Micron Technology, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Business Context and Reporting Period
Micron is a global semiconductor-memory manufacturer serving computing, networking, mobile, storage, automotive, industrial, and consumer markets. The filing covers the quarter and six months ended March 2, 2017, compared primarily with the quarter and six months ended March 3, 2016. Fiscal 2017 includes the December 6, 2016 acquisition of the remaining 67% of Inotera, after which Inotera was consolidated.
Key Financial Metrics
| Metric | Quarter Ended March 2, 2017 | Prior-Year Quarter | Six Months Ended March 2, 2017 | Prior-Year Six Months |
|---|---|---|---|---|
| Net sales | $4.648 billion | $2.934 billion | $8.618 billion | $6.284 billion |
| Gross margin | $1.704 billion; 37% | $579 million; 20% | $2.715 billion; 32% | $1.428 billion; 23% |
| Operating income | $1.044 billion; 22% of sales | $(5) million | $1.403 billion; 16% of sales | $227 million |
| Net income attributable to Micron | $894 million | $(97) million | $1.074 billion | $109 million |
| Diluted EPS | $0.77 | $(0.09) | $0.95 | $0.10 |
| Operating cash flow | Not separately provided | Not separately provided | $2.543 billion | $1.883 billion |
Second-quarter sales increased 58% year over year and 17% sequentially. DRAM represented $2.960 billion, or 64%, of quarterly sales; trade Non-Volatile Memory represented $1.412 billion, or 30%. Segment sales were $1.917 billion for CNBU, $1.082 billion for MBU, $1.041 billion for SBU, and $590 million for EBU.
As of March 2, 2017, cash and equivalents were $3.633 billion, short-term investments were $265 million, and long-term marketable investments were $589 million, for total cash and marketable investments of approximately $4.487 billion. Current assets were $9.945 billion against current liabilities of $5.207 billion.
Total debt was $12.425 billion, comprising $1.117 billion of current debt and $11.308 billion of long-term debt. Debt increased from $9.910 billion at September 1, 2016, primarily due to financing for the Inotera acquisition. The company reported $3.191 billion of fair value for convertible notes versus $1.472 billion of carrying value.
Material Changes Versus Comparable Periods
- Revenue growth reflected higher DRAM average selling prices and volumes, increased demand, improved manufacturing output, and technology improvements. DRAM quarterly sales increased 86% year over year, while trade Non-Volatile Memory sales increased 31%.
- DRAM average selling price per gigabit increased 21% sequentially and 7% year over year; trade Non-Volatile Memory average selling price per gigabit declined 6% sequentially and 12% year over year.
- Gross margin expanded to 37% from 20% in the prior-year quarter and 25% in the immediately preceding quarter, driven primarily by DRAM pricing and manufacturing cost reductions.
- Depreciation was reduced by approximately $100 million per quarter in 2017 after the estimated useful lives of equipment in DRAM fabrication facilities were increased from five to seven years.
- The Inotera acquisition contributed consolidated operations, increased DRAM production exposure, added approximately $1.086 billion of provisional goodwill, and generated a $71 million non-operating gain from remeasurement of Micron’s previously held interest.
- Quarterly interest expense increased to $161 million from $97 million in the prior-year quarter, reflecting higher debt balances, including the $2.5 billion 2021 MSTW Term Loan and $450 million 2021 MSAC Term Loan.
- Six-month investing cash outflows increased to $5.366 billion, including $2.634 billion for the Inotera acquisition and $2.428 billion of capital expenditures. Financing activities provided $2.341 billion, principally from new debt.
Guidance, Outlook, Commentary, and Risks
- Management expects cash, investments, operating cash flow, and available financing to meet requirements for at least the next 12 months.
- Estimated 2017 property, plant, and equipment cash expenditures are approximately $4.8 billion to $5.2 billion, with approximately $580 million of related commitments as of March 2, 2017.
- On March 27, 2017, Micron commenced tender offers for up to $1.0 billion of specified senior notes, intended to reduce interest expense and leverage using cash on hand.
- Tax incentive arrangements reduced the second-quarter tax provision by $132 million and benefited diluted EPS by approximately $0.11. These arrangements expire in whole or in part at various dates through 2030.
- Approximately $60 million of Inotera inventory fair-value step-up was charged to cost of goods sold in the second quarter, with a significant portion of the remaining step-up expected in the third quarter.
- Key risks include memory-price volatility, intense competition and potential industry overcapacity, dependence on continual technology and cost improvements, manufacturing disruptions, foreign-currency exposure, high capital requirements, debt covenants, and integration of Inotera.
- Significant legal contingencies include patent-infringement claims and the Qimonda litigation, which could result in loss of Inotera shares, monetary damages, or termination of a patent cross-license. The filing states that potential losses cannot be estimated.
- Cash availability is constrained by restrictions affecting the MMJ Group, MSTW and Inotera, and IMFT. Approximately $849 million of cash and short-term investments was held by foreign subsidiaries whose earnings were considered indefinitely reinvested.
Most Important Facts for Investors to Verify
- Whether DRAM pricing and industry demand remain strong enough to offset future memory-price declines and potential capacity additions.
- The pace and profitability of Inotera integration, including the remaining inventory step-up charge, goodwill allocation, capital needs, and debt-covenant compliance.
- Whether 2017 capital expenditures remain within the $4.8 billion to $5.2 billion estimate while maintaining positive free cash flow.
- The effect of increased leverage, variable-rate debt, convertible-note settlements, and the planned senior-note tender offers on liquidity and dilution.
- The sustainability of the unusually low effective tax rate and foreign tax incentives that contributed $132 million of second-quarter tax benefits.
- Developments in the Qimonda and patent matters, as the filing does not provide a clear estimate of potential losses.