R&D costs.
Operating Expenses and Other
Research and Development: R&D expenses vary primarily with the number of development and pre-qualification wafers processed, 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 internal reviews and tests for performance and reliability. R&D expenses can vary significantly depending on the timing of product qualification.
R&D expenses for 2022 increased 17% as compared to 2021 primarily due to higher employee compensation from increases in headcount, higher volumes of development and prequalification wafers, and higher depreciation expense. R&D expenses for 2021 increased 2% as compared to 2020 primarily due to increases in employee compensation and depreciation expense resulting from higher capital spending, partially offset by lower volumes of development and prequalification wafers.
Selling, General, and Administrative: SG&A expenses for 2022 were 19% higher as compared to 2021 primarily due to increases in employee compensation, professional services, and legal fees. SG&A expenses for 2021 were relatively unchanged as compared to 2020.
Restructure and Asset Impairments: In the first quarter of 2022, we sold our Lehi, Utah facility to TI. In 2021, the Lehi facility was classified as held for sale and we recognized a restructure charge of $435 million to write down the assets held for sale to the expected consideration to be received under our agreement with TI. For further discussion see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Lehi, Utah Fab and 3D XPoint.”
Interest Income (Expense): Net interest expense for 2022 decreased by $53 million as compared to 2021 primarily due to an increase of $59 million in interest income as a result of increases in interest rates on our cash and investments. Net interest expense for 2021 increased by $66 million as compared to 2020 primarily due to a decrease of $77 million in interest income as a result of decreases in interest rates on our cash and investments.
Income Taxes: Our income tax (provision) benefit consisted of the following:
Income tax (provision) benefit (888) (394) (280)
Effective tax rate 9.3 % 6.3 % 9.4 %
Our effective tax rate increased in 2022 as compared to 2021 primarily due to the geographic mix of our earnings and a valuation allowance recorded against our Idaho deferred tax assets of $189 million, partially offset by tax impacts of changes in foreign currency exchange rates. Our effective tax rate decreased in 2021 as compared to 2020 primarily as a result of a $104 million tax benefit recorded for the discrete $435 million charge to write down the Lehi assets held for sale.
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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 $1.12 billion (benefiting our diluted earnings per share by $1.00) for 2022, by $758 million ($0.66 per diluted share) for 2021, and by $215 million ($0.19 per diluted share) for 2020.
Beginning in 2023, provisions in the Tax Cuts and Jobs Act of 2017 will require us to capitalize and amortize R&D expenditures rather than deducting the costs as incurred. Unless the effective date is deferred or the law is repealed, we expect an increase to our effective tax rate for several years. In addition, the mix of our income, together with U.S. and foreign tax rules, results in taxes becoming more fixed at lower profitability levels. As a result of these factors, we estimate tax expense of at least $300 million for 2023. Beyond this level, our actual tax expense will depend on the level of operating income through the year.
Beginning in 2024, the Inflation Reduction Act of 2022 imposes a 15% book minimum tax on corporations with three-year average annual adjusted financial statement income exceeding $1 billion. We are in the process of assessing whether the book minimum tax would impact our effective tax rate.
Various tax reforms are being considered in multiple jurisdictions that, if enacted, contain provisions that could increase our tax expense. We continue to monitor the potential impact of these various tax reform proposals to our overall global effective tax rate and financial statements.
See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Income Taxes.”
Other:Further information can be found in “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Other Operating (Income) Expense, Net”; “ – Other Non-Operating Income (Expense), Net”; and other notes to the financial statements.
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. Cash and marketable investments totaled $10.98 billion as of September 1, 2022, and $10.40 billion as of September 2, 2021. Our cash and 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 of September 1, 2022, $3.79 billion of our cash and marketable investments was held by our foreign subsidiaries.
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 of September 1, 2022, $2.50 billion was available to draw under our Revolving Credit Facility. Funding of certain significant capital projects is also dependent on the receipt of government incentives, which are subject to conditions and may not be obtained.
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 2023 for property, plant, and equipment, net of partner contributions, to be around $8 billion. Actual amounts for 2023 will vary depending on market conditions. As of September 1, 2022, we had purchase obligations of approximately $4.04 billion for the acquisition of property, plant, and equipment, of which approximately $2.97 billion is expected to be paid within one year. For a description of other contractual obligations, such as debt, leases, and purchase obligations, see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Debt,” “ – Leases,” and “ – Commitments.”
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To support expected memory demand in the second half of the decade, we will need to add new DRAM wafer capacity. Following the enactment of the CHIPS Act in 2022, we announced plans to invest in two leading-edge memory manufacturing fabs in the United States, contingent on CHIPS Act support through grants and investment tax credits. As part of this plan, in September 2022, we broke ground on a leading-edge memory manufacturing fab in Boise, Idaho. Construction of the fab is expected to begin in calendar 2023 with DRAM production targeted to start in calendar 2025. In addition, in October 2022, we announced plans to build a second leading-edge DRAM manufacturing fab in Clay, New York. We plan to start site preparation work in calendar 2023 and expect construction to begin in calendar 2024, with production anticipated to ramp in the latter half of the decade. We expect these new fabs to fulfill our requirements for additional wafer capacity starting in the second half of the decade and beyond, in line with industry demand trends.
On November 1, 2021, we issued $1 billion in aggregate principal amount of unsecured 2032 Green Bonds. Over time, we plan to allocate an amount equal to the net proceeds to fund eligible sustainability-focused projects involving renewable energy, green buildings, energy efficiency, water management, waste abatement, and a circular economy.
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 Rule 10b5-1 trading plans. 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. Through September 1, 2022, we have repurchased an aggregate of $6.47 billion of the authorized amount. See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Equity.”
On September 29, 2022, our Board of Directors declared a quarterly dividend of $0.115 per share, payable in cash on October 26, 2022, to shareholders of record as of the close of business on October 11, 2022. The declaration and payment of any future cash dividends are at the discretion and subject to the approval of our Board of Directors. Our Board of Directors' decisions regarding the amount and payment of dividends will depend on many factors, including, but not limited to, our financial condition, results of operations, capital requirements, business conditions, debt service obligations, contractual restrictions, industry practice, legal requirements, regulatory constraints, and other factors that our Board of Directors may deem relevant.
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 and thereafter for the foreseeable future.
Cash Flows
Net cash provided by (used for) investing activities (11,585) (10,589) (7,589)
Net cash provided by (used for) financing activities (2,980) (1,781) (317)
Operating Activities: Cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation expense, amortization of intangible assets, asset impairments, and stock-based compensation, and the effects of changes in operating assets and liabilities. The increase in cash provided by operating activities for 2022 as compared to 2021 was primarily due to higher net income adjusted for non-cash items and the effect of lower receivables, partially offset by an increase in inventories.
The increase in cash provided by operating activities for 2021 as compared to 2020 was primarily due to higher net income adjusted for non-cash items and the effect of lower inventories, partially offset by an increase in receivables due to a higher level of sales.
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Investing Activities: For 2022, net cash used for investing activities consisted primarily of $12.07 billion of expenditures for property, plant, and equipment; inflows of $115 million of partner contributions for capital expenditures; $888 million of net inflows from the sale of the Lehi, Utah fab; and $155 million of net outflows from purchases, sales, and maturities of available-for-sale securities.
For 2021, net cash used for investing activities consisted primarily of $10.03 billion of expenditures for property, plant, and equipment, partially offset by inflows of $502 million of partner contributions for capital expenditures, and $1.06 billion of net outflows from purchases, sales, and maturities of available-for-sale securities.
For 2020, net cash used for investing activities consisted primarily of $8.22 billion of expenditures for property, plant, and equipment, partially offset by inflows of $272 million of partner contributions for capital expenditures, and $415 million of net inflows from purchases, sales, and maturities of available-for-sale securities.
Financing Activities: For 2022, net cash used for financing activities included $2.43 billion for the acquisition of 35.4 million shares of our common stock under our share repurchase authorization, $2.03 billion of repayments of debt primarily to redeem the 2023 Notes and 2024 Notes, $461 million of cash payments of dividends to shareholders, and $141 million of payments on equipment purchase contracts. Cash used for financing activities was partially offset by aggregate proceeds of $2.00 billion from the issuance of the unsecured 2032 Green Bonds, 2041 Notes, and 2051 Notes.
For 2021, net cash used for financing activities consisted primarily of $1.20 billion for the acquisition of 15.6 million shares of our common stock under our share repurchase authorization, $295 million of payments on equipment purchase contracts, $185 million of cash payments to settle conversions of our 2032D Notes, and $147 million of repayments of finance leases and other debt. In addition, we received proceeds of $1.19 billion under an unsecured 2024 Term Loan A and used the proceeds to repay the $1.19 billion Extinguished 2024 Term Loan A.
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 repayments of IMFT’s debt obligations to Intel, $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 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 Extinguished 2024 Term Loan A.
See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Debt.”
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 and involve a significant level of uncertainty. 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.
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.
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Goodwill: 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. Our qualitative assessment for the current year indicated that the fair value for all of our reporting units substantially exceeded their carrying value and that a quantitative assessment was unnecessary.
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.
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 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. Our income tax provision or benefit is dependent, in part, on our ability to forecast future taxable income in Japan, the United States, Malaysia, 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 cost or net realizable value, with cost being determined on a FIFO basis. Effective as of the beginning of the second quarter of 2021, we changed our method of inventory costing from average cost to FIFO. 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. Actual selling prices and volumes may vary significantly from projected prices and volumes due to the volatile nature of the semiconductor memory and storage markets. 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. As a result, the timing of when product costs are charged to costs of goods sold can vary significantly. 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 $337 million as of September 1, 2022. 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.
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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. 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.
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 based on historical returns. 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.
Recently Adopted Accounting Standards
No material items.
Recently Issued Accounting Standards
No material items.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness and our investment portfolio. As of September 1, 2022 and September 2, 2021, we had fixed-rate debt with an aggregate carrying value of $4.03 billion and $3.89 billion, respectively, and as a result, the fair value of our debt fluctuates with changes in market interest rates. In 2022, we issued new debt and repaid other debt, which significantly increased the average remaining maturity of our fixed-rate debt resulting in increased variability of its fair value from interest rate changes. We estimate that, as of September 1, 2022 and September 2, 2021, a hypothetical 1% decrease in market interest rates would increase the fair value of our fixed-rate debt by approximately $275 million and $200 million, respectively.
Interest rate risk related to our investment portfolio is managed by primarily investing in shorter term securities. As of September 1, 2022, a hypothetical 1% increase in interest rates would decrease the fair value of our portfolio by approximately $30 million. Such impact would only be realized if investments were sold prior to maturity.
As of September 1, 2022 and September 2, 2021, we had floating-rate debt and fixed-rate debt that is swapped to floating-rate debt with an aggregate principal amount of $2.09 billion. A hypothetical 1% increase in the interest rates of this floating-rate debt would result in an increase in annual interest expense of approximately $21 million as of September 1, 2022 and September 2, 2021.
Foreign Currency Exchange Rate Risk
The information in this section should be read in conjunction with the information related to changes in the currency exchange rates in “Part I – Item 1A. Risk Factors.” Changes in currency exchange rates could materially adversely affect our results of operations or financial condition.
The functional currency for all of our operations is the U.S. dollar. The substantial majority of our sales are transacted in the U.S. dollar; however, significant amounts of our operating expenditures and capital purchases, and certain assets and liabilities, are incurred in or exposed to other currencies, primarily the euro, Malaysian ringgit, New Taiwan dollar, Singapore dollar, and yen. We have established currency risk management programs for our monetary assets and liabilities denominated in foreign currencies to hedge against fluctuations in the fair value and volatility of future cash flows caused by changes in currency exchange rates. We generally utilize currency forward contracts in these hedging programs, which reduce, but do not always entirely eliminate, the impact of currency exchange rate movements. We do not use derivative financial instruments for trading or speculative purposes.
Based on monetary assets and liabilities denominated in foreign currencies, we estimate that a hypothetical 10% adverse change in exchange rates versus the U.S. dollar would result in losses of approximately $186 million as of September 1, 2022 and $122 million as of September 2, 2021. We hedge our exposure to changes in currency exchange rates by utilizing a rolling hedge strategy for our primary currency exposures with currency forward contracts that generally mature within three months. The effectiveness of our hedges is dependent, among other factors, upon our ability to accurately measure exposures on a timely basis. To hedge the exposure of changes in cash flows from changes in currency exchange rates for certain capital expenditures and manufacturing costs, we may utilize currency forward contracts that generally mature within two years. See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Derivative Instruments.”
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Consolidated Statements of Operations 54
Consolidated Statements of Comprehensive Income 55
Consolidated Balance Sheets 56
Consolidated Statements of Changes in Equity 57
Consolidated Statements of Cash Flows 58
Notes to Consolidated Financial Statements 59
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 88
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Micron Technology, Inc.
Consolidated Statements of Operations
(In millions, except per share amounts)
Restructure and asset impairments 48 488 60
Other operating (income) expense, net (34) 95 8
Other non-operating income (expense), net (38) 81 60
Income tax (provision) benefit (888) (394) (280)
Equity in net income (loss) of equity method investees 4 37 7
Net income attributable to noncontrolling interests — — (23)
Earnings per share
Number of shares used in per share calculations
See accompanying notes to consolidated financial statements.
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Micron Technology, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
Other comprehensive income (loss), net of tax
Gains (losses) on derivative instruments (516) (67) 46
Gains (losses) on investments (48) (7) 1
Foreign currency translation adjustments (1) 2 —
Pension liability adjustments 3 3 15
Other comprehensive income (loss) (562) (69) 62
Comprehensive income attributable to noncontrolling interests — — (23)
Comprehensive income attributable to Micron $ 8,125 $ 5,792 $ 2,749
See accompanying notes to consolidated financial statements.
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Micron Technology, Inc.
Consolidated Balance Sheets
(In millions, except par value amounts)
Assets
Assets held for sale 13 974
Long-term marketable investments 1,647 1,765
Operating lease right-of-use assets 678 551
Liabilities and equity
Accounts payable and accrued expenses $ 6,090 $ 5,325
Noncurrent operating lease liabilities 610 504
Noncurrent unearned government incentives 589 808
Other noncurrent liabilities 835 559
Commitments and contingencies
Shareholders’ equity
Accumulated other comprehensive income (loss) (560) 2
See accompanying notes to consolidated financial statements.
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Micron Technology, Inc.
Consolidated Statements of Changes in Equity
(In millions, except per share amounts)
Micron Shareholders
Numberof Shares Amount
Other comprehensive income (loss), net — — — — — 62 62 — 62
Stock-based compensation expense — — 328 — — — 328 — 328
Repurchase of stock - repurchase program — — — — (176) — (176) — (176)
Settlement of capped calls — — 98 — (98) — — — —
Acquisitions of noncontrolling interest — — 120 — — — 120 (904) (784)
Cash settlement of convertible notes — — (56) — — — (56) — (56)
Other comprehensive income (loss), net — — — — — (69) (69) — (69)
Stock-based compensation expense — — 378 — — — 378 — 378
Repurchase of stock - repurchase program — — — — (1,200) — (1,200) — (1,200)
Stock issued for convertible notes 11 1 (1) — — — — — —
Cash settlement of convertible notes — — (52) — — — (52) (52)
Other comprehensive income (loss), net — — — — — (562) (562) — (562)
Stock-based compensation expense — — 514 — — — 514 — 514
Repurchase of stock - repurchase program — — — — (2,432) — (2,432) — (2,432)
See accompanying notes to consolidated financial statements.
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Micron Technology, Inc.
Consolidated Statements of Cash Flows
(In millions)
Cash flows from operating activities
Depreciation expense and amortization of intangible assets 7,116 6,214 5,650
(Gain) loss on debt repurchases and conversions 83 1 (40)
Restructure and asset impairments 44 454 40
Change in operating assets and liabilities:
Accounts payable and accrued expenses 744 210 725
Cash flows from investing activities
Expenditures for property, plant, and equipment (12,067) (10,030) (8,223)
Purchases of available-for-sale securities (1,770) (3,163) (1,857)
Proceeds from maturities of available-for-sale securities 1,321 1,250 814
Proceeds from sale of Lehi, Utah fab 888 — —
Proceeds from sales of available-for-sale securities 294 856 1,458
Proceeds from government incentives 115 495 262
Net cash provided by (used for) investing activities (11,585) (10,589) (7,589)
Cash flows from financing activities
Repurchases of common stock - repurchase program (2,432) (1,200) (176)
Payments of dividends to shareholders (461) — —
Payments on equipment purchase contracts (141) (295) (63)
Acquisition of noncontrolling interest in IMFT — — (744)
Net cash provided by (used for) financing activities (2,980) (1,781) (317)
Supplemental disclosures
Income taxes paid, net $ (493) $ (361) $ (167)
Interest paid, net of amounts capitalized (154) (171) (165)
Noncash equipment acquisitions on contracts payable 157 289 171
See accompanying notes to consolidated financial statements.
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Micron Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in millions, except per share amounts)
Significant Accounting Policies
Basis of Presentation
We are an industry leader in innovative memory and storage solutions transforming how the world uses information to enrich life for all. With a relentless focus on our customers, technology leadership, and manufacturing and operational excellence, Micron delivers a rich portfolio of high-performance DRAM, NAND, and NOR memory and storage products through our Micron® and Crucial® brands. Every day, the innovations that our people create fuel the data economy, enabling advances in artificial intelligence and 5G applications that unleash opportunities — from the data center to the intelligent edge and across the client and mobile user experience.
The accompanying consolidated financial statements include the accounts of Micron Technology, Inc. and our consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America.Intercompany balances and transactions have been eliminated in consolidation.Certain reclassifications have been made to prior period amounts to conform to current period presentation. See
“Inventories” below for changes to our significant accounting policies, and the “Inventories” note for additional
information.
Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Fiscal 2022 and 2021 each contained 52 weeks and fiscal 2020 contained 53 weeks. Our fourth quarter of fiscal 2020 contained 14 weeks and all other fiscal quarters in the years presented contained 13 weeks. All period references are to our fiscal periods unless otherwise indicated.
Derivative and Hedging Instruments
We use derivative instruments to manage our exposure to changes in currency exchange rates from (1) our monetary assets and liabilities denominated in currencies other than the U.S. dollar and (2) forecasted cash flows for certain capital expenditures and manufacturing costs. We also use derivative instruments to manage our exposure to changes in commodity prices for manufacturing supplies and to minimize certain exposures to changes in the fair value of fixed-rate debt that result from fluctuations in benchmark interest rates. Derivative instruments are measured at their fair values and recognized as either assets or liabilities.
The accounting for changes in the fair value of derivative instruments is based on the intended use of the derivative and the resulting designation. For derivative instruments that are not designated for hedge accounting, gains or losses from changes in fair values are recognized in other non-operating income (expense). For derivative instruments designated as cash flow hedges, gains or losses are included as a component of accumulated other comprehensive income and reclassified into earnings in the same line items and in the same periods in which the underlying transactions affect earnings. For derivative instruments designated as cash flow hedges, time value is excluded from the assessment of effectiveness and the gains and losses attributable to time value are recognized in earnings. For derivative instruments designated as fair value hedges, changes in the fair values of the derivative instruments and the offsetting changes in the fair values of the underlying hedged items are both recognized in earnings.
We enter into master netting arrangements with our counterparties to mitigate credit risk in derivative hedge transactions. These master netting arrangements allow us and our counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled with each counterparty have been presented in our consolidated balance sheet on a net basis.
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Financial Instruments
Cash equivalents include highly liquid short-term investments with original maturities to us of three months or less that are readily convertible to known amounts of cash. Other investments with remaining maturities of less than one year are included in short-term investments. Investments with remaining maturities greater than one year are included in long-term marketable investments. The carrying value of investment securities sold is determined using the specific identification method.
Functional Currency
The U.S. dollar is the functional currency for us and all of our consolidated subsidiaries.
Goodwill
We perform an annual impairment assessment for goodwill in our fourth quarter each year.
Government Incentives
We receive incentives from governmental entities related to expenses, assets, and other activities. Our government incentives may require that we meet or maintain specified spending levels and other operational metrics and may be subject to reimbursement if such conditions are not met or maintained. Government incentives are recorded in the financial statements in accordance with their purpose: as a reduction of expenses, a reduction of asset costs, or other income. Incentives related to specific operating activities are offset against the related expense in the period the expense is incurred. Incentives related to the acquisition or construction of fixed assets are recognized as a reduction in the carrying amounts of the related assets and reduce depreciation expense over the useful lives of the assets. Other incentives are recognized as other operating income. Government incentives received prior to being earned are recognized in current or noncurrent deferred income or restricted cash, whereas government incentives earned prior to being received are recognized in current or noncurrent receivables. Cash received from government incentives related to operating expenses is included as an operating activity in the statement of cash flows, whereas cash received from incentives related to the acquisition of property, plant, and equipment is included as an investing activity.
Inventories
Effective as of the beginning of the second quarter of 2021, we changed the method of inventory costing from average cost to FIFO. The difference between average cost and FIFO was not material to any previously reported financial statements. Therefore, we have recognized the cumulative effect of the change as a reduction of inventories and a charge to cost of goods sold of $133 million as of the beginning of the second quarter of 2021.
Inventories are stated at the lower of cost or net realizable value, with cost being determined on a FIFO basis. Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs. When net realizable value (which requires projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories) is below cost, we record a charge to cost of goods sold to write down inventories to their estimated net realizable value in advance of when inventories are actually sold. We review the major characteristics of product type and markets in determining the unit of account for which we perform the lower of cost or net realizable value analysis and categorize all inventories (including DRAM, NAND, and other memory) as a single group. We remove amounts from inventory and charge such amounts to cost of goods sold on a FIFO basis.
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Leases
We determine if an arrangement is a lease, or contains a lease, at the inception of the arrangement and evaluate whether the lease is an operating lease or a finance lease at the commencement date. We recognize right-of-use assets and lease liabilities for operating and finance leases with terms greater than 12 months. Right-of-use assets represent our right to use an asset for the lease term, while lease liabilities represent our obligation to make lease payments. We do not separate lease and non-lease components for real-estate and gas plant leases. Sublease income is included within lease expense.
Product and Process Technology
Costs incurred to (1) acquire product and process technology, (2) patent technology, and (3) maintain patent technology, are capitalized and amortized on a straight-line basis over periods ranging up to 12.5 years. We capitalize a portion of costs incurred to patent technology based on historical data of patents issued as a percent of patents we file. Product and process technology costs are amortized over the shorter of (1) the estimated useful life of the technology, (2) the patent term, or (3) the term of the technology agreement. Fully-amortized assets are removed from product and process technology and accumulated amortization.
Product Warranty
We generally provide a limited warranty that our products are in compliance with applicable specifications existing at the time of delivery. Under our standard terms and conditions of sale, liability for certain failures of product during a stated warranty period is usually limited to repair or replacement of defective items or return of, or a credit with respect to, amounts paid for such items. Under certain circumstances, we provide more extensive limited warranty coverage than that provided under our standard terms and conditions. Our warranty obligations are not material.
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost and depreciated using the straight-line method over estimated useful lives of generally 10 to 30 years for buildings, 5 to 7 years for equipment, and 3 to 5 years for software. Assets held for sale are carried at the lower of estimated fair value or carrying value and are included in current assets. When property, plant, or equipment is retired or otherwise disposed, the net book value is removed and we recognize any gain or loss in results of operations.
We capitalize interest on borrowings during the period of time we carry out the activities necessary to bring assets to the condition of their intended use and location. Capitalized interest becomes part of the cost of assets.
Research and Development
Costs related to the conceptual formulation and design of products and processes are charged to R&D expense as incurred. Development of a product is deemed complete when it is qualified through reviews and tests for performance and reliability. Subsequent to product qualification, product costs are included in cost of goods sold. Amounts from cost-sharing arrangements are reflected as a reduction of R&D expense.
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 based on historical returns. 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.
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Stock-based Compensation
Stock-based compensation is measured at the grant date, based on the fair value of the award, and recognized as expense under the straight-line attribution method over the requisite service period. We account for forfeitures as they occur. We issue new shares upon the exercise of stock options, conversion of share units, or issuance of shares under our ESPP.
Treasury Stock
Treasury stock is carried at cost. When we retire our treasury stock, any excess of the repurchase price paid over par value is allocated between additional capital and retained earnings.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires our 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 differ under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. Actual results could differ from estimates.
Lehi, Utah Fab and 3D XPoint
In the second quarter of 2021, we updated our portfolio strategy to further strengthen our focus on memory and storage innovations for the data center market. In connection therewith, we determined that there was insufficient market validation to justify the ongoing investments required to commercialize 3D XPoint at scale. Accordingly, we ceased development of 3D XPoint technology and engaged in discussions with potential buyers for the sale of our facility located in Lehi, Utah that was dedicated to 3D XPoint production. As a result, we classified the property, plant, and equipment as held for sale as of the second quarter of 2021 and ceased depreciating the assets. On June 30, 2021, we announced a definitive agreement to sell our Lehi facility to TI and closed the sale on October 22, 2021.
In the first quarter of 2022, we received $893 million from TI for the sale of the Lehi facility and disposed of $918 million of net assets, consisting primarily of property, plant, and equipment of $921 million; $55 million of other assets, consisting primarily of a receivable for reimbursement of property taxes, equipment spare parts, and raw materials; and $58 million of liabilities, consisting primarily of a finance lease obligation. As a result of the disposition of the Lehi facility and other related adjustments, we recognized a loss of $23 million included in restructure and asset impairments in the first quarter of 2022.
In 2021, we recognized a charge of $435 million included in restructure and asset impairments in connection with the definitive agreement with TI (and a tax benefit of $104 million included in income tax (provision) benefit) to write down the assets held for sale to the expected consideration, net of estimated selling costs. The impairment charge was based on Level 3 inputs including expected consideration and the composition of assets included in the sale, which were derived from the agreement with TI. We also recognized a charge of $49 million to cost of goods sold in 2021 to write down 3D XPoint inventory due to our decision to cease further development of this technology. Our 3D XPoint technology development and Lehi facility operations were primarily included in our CNBU segment results.
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As of September 2, 2021, the significant balances of assets held for sale in connection with our Lehi facility were as follows:
Property, plant, and equipment $ 1,334
Other current assets 50
Impairment (435)
Lehi assets held for sale $ 949
As of September 2, 2021, we also had a $50 million finance lease obligation included in the current portion of long-term debt and $11 million of other liabilities that were subsequently transferred with the sale. As of September 2, 2021, the carrying value of the Lehi assets held for sale approximated the expected cash consideration, net of estimated selling expenses.
Variable Interest Entities
We have interests in entities that are variable interest entities (“VIEs”). 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.
Through the first quarter of 2020, IMFT, which operated a facility in Lehi, Utah, was a VIE because all of its costs were passed to us and its other member, Intel, through product purchase agreements and because IMFT was dependent upon us or Intel for additional cash requirements. The primary activities of IMFT were driven by the constant introduction of product and process technology. Because we performed a significant majority of the technology development, we had the power to direct its key activities. We consolidated IMFT due to this power and our obligation to absorb losses and the right to receive benefits from IMFT that could have been potentially significant to it.
In the first quarter of 2020, we paid $1.25 billion to acquire Intel’s noncontrolling interest in IMFT and settle IMFT’s debt obligations to Intel, at which time IMFT became a wholly-owned subsidiary. In connection therewith, we recognized a $160 million adjustment to equity for the difference between the $744 million of cash consideration allocated to Intel’s noncontrolling interest and its $904 million carrying value.
IMFT manufactured semiconductor products exclusively for its members under a long-term supply agreement at prices approximating cost. In 2020, IMFT manufactured 3D XPoint memory and its sales to Intel were $158 million through the date of our purchase of Intel’s noncontrolling interest.
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Cash and Investments
All of our marketable debt investments were classified as available-for-sale as of the dates noted below. Cash and equivalents and the fair values of our available-for-sale investments, which approximated amortized costs, were as follows:
Cash, cash equivalents, and restricted cash $ 8,339 $ 7,829
(1)The maturities of long-term marketable securities primarily range fromone tofour years.
(2)The fair value of Level 1 securities is measured based on quoted prices in active markets for identical assets.
(3)The fair value of Level 2 securities is measured using information obtained from pricing services, which obtain quoted market prices for similar instruments, non-binding market consensus prices that are corroborated by observable market data, or various other methodologies, to determine the appropriate value at the measurement date. We perform supplemental analysis to validate information obtained from these pricing services. No adjustments were made to the fair values indicated by such pricing information as of September 1, 2022 or September 2, 2021.
(4)Restricted cash is included in other current assets and other noncurrent assets and primarily relates to certain government incentives received prior to being earned and for which restrictions lapse upon achieving certain performance conditions.
Gross realized gains and losses from sales of available-for-sale securities were not significant for any period presented.
Non-marketable Equity Investments
In addition to the amounts included in the table above, we had $222 million and $153 million of non-marketable equity investments without a readily determinable fair value that were included in other noncurrent assets as of September 1, 2022 and September 2, 2021, respectively. We recognized net gains in other non-operating income on these non-marketable investments of $36 million and $70 million for 2022 and 2021, respectively. These gains primarily resulted from adjustments of these investments to the value indicated by transactions in the same or similar investments.
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Receivables
Inventories
Raw materials and supplies 805 505
Effective as of the beginning of the second quarter of 2021, we changed our method of inventory costing from average cost to FIFO. This change in accounting principle is preferable because in an environment with continuously changing production costs FIFO more closely matches the actual cost of goods sold with the revenues from sales of those specific units, better represents the actual cost of inventories remaining on hand at any period-end, and improves comparability with our semiconductor industry peers. The change to FIFO was not material to any prior periods, nor was the cumulative effect of $133 million material to the second quarter of 2021. As such, prior periods were not retrospectively adjusted, and the cumulative effect was reported as an increase to cost of goods sold for the second quarter of 2021 of $133 million, with an offsetting reduction to beginning inventories. This charge resulted in a corresponding reduction to operating income, a $128 million reduction to net income, and an $0.11 reduction to diluted earnings per share for both the second quarter and the year ended 2021.
Property, Plant, and Equipment
(1)Includes costs related to equipment not placed into service of $3.35 billion as of September 1, 2022 and $1.99 billion as of September 2, 2021.
(2)Includes building-related construction, tool installation, and software costs for assets not placed into service.
Depreciation expense was $7.03 billion, $6.13 billion, and $5.57 billion for 2022, 2021, and 2020, respectively. Interest capitalized as part of the cost of property, plant, and equipment was $77 million, $66 million, and $77 million for 2022, 2021, and 2020, respectively.
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Intangible Assets and Goodwill
As of GrossAmount AccumulatedAmortization GrossAmount AccumulatedAmortization
In 2022, 2021, and 2020, we capitalized $158 million, $106 million, and $73 million, respectively, for product and process technology with weighted-average useful lives of 9 years, 9 years, and 10 years, respectively. Amortization expense was $85 million, $82 million, and $78 million for 2022, 2021, and 2020, respectively. Expected amortization expense is $83 million for 2023, $72 million for 2024, $52 million for 2025, $43 million for 2026, and $37 million for 2027.
Leases
We have finance and operating leases through which we obtain the right to use facilities, land, and equipment that support our business operations. Our finance leases consist primarily of gas or other supply agreements that are deemed to contain embedded leases. Our operating leases consist primarily of offices, laboratories, other facilities, and land. Certain of our operating leases include one or more options to extend the lease term for periods from one year to 10 years for real estate and one year to 30 years for land.
Certain supply or service agreements require us to exercise significant judgment to determine whether the agreement contains a lease. Our assessment includes determining whether we or the supplier control the assets used to fulfill the agreements by identifying whether we or the supplier have the right to change the type, quantity, timing, or location of the output of the assets. Our gas supply arrangements generally are deemed to contain a lease because we have the right to substantially all of the output of the assets used to produce the supply and we have the right to change the quantity and timing of the output of those assets. In determining the lease term, we assess whether we are reasonably certain to exercise any options to renew or terminate a lease or to purchase the right-of-use asset. Measuring the present value of the initial lease liability requires judgment to determine the discount rate, which we base on interest rates for borrowings with similar terms and collateral issued by entities with credit ratings similar to ours.
The components of lease cost are presented below:
Finance lease cost
Amortization of right-of-use asset $ 99 $ 69 $ 140
Interest on lease liability 24 20 22
(1)Operating lease cost includes short-term and variable lease expenses, which were not material for the periods presented.
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Supplemental cash flow information related to leases was as follows:
Cash flows used for operating activities
Cash flows used for financing activities – Finance leases 103 85 248
Noncash acquisitions of right-of-use assets
(1)Includes $48 million of reimbursements received for tenant improvements for 2020.
Supplemental balance sheet information related to leases was as follows:
Weighted-average remaining lease term (in years)
Operating leases 12 12
Weighted-average discount rate
As of September 1, 2022, maturities of lease liabilities were as follows:
For the year ending Finance Leases Operating Leases
Less imputed interest (131) (140)
The table above excludes obligations for leases that have been executed but have not yet commenced. As of September 1, 2022, excluded obligations consisted of $212 million of finance lease obligations over a weighted-average period of 14 years for gas supply arrangements deemed to contain embedded leases. We will recognize right-of-use assets and associated lease liabilities at the time such assets become available for our use.
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Accounts Payable and Accrued Expenses
Property, plant, and equipment 2,170 1,887
Salaries, wages, and benefits 877 984
Debt
Net Carrying Amount Net Carrying Amount
(1) In 2021, we entered into fixed-to-floating interest rate swaps on the 2027 Notes with an aggregate $900 million notional amount equal to the principal amount of the 2027 Notes. The resulting variable interest paid is at a rate equal to SOFR plus approximately 3.33%. The fixed-to-floating interest rate swaps are accounted for as fair value hedges, as a result, the carrying values of our 2027 Notes reflect adjustments in fair value.
As of September 1, 2022, all of our debt, other than our finance leases, are unsecured obligations that rank equally in right of payment with all of our other existing and future unsecured indebtedness and are effectively subordinated to all future secured indebtedness, to the extent of the value of the assets securing such indebtedness. As of September 1, 2022, Micron had unsecured debt with a carrying value of $6.02 billion that was structurally subordinated to all liabilities of its subsidiaries, including trade payables. The terms of our indebtedness generally contain cross payment default and cross acceleration provisions. Micron’s guarantees of certain liabilities of its subsidiaries are unsecured obligations ranking equally in right of payment with all of Micron’s other existing and future unsecured indebtedness.
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Senior Unsecured Notes
On November 1, 2021, we issued $2.00 billion aggregate principal amount of unsecured 2032 Green Bonds, 2041 Notes, and 2051 Notes in a public offering. Issuance costs for these notes were $14 million. Over time, we plan to allocate an amount equal to the net proceeds of the 2032 Green Bonds to fund eligible sustainability-focused projects involving renewable energy, green buildings, energy efficiency, water management, waste abatement, and a circular economy.
We may redeem our 2026 Notes, 2027 Notes, 2029 Notes, 2030 Notes, 2032 Green Bonds, 2041 Notes, and 2051 Notes (the “Senior Unsecured Notes”), in whole or in part, at our option prior to their respective maturity date at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the present value of the remaining scheduled payments of principal, in each case plus accrued interest. We may also redeem any series of our Senior Unsecured Notes, in whole or in part, at a price equal to par between two and six months prior to maturity in accordance with the respective terms of such series.
Each series of Senior Unsecured Notes contains covenants that, among other things, limit, in certain circumstances, our ability and/or the ability of our restricted subsidiaries (which are generally domestic subsidiaries in which we own at least 80% of the voting stock and which own principal property, as defined in the indenture governing such notes) to (1) create or incur certain liens; (2) enter into certain sale and lease-back transactions; and (3) consolidate with or merge with or into, or convey, transfer, or lease all or substantially all of our properties and assets, to another entity. These covenants are subject to a number of limitations and exceptions. Additionally, if a change of control triggering event occurs, as defined in the indentures governing our senior unsecured notes, we will be required to offer to purchase such notes at 101% of the outstanding aggregate principal amount plus accrued interest up to the purchase date.
Revolving Credit Facility
In 2021, we terminated our existing undrawn credit facility and entered into a new five-year unsecured Revolving Credit Facility. Under the Revolving Credit Facility, we can draw up to $2.50 billion which would generally bear interest at a rate equal to LIBOR plus 1.00% to 1.75%, depending on our corporate credit ratings. The credit facility agreement provides for a transition to SOFR or other alternate benchmark rate upon the retirement of LIBOR in 2023. Any amounts outstanding under the Revolving Credit Facility would mature in May 2026 and amounts borrowed may be prepaid without penalty. As of September 1, 2022, no amounts were outstanding under the Revolving Credit Facility and $2.50 billion was available to us.
Under the terms of the Revolving Credit Facility, we must maintain a leverage ratio, calculated as of the last day of each fiscal quarter, of total indebtedness to adjusted EBITDA not to exceed 3.25 to 1.00. The Revolving Credit Facility contains other covenants that, among other things, limit, in certain circumstances, our ability and/or the ability of our restricted subsidiaries to (1) create or incur certain liens and enter into sale and lease-back transactions, (2) create, assume, incur, or guarantee certain additional secured indebtedness and unsecured indebtedness of our restricted subsidiaries, and (3) consolidate with or merge with or into, or convey, transfer, lease, or otherwise dispose of all or substantially all of our assets, to another entity. These covenants are subject to a number of limitations, exceptions, and qualifications.
2024 Term Loans
In 2021, we drew $1.19 billion under an unsecured 2024 Term Loan A and used the proceeds to repay the $1.19 billion Extinguished 2024 Term Loan A. The 2024 Term Loan A bears interest at a rate equal to LIBOR plus 0.625% to 1.375% based on our current corporate credit ratings. The term loan agreement provides for a transition to SOFR or other alternate benchmark rate upon the retirement of LIBOR in 2023. The principal amount is due October 2024 and may be prepaid without penalty. The 2024 Term Loan A contains the same leverage ratio and substantially the same other covenants as the Revolving Credit Facility.
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Debt Activity
The table below presents the effects of issuances and prepayments of debt in 2022:
Issuances
Prepayments
In 2021, substantially all holders of our 2032D Notes converted their notes. We settled these conversions and all remaining 2032D Notes with $185 million in cash and 11.1 million shares of our stock, which approximated the carrying value of debt and equity for those notes.
In 2020, we recognized aggregate non-operating gains of $40 million in connection with debt prepayments and conversions of $3.77 billion of principal amount of notes (carrying value of $3.90 billion) for an aggregate of $3.92 billion in cash.
Maturities of Notes Payable
As of September 1, 2022, maturities of notes payable by fiscal year were as follows:
Unamortized discounts (27)
Hedge accounting fair value adjustment (91)
Commitments
As of September 1, 2022, we had commitments of approximately $7.1 billion for purchase obligations, of which approximately $5.4 billion will be due within one year. Purchase obligations include payments for the acquisition of property, plant, and equipment, and other goods or services of either a fixed or minimum quantity and exclude any payments for leases that have been executed but have not yet commenced.
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Contingencies
We are currently a party to legal actions other than those described below arising from the normal course of business, none of which are expected to have a material adverse effect on our business, results of operations, or financial condition.
Patent Matters
As is typical in the semiconductor and other high-tech industries, from time to time, others have asserted, and may in the future assert, that our products or manufacturing processes infringe upon their intellectual property rights.
On December 15, 2014, Innovative Memory Solutions, Inc. filed a patent infringement action against Micron in the U.S. District Court for the District of Delaware. The complaint alleges that a variety of our NAND products infringe eight U.S. patents and seeks damages, attorneys’ fees, and costs. Subsequently, six patents were invalidated or withdrawn, leaving two asserted patents in the District Court.
On March 19, 2018, Micron Semiconductor (Xi’an) Co., Ltd. (“MXA”) was served with a patent infringement complaint filed by Fujian Jinhua Integrated Circuit Co., Ltd. (“Jinhua”) in the Fuzhou Intermediate People’s Court in Fujian Province, China (the “Fuzhou Court”). On April 3, 2018, Micron Semiconductor (Shanghai) Co. Ltd. (“MSS”) was served with the same complaint. The complaint alleges that MXA and MSS infringed one Chinese patent by manufacturing and selling certain Crucial DDR4 DRAM modules. The complaint seeks an order requiring MXA and MSS to destroy inventory of the accused products and equipment for manufacturing the accused products in China; to stop manufacturing, using, selling, and offering for sale the accused products in China; and to pay damages of 98 million Chinese yuan plus court fees incurred.
On March 21, 2018, MXA was served with a patent infringement complaint filed by United Microelectronics Corporation (“UMC”) in the Fuzhou Court. On April 3, 2018, MSS was served with the same complaint. The complaint alleges that MXA and MSS infringed one Chinese patent by manufacturing and selling certain Crucial DDR4 DRAM modules. The complaint seeks an order requiring MXA and MSS to destroy inventory of the accused products and equipment for manufacturing the accused products in China; to stop manufacturing, using, selling, and offering for sale the accused products in China; and to pay damages of 90 million Chinese yuan plus court fees incurred. On November 26, 2021, pursuant to a settlement agreement between UMC and Micron, UMC filed an application to the Fuzhou Court to withdraw its complaints against MXA and MSS.
On April 3, 2018, MSS was served with another patent infringement complaint filed by Jinhua and an additional complaint filed by UMC in the Fuzhou Court. The additional complaints allege that MSS infringes two Chinese patents by manufacturing and selling certain Crucial MX300 SSDs. The complaint filed by UMC seeks an order requiring MSS to destroy inventory of the accused products and equipment for manufacturing the accused products in China; to stop manufacturing, using, selling, and offering for sale the accused products in China; and to pay damages of 90 million Chinese yuan plus court fees incurred. The complaint filed by Jinhua seeks an order requiring MSS to destroy inventory of the accused products and equipment for manufacturing the accused products in China; to stop manufacturing, using, selling, and offering for sale the accused products in China; and to pay damages of 98 million Chinese yuan plus court fees incurred. On November 26, 2021, pursuant to a settlement agreement between UMC and Micron, UMC filed an application to the Fuzhou Court to withdraw its complaint against MSS.
On July 5, 2018, MXA and MSS were notified that the Fuzhou Court granted a preliminary injunction against those entities that enjoins them from manufacturing, selling, or importing certain Crucial and Ballistix-branded DRAM modules and solid-state drives in China. We are complying with the ruling and have requested the Fuzhou Court to reconsider or stay its decision.
On May 4, 2020, Flash-Control, LLC filed a patent infringement action against Micron in the U.S. District Court for the Western District of Texas. The complaint alleges that four U.S. patents are infringed by unspecified DDR4 SDRAM, NVRDIMM, NVDIMM, 3D XPoint, and/or SSD products that incorporate memory controllers and flash memory. The complaint seeks damages, attorneys’ fees, and costs. On July 21, 2020, in a separate matter, the District Court ruled that two of the four asserted patents are invalid, and on July 14, 2021, the U.S. Court of Appeals for the Federal Circuit affirmed the ruling of invalidity.
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On April 28, 2021, Netlist, Inc. (“Netlist”) filed two patent infringement actions against Micron, Micron Semiconductor Products, Inc. (“MSP”) and Micron Technology Texas, LLC (“MTEC”) in the U.S. District Court for the Western District of Texas. The first complaint alleges that one U.S. patent is infringed by certain of our non-volatile dual in-line memory modules. The second complaint alleges that three U.S. patents are infringed by certain of our load-reduced dual in-line memory modules (“LRDIMMs”). Each complaint seeks injunctive relief, damages, attorneys’ fees, and costs. On March 31, 2022, Netlist filed a patent infringement complaint against Micron and Micron Semiconductor Germany, GmbH in Dusseldorf Regional Court alleging that two German patents are infringed by certain of our LRDIMMs. The complaint seeks damages and costs. On June 24, 2022, Netlist amended its complaint to also seek injunctive relief. On June 10, 2022, Netlist filed a patent infringement complaint against Micron, MSP, and MTEC in the U.S. District Court for the Eastern District of Texas (“E.D. Tex.”) alleging that six U.S. patents are infringed by certain of our memory modules and HBM products. The complaint seeks injunctive relief, damages, and attorneys’ fees. On August 1, 2022, Netlist filed a second patent infringement complaint against Micron, MSP, and MTEC in E.D. Tex. alleging that one U.S. patent is infringed by certain of our LRDIMMs. On August 15, 2022, Netlist amended the second complaint to assert that two additional U.S. patents are infringed by certain of our LRDIMMs. The second complaint in E.D. Tex. seeks injunctive relief, damages, and attorneys’ fees.
On May 10, 2021, Vervain, LLC filed a patent infringement action against Micron, MSP, and MTEC in the U.S. District Court for the Western District of Texas. The complaint alleges that four U.S. patents are infringed by certain SSD products. The complaint seeks injunctive relief, damages, attorneys’ fees, and costs.
On April 27, 2022, Bell Semiconductor, LLC (“Bell”) filed a patent infringement action against Micron in the U.S. District Court for the District of Idaho. The complaint alleges that one U.S. patent is infringed by a certain SSD controller. On April 28, 2022, Bell filed a complaint with the U.S. International Trade Commission (“ITC”) alleging violations of Section 337 of the Tariff Act of 1930 based on alleged importation of articles and components that infringe the same U.S. patent that Bell asserts in the complaint it filed in the District of Idaho. At Bell’s request, the ITC investigation was terminated on August 30, 2022. On August 26, 2022, Bell filed a second patent infringement complaint in the District of Idaho alleging that two U.S. patents are infringed by a certain SSD controller. On September 30, 2022, Bell filed a complaint against Micron in the U.S. District Court for the District of Delaware alleging that six U.S. patents are infringed by certain SSD, GDDR5, GDDR6, GDDR6X, and DDR3 SDRAM products. On October 5, 2022, Bell filed a third complaint against Micron in the District of Idaho alleging that one U.S. patent is infringed by Micron’s process for designing a NAND flash device included in certain Micron SSD products. Each of Bell’s complaints in the District Courts seeks damages, injunctive relief, attorneys’ fees, and costs. On October 6, 2022, Bell filed a complaint with the ITC alleging violations of Section 337 of the Tariff Act of 1930 based on alleged importation of certain SSDs that infringe two U.S. patents also asserted by Bell in two of the lawsuits pending in the District of Idaho. The complaint requests institution of an investigation and, after the investigation, issuance of a limited exclusion order and cease and desist orders prohibiting Micron from importing, selling, offering for sale, or marketing the accused products in the United States.
On August 16, 2022, Sonrai Memory Ltd. filed a patent infringement action against Micron in the U.S. District Court for the Western District of Texas. The complaint alleges that two U.S. patents are infringed by certain SSD and NAND flash products. The complaint seeks damages, attorneys’ fees, and costs.
Among other things, the above lawsuits pertain to substantially all of our DRAM, NAND, and other memory and storage products we manufacture, which account for substantially all of our revenue.
Qimonda
On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda’s insolvency proceedings, filed suit against Micron and Micron Semiconductor B.V. (“Micron B.V.”), in the District Court of Munich, Civil Chamber. The complaint seeks to void, under Section 133 of the German Insolvency Act, a share purchase agreement between Micron B.V. and Qimonda signed in fall 2008, pursuant to which Micron B.V. purchased substantially all of Qimonda’s shares of Inotera (the “Inotera Shares”), representing approximately 18% of Inotera’s outstanding shares at that time, and seeks an order requiring us to re-transfer those shares to the Qimonda estate. The complaint also seeks, among other things, to recover damages for the alleged value of the joint venture relationship with Inotera and to terminate, under Sections 103 or 133 of the German Insolvency Code, a patent cross-license between us and Qimonda entered into at the same time as the share purchase agreement.
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Following a series of hearings with pleadings, arguments, and witnesses on behalf of the Qimonda estate, on March 13, 2014, the court issued judgments: (1) ordering Micron B.V. to pay approximately $1 million in respect of certain Inotera Shares sold in connection with the original share purchase; (2) ordering Micron B.V. to disclose certain information with respect to any Inotera Shares sold by it to third parties; (3) ordering Micron B.V. to disclose the benefits derived by it from ownership of the Inotera Shares, including in particular, any profits distributed on the Inotera Shares and all other benefits; (4) denying Qimonda’s claims against Micron for any damages relating to the joint venture relationship with Inotera; and (5) determining that Qimonda’s obligations under the patent cross-license agreement are canceled. In addition, the court issued interlocutory judgments ordering, among other things: (1) that Micron B.V. transfer to the Qimonda estate the Inotera Shares still owned by Micron B.V. and pay to the Qimonda estate compensation in an amount to be specified for any Inotera Shares sold to third parties; and (2) that Micron B.V. pay the Qimonda estate as compensation an amount to be specified for benefits derived by Micron B.V. from ownership of the Inotera Shares. The interlocutory judgments had no immediate, enforceable effect and Micron, accordingly, has been able to continue to operate with full control of the Inotera Shares subject to further developments in the case. Micron and Micron B.V. appealed the judgments to the German Appeals Court, which thereafter appointed an independent expert to perform an evaluation of Dr. Jaffé’s claims that the amount Micron paid for Qimonda was less than fair market value. On March 31, 2020, the expert presented an opinion to the Appeals Court concluding that the amount paid by Micron was within an acceptable range of fair value. On October 5, 2022, the Appeals Court ruled that the relevant issue to be addressed is whether Qimonda's creditors were prejudiced such that the original transaction should be voided. A hearing of the Appeals Court has been scheduled for December 2022.
Antitrust Matters
On April 27, 2018, a complaint was filed against Micron and other DRAM suppliers in the U.S. District Court for the Northern District of California. Subsequently, two substantially identical cases were filed in the same court. The lawsuits purported to be on behalf of a nationwide class of indirect purchasers of DRAM products. On October 28, 2019, the plaintiffs filed a consolidated, amended complaint that purported to be on behalf of a nationwide class of indirect purchasers of DRAM products. The amended complaint asserted claims based on alleged price-fixing of DRAM products under federal and state law during the period from June 1, 2016 to at least February 1, 2018, and sought treble monetary damages, costs, interest, attorneys’ fees, and other injunctive and equitable relief. On December 21, 2020, the District Court dismissed the plaintiffs’ claims and entered judgment against them. The plaintiffs appealed to the U.S. Court of Appeals for the Ninth Circuit. On March 7, 2022, the Court of Appeals affirmed the District Court’s ruling dismissing plaintiffs’ claims, and subsequently denied the plaintiffs’ request for rehearing. The plaintiffs did not further appeal the ruling of the Court of Appeals.
On June 26, 2018, a complaint was filed against Micron and other DRAM suppliers in the U.S. District Court for the Northern District of California. Subsequently, four substantially identical cases were filed in the same court. On October 28, 2019, the plaintiffs filed a consolidated, amended complaint. The consolidated complaint purported to be on behalf of a nationwide class of direct purchasers of DRAM products. The consolidated complaint asserted claims based on alleged price-fixing of DRAM products under federal and state law during the period from June 1, 2016 through at least February 1, 2018, and sought treble monetary damages, costs, interest, attorneys’ fees, and other injunctive and equitable relief. On January 11, 2021, the plaintiffs filed a further amended complaint asserting substantially the same claims and seeking the same relief. On September 3, 2021, the District Court granted Micron’s motion to dismiss the further amended complaint with prejudice. On October 1, 2021, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. On June 29, 2022, the Court of Appeals granted a joint motion to dismiss the plaintiffs’ appeal.
Additionally, six cases have been filed in the following Canadian courts on the dates indicated: Superior Court of Quebec (April 30, 2018 and May 3, 2018), the Federal Court of Canada (May 2, 2018), the Ontario Superior Court of Justice (May 15, 2018), and the Supreme Court of British Columbia (May 10, 2018). The plaintiffs in these cases are individuals seeking certification of class actions on behalf of direct and indirect purchasers of DRAM in Canada (or regions of Canada) between June 1, 2016 and February 1, 2018. The substantive allegations in these cases are similar to those asserted in the cases filed in the United States.
On May 15, 2018, the Chinese State Administration for Market Regulation (“SAMR”) notified Micron that it was investigating potential collusion and other anticompetitive conduct by DRAM suppliers in China. On May 31, 2018, SAMR made unannounced visits to our sales offices in Beijing, Shanghai, and Shenzhen to seek certain information as part of its investigation. We are cooperating with SAMR in its investigation.
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Securities Matters
On March 5, 2019, a derivative complaint was filed by a shareholder against certain current and former officers and directors of Micron, allegedly on behalf of and for the benefit of Micron, in the U.S. District Court for the District of Delaware alleging securities fraud, breaches of fiduciary duties, and other violations of law involving misrepresentations about purported anticompetitive behavior in the DRAM industry. The complaint seeks damages, fees, interest, costs, and other appropriate relief.
On February 9, 2021, a derivative complaint was filed by a shareholder against Sanjay Mehrotra and other current and former directors of Micron, allegedly on behalf of and for the benefit of Micron, in the U.S. District Court for the District of Delaware alleging violations of securities laws, breaches of fiduciary duties, and other violations of law involving allegedly false and misleading statements about Micron’s commitment to diversity and progress in diversifying its workforce, executive leadership, and Board of Directors. The complaint seeks damages, fees, interest, costs, and an order requiring Micron to take various actions to allegedly improve its corporate governance and internal procedures.
Other Matters
In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify another party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these types of agreements have not had a material adverse effect on our business, results of operations, or financial condition.
Contingency Assessment
We are unable to predict the outcome of any of the matters noted above and cannot make a reasonable estimate of the potential loss or range of possible losses. A determination that our products or manufacturing processes infringe the intellectual property rights of others or entering into a license agreement covering such intellectual property could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes. Any of the foregoing, as well as the resolution of any other legal matter noted above, could have a material adverse effect on our business, results of operations, or financial condition.
Equity
Common Stock Repurchases: 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 Rule 10b5-1 trading plans. 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. We repurchased 35.4 million shares of our common stock for $2.43 billion in 2022 and 15.6 million shares for $1.20 billion in 2021. Through September 1, 2022, we had repurchased an aggregate of $6.47 billion under the authorization. Amounts repurchased are included in treasury stock.
Dividends: On September 29, 2022, we announced that our Board of Directors had declared a quarterly dividend of $0.115 per share, payable in cash on October 26, 2022, to shareholders of record as of the close of business on October 11, 2022.
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Accumulated Other Comprehensive Income (Loss):Changes in accumulated other comprehensive income (loss) by component for the year ended September 1, 2022 were as follows:
Other comprehensive income before reclassifications (720) (63) 6 (1) (778)
Amount reclassified out of accumulated other comprehensive income 53 1 (2) — 52
Other comprehensive income (loss) (516) (48) 3 (1) (562)
Fair Value Measurements
The estimated fair values and carrying values of our outstanding debt instruments were as follows:
As of FairValue CarryingValue FairValue CarryingValue
The fair values of our debt instruments were estimated based on Level 2 inputs, including the trading price of our notes when available, discounted cash flows, and interest rates based on similar debt issued by parties with credit ratings similar to ours.
Assets classified as held for sale are carried at the lower of estimated fair value or carrying value. Significant judgments and assumptions are required to estimate their fair values. Actual selling prices could vary significantly from our estimated fair value and we could recognize additional losses in the event that the sales prices of assets classified as held for sale are lower than their carrying values.
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Derivative Instruments
Notional or Contractual Amount Fair Value of
Assets(1) Liabilities(2)
Derivative instruments with hedge accounting designation
Cash flow currency hedges $ 5,427 $ — $ (330)
Cash flow commodity hedges 97 1 (6)
Fair value interest rate hedges 900 — (91)
Derivative instruments without hedge accounting designation
Non-designated currency hedges 2,821 7 (13)
Derivative instruments with hedge accounting designation
Cash flow currency hedges $ 3,601 $ 10 $ (66)
Cash flow commodity hedges 45 2 —
Fair value interest rate hedges 900 5 —
Derivative instruments without hedge accounting designation
Non-designated currency hedges 996 3 (2)
(1)Included in receivables and other noncurrent assets.
(2)Included in accounts payable and accrued expenses and other noncurrent liabilities.
Derivative Instruments with Hedge Accounting Designation
Cash Flow Hedges: We utilize forward and swap contracts that generally mature within two years designated as cash flow hedges to minimize our exposure to changes in currency exchange rates or commodity prices for certain capital expenditures and manufacturing costs. Forward and swap contracts are measured at fair value based on market-based observable inputs including market spot and forward rates, interest rates, and credit-risk spreads (Level 2). We do not use derivative instruments for speculative purposes. We recognized losses from cash flow hedges of $735 million and $52 million for 2022 and 2021, respectively, and gains of $51 million for 2020, in accumulated other comprehensive income. We reclassified $53 million of losses and $41 million of gains in 2022 and 2021, respectively, from accumulated other comprehensive income to earnings, primarily to cost of goods sold. The reclassifications were not significant in 2020. As of September 1, 2022, we expect to reclassify $263 million of pre-tax losses related to cash flow hedges from accumulated other comprehensive income into earnings in the next 12 months.
Fair Value Hedges: We utilize fixed-to-floating interest rate swaps designated as fair value hedges to minimize certain exposures to changes in the fair value of fixed-rate debt that result from fluctuations in benchmark interest rates. Interest rate swaps are measured at fair value based on market-based observable inputs including interest rates and credit-risk spreads (Level 2). The changes in the fair values of derivatives designated as fair value hedges and the offsetting changes in the underlying fair values of the hedged items are both recognized in earnings. When a derivative is no longer designated as a fair value hedge for any reason, including termination and maturity, the remaining unamortized difference between the carrying value of the hedged item at that time and the face value of the hedged item is amortized to earnings over the remaining life of the hedged item, or immediately if the hedged item has matured or been extinguished. We recognized interest expense of $96 million for changes in the fair value of our interest rate swaps in 2022. We also recognized offsetting interest expense of the same amounts related to the changes in the fair value of the hedged portion of the underlying debt for these periods. The amounts recognized for 2021 were not significant.
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Derivative Instruments without Hedge Accounting Designation
Currency Derivatives: We generally utilize a rolling hedge strategy with currency forward contracts that mature within three months to hedge our exposures of monetary assets and liabilities from changes in currency exchange rates. At the end of each reporting period, monetary assets and liabilities denominated in currencies other than the U.S. dollar are remeasured into U.S. dollars and the associated outstanding forward contracts are marked to market. Currency forward contracts are valued at fair values based on the middle of bid and ask prices of dealers or exchange quotations (Level 2). Realized and unrealized gains and losses on derivative instruments without hedge accounting designation as well as the changes in the underlying monetary assets and liabilities from changes in currency exchange rates are included in other non-operating income (expense), net. The amounts recognized for derivative instruments without hedge accounting designation were not significant for the periods presented.
Derivative Counterparty Credit Risk and Master Netting Arrangements
Our derivative instruments expose us to credit risk to the extent counterparties may be unable to meet the terms of the contracts. Our maximum exposure to loss due to credit risk if counterparties fail completely to perform according to the terms of the contracts would generally equal the fair value of assets for these contracts as listed in the tables above. We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading risk across multiple financial institutions. As of September 1, 2022 and September 2, 2021, amounts netted under our master netting arrangements were not significant.
Equity Plans
As of September 1, 2022, 90 million shares of our common stock were available for future awards under our equity plans, including 18 million shares approved for issuance under our employee stock purchase plan (“ESPP”).
Restricted Stock and Restricted Stock Units (“Restricted Stock Awards”)
As of September 1, 2022, there were 23 million shares of Restricted Stock Awards outstanding, 20 million of which contained only service conditions. For service-based Restricted Stock Awards granted through October 2021, restrictions generally lapse in one-fourth or one-third increments during each year of employment after the grant date. For service-based Restricted Stock Awards granted beginning in November 2021, restrictions generally lapse on 25% of the units granted after the first year and on 6.25% each quarter thereafter over the remaining three years of employment. Restrictions generally lapse on Restricted Stock with performance or market conditions as conditions are met over a 3-year period. At the end of the performance period, the number of actual shares to be awarded will vary between 0% and 200% of target amounts, depending upon the achievement level. In 2022, our Board of Directors approved dividend equivalent rights for unvested restricted stock units awarded on or after October 13, 2021.
Restricted Stock Awards activity for 2022 is summarized as follows:
Number of Shares Weighted-Average Grant Date Fair Value Per Share
Restrictions lapsed (7) 47.36
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Restricted stock award shares granted 13 11 8
Weighted-average grant-date fair value per share $ 70.81 $ 53.58 $ 46.44
Aggregate vesting-date fair value of shares vested $ 498 $ 385 $ 294
Employee Stock Purchase Plan (“ESPP”)
Our ESPP is offered to substantially all employees and permitted eligible employees to purchase shares of our common stock through payroll deductions of up to 10% of their eligible compensation, subject to certain limitations prior to August 2021. Beginning in August 2021, employees are permitted to deduct up to 15% of their eligible compensation to purchase shares under the ESPP. The purchase price of the shares under the ESPP equals 85% of the lower of the fair market value of our common stock on either the first or last day of each six-month offering period. Compensation expense is calculated as of the beginning of the offering period as the fair value of the employees’ purchase rights utilizing the Black-Scholes option valuation model and is recognized over the offering period. Grant-date fair value and assumptions used in the Black-Scholes option valuation model were as follows:
Weighted-average grant-date fair value per share $ 18.87 $ 20.71 $ 14.24
Average expected life in years 0.5 0.5 0.5
Weighted-average risk-free interest rate 2.0 % 0.1 % 0.8 %
Expected dividend yield 0.6 % 0.3 % 0.0 %
Under the ESPP, employees purchased 4 million shares of common stock for $215 million in 2022, 3 million shares for $140 million in 2021, and 3 million shares for $118 million in 2020.
Stock Options
As of September 1, 2022, stock options of 3 million shares were outstanding, all of which were fully exercisable. Stock options expire 8 years from the date of grant. We did not grant any stock options in 2022, 2021, or 2020. Stock options of 1 million shares were exercised in 2022. The total intrinsic value for options exercised was $54 million, $143 million, and $130 million in 2022, 2021, and 2020, respectively.
Stock-based Compensation Expense
Stock-based compensation expense by caption
Selling, general, and administrative 133 99 103
Restructure (5) — —
Stock-based compensation expense by type of award
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Income tax benefits related to the tax deductions for share-based awards are recognized only upon the settlement of the related share-based awards. Income tax benefits for share-based awards were $77 million, $83 million, and $72 million for 2022, 2021, and 2020, respectively. Stock-based compensation expense of $48 million and $30 million was capitalized and remained in inventory as of September 1, 2022 and September 2, 2021, respectively. As of September 1, 2022, $1.02 billion of total unrecognized compensation costs for unvested awards, before the effect of any future forfeitures, was expected to be recognized through the fourth quarter of 2026, resulting in a weighted-average period of 1.3 years.
Employee Benefit Plans
We have employee retirement plans at our U.S. and international sites. Details of significant plans are as follows:
Employee Savings Plan for U.S. Employees
We have a 401(k) retirement plan under which U.S. employees may contribute up to 75% of their eligible pay, subject to Internal Revenue Service annual contribution limits, to various savings alternatives, none of which include direct investment in our stock. We match in cash eligible contributions from employees up to 5% of the employee’s annual eligible earnings. Contribution expense for the 401(k) plan was $66 million, $77 million, and $66 million in 2022, 2021, and 2020, respectively.
Retirement Plans
We have pension plans available to employees at various foreign sites. As of September 1, 2022, the projected benefit obligations of our plans were $186 million and plan assets were $221 million. As of September 2, 2021, the projected benefit obligations of our plans were $222 million and plan assets were $256 million. Pension expense was not material for 2022, 2021, or 2020.
Revenue
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. Substantially all contracts with our customers are short-term in duration at fixed, negotiated prices with payment generally due shortly after delivery. From time to time, we have contracts with initial terms that include performance obligations that extend beyond one year. As of September 1, 2022, our future performance obligations beyond one year were not significant.
As of September 1, 2022 and September 2, 2021, other current liabilities included $1.26 billion and $846 million for estimates of consideration payable to customers, respectively, including estimates for pricing adjustments and returns.
Revenue by Technology
Other (primarily 3D XPoint memory and NOR) 561 659 794
See “Segment and Other Information” for disclosure of disaggregated revenue by market segment.
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Restructure and Asset Impairments
Restructure and asset impairments $ 48 $ 488 $ 60
Restructure and asset impairments for 2022 and 2021 are primarily related to the sale of our Lehi, Utah facility. See “Lehi, Utah Fab and 3D XPoint.” Restructure and asset impairments for 2020 primarily related to asset impairments and employee relocation and severance costs related to right-sizing our Lehi, Utah facility.
Other Operating (Income) Expense, Net
Patent license charges $ — $ 128 $ —
(Gain) loss on disposition of property, plant, and equipment (41) (24) (3)
Other Non-Operating Income (Expense), Net
Gain (loss) on investments $ 26 $ 82 $ 22
Gain (loss) on debt prepayments, repurchases, and conversions (83) (1) 40
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Income Taxes
Our income tax (provision) benefit consisted of the following:
Income tax (provision) benefit
Current
U.S. federal $ (65) $ (42) $ (20)
State (1) (1) (2)
Deferred
Income tax (provision) benefit $ (888) $ (394) $ (280)
The table below reconciles our tax (provision) benefit based on the U.S. federal statutory rate to our effective rate:
Change in unrecognized tax benefits (67) 0.7 % (238) 3.8 % (33) 1.1 %
Research and development tax credits 66 (0.7) % 123 (2.0) % 62 (2.1) %
Foreign derived intangible income deduction 41 (0.4) % 18 (0.3) % 67 (2.2) %
State taxes, net of federal benefit — — % 59 (0.9) % 23 (0.8) %
Debt premium deductions — — % 130 (2.1) % — — %
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 $1.12 billion (benefiting our diluted earnings per share by $1.00) for 2022, by $758 million ($0.66 per diluted share) for 2021, and by $215 million ($0.19 per diluted share) for 2020.
As of September 1, 2022, certain non-U.S. subsidiaries had cumulative undistributed earnings of $4.38 billion that were deemed to be indefinitely reinvested. A provision has not been recognized to the extent that distributions from such subsidiaries are subject to additional foreign withholding or state income tax. Determination of the amount of unrecognized deferred tax liabilities related to investments in these foreign subsidiaries is not practicable.
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Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes as well as carryforwards. Deferred tax assets and liabilities consist of the following:
Deferred tax assets
Net operating loss and tax credit carryforwards $ 796 $ 783
Accrued salaries, wages, and benefits 157 206
Operating lease liabilities 138 109
Inventories 77 —
Property, plant, and equipment 44 37
Less valuation allowance (471) (233)
Deferred tax assets, net of valuation allowance 883 1,017
Deferred tax liabilities
Right-of-use assets (126) (90)
Product and process technology — (12)
Deferred tax liabilities (194) (245)
Net deferred tax assets $ 689 $ 772
Reported as
Deferred tax assets $ 702 $ 782
Deferred tax liabilities (included in other noncurrent liabilities) (13) (10)
Net deferred tax assets $ 689 $ 772
We assess positive and negative evidence for each jurisdiction to determine whether it is more likely than not that existing deferred tax assets will be realized. As of September 1, 2022, and September 2, 2021, we had a valuation allowance of $471 million and $233 million, respectively, against our net deferred tax assets, primarily related to carryforwards in U.S. states and Malaysia. Changes in 2022 in the valuation allowance were due to adjustments based on management's assessment of the realizability of tax credits, allowances and net operating losses based on a level that is more likely than not to be realized.
On March 16, 2022, the Idaho governor signed a new law that changed the way corporations calculate Idaho taxable income. This new law is expected to reduce our Idaho taxable income, and consequently, we do not expect to utilize our tax credits in Idaho for the foreseeable future. As a result, we recorded a valuation allowance against our Idaho deferred tax assets and an increase to tax expense of $189 million in 2022.
As of September 1, 2022, our net operating loss carryforward amounts and expiration periods, as reported to tax authorities, were as follows:
Year of Expiration State Japan Malaysia Other Total
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As of September 1, 2022, our federal and state tax credit carryforward amounts and expiration periods, as reported to tax authorities, were as follows:
Year of Tax Credit Expiration U.S. Federal State Total
Below is a reconciliation of the beginning and ending amount of our unrecognized tax benefits:
Beginning unrecognized tax benefits $ 660 $ 411 $ 383
Increases related to tax positions from prior years 14 2 14
Increases related to tax positions taken in current year 80 260 27
Decreases related to tax positions from prior years (23) (13) (13)
Ending unrecognized tax benefits $ 731 $ 660 $ 411
As of September 1, 2022, gross unrecognized tax benefits were $731 million, which would have an impact of approximately $564 million on our effective tax rate in the future, if recognized. Amounts accrued for interest and penalties related to uncertain tax positions were not significant for any period presented. The resolution of tax audits or expiration of statute of limitations could also reduce our unrecognized tax benefits. Although the timing of final resolution is uncertain, the estimated potential reduction in our unrecognized tax benefits in the next 12 months would not be significant.
We and our subsidiaries file income tax returns with the U.S. federal government, various U.S. states, and various foreign jurisdictions throughout the world. We regularly engage in discussions and negotiations with tax authorities regarding tax matters, including transfer pricing, and we continue to defend any and all such claims presented. Our U.S. federal and state tax returns remain open to examination for 2018 through 2022. We are currently under audit by the Internal Revenue Service for our 2018 and 2019 tax years. In addition, tax returns that remain open to examination in Singapore, Taiwan and Japan range from the years 2016 to 2022. We believe that adequate amounts of taxes and related interest and penalties have been provided, and any adjustments as a result of examinations are not expected to materially adversely affect our business, results of operations, or financial condition.
Earnings Per Share
Net income attributable to Micron – Basic $ 8,687 $ 5,861 $ 2,687
Assumed conversion of debt — — (4)
Net income attributable to Micron – Diluted $ 8,687 $ 5,861 $ 2,683
Weighted-average common shares outstanding – Basic 1,112 1,120 1,110
Dilutive effect of equity plans and convertible notes 10 21 21
Weighted-average common shares outstanding – Diluted 1,122 1,141 1,131
Earnings per share
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Antidilutive potential common shares excluded from the computation of diluted earnings per share, that could dilute basic earnings per share in the future, were as follows at the end of the periods shown:
Equity plans 5 2 5
Segment and Other Information
Segment information reported herein is consistent with how it is reviewed and evaluated by our chief operating decision maker. We have the following four business units, which are our reportable segments:
Compute and Networking Business Unit (“CNBU”):Includes memory products sold into client, cloud server, enterprise, graphics, and networking markets.
Mobile Business Unit (“MBU”):Includes memory and storage products sold into smartphone and other mobile-device markets.
Embedded Business Unit (“EBU”):Includes memory and storage products sold into automotive, industrial, and consumer markets.
Storage Business Unit (“SBU”):Includes SSDs and component-level solutions sold into enterprise and cloud, client, and consumer storage markets, and other discrete storage products sold in component and wafer form.
Certain operating expenses directly associated with the activities of a specific segment are charged to that segment. Other indirect operating income and expenses are generally allocated to segments based on their respective percentage of cost of goods sold or forecasted wafer production. We do not identify or report internally our assets (other than goodwill) or capital expenditures by segment, nor do we allocate gains and losses from equity method investments, interest, other non-operating income or expense items, or taxes to segments. As of September 1, 2022 and September 2, 2021, CNBU, MBU, SBU, and EBU had goodwill of $832 million, $198 million, $101 million, and $97 million, respectively.
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Revenue
Operating income (loss)
Unallocated
Inventory accounting policy change to FIFO — (133) —
Change in inventory cost absorption — (160) —
3D XPoint inventory write-down — (49) —
Restructure and asset impairments (48) (488) (60)