MICRON TECHNOLOGY INC annual report, FY2016

Micron Technology, Inc. — Fiscal 2016 Form 10-K Summary

Reporting period: Fiscal year ended September 1, 2016, comprising 52 weeks. The filing also presents fourth-quarter fiscal 2016 results. Micron is a global semiconductor memory manufacturer focused on DRAM, NAND Flash, NOR Flash, SSDs, modules, multi-chip packages, and related systems.

Business Context

• Reportable segments: Compute and Networking (CNBU), Storage (SBU), Mobile (MBU), and Embedded (EBU).
• DRAM represented 58% of fiscal 2016 sales; trade non-volatile memory, primarily NAND Flash, represented 33%; non-trade non-volatile memory represented 4%; and other products represented 4%.
• Micron began selling commercial volumes of 3D NAND and began production of 3D XPoint memory in 2016. Management expected 3D NAND to become the majority of NAND output beginning in the first quarter of fiscal 2017.

Financial Performance and Key Metrics

Metric	FY2016	FY2015	Change
Net sales	$12.399 billion	$16.192 billion	Down 23%
Gross margin	$2.505 billion; 20%	$5.215 billion; 32%	Down 12 percentage points
Operating income	$168 million; 1%	$2.998 billion; 19%	Down materially
Net income attributable to Micron	$(276) million	$2.899 billion	Shifted to loss
Diluted earnings per share	$(0.27)	$2.47	Declined
Cash flow from operations	$3.168 billion	$5.208 billion	Down 39%
Capital expenditures	$5.817 billion cash expenditures	$4.021 billion	Up 45%

• FY2016 net sales declined primarily because average selling price reductions exceeded increases in gigabit sales volumes. DRAM average selling price per gigabit declined 35%, while trade non-volatile memory pricing declined 20%.
• Cost per gigabit declined 17% for DRAM and 16% for trade non-volatile memory, but manufacturing cost reductions were insufficient to offset pricing pressure.
• Research and development expense increased 5% to $1.617 billion. SG&A declined 8% to $659 million.
• Segment sales and operating income were: CNBU $4.529 billion and $(134) million; SBU $3.262 billion and $(205) million; MBU $2.569 billion and $39 million; and EBU $1.939 billion and $433 million.
• Fourth-quarter FY2016 sales were $3.217 billion, gross margin was $579 million, operating loss was $32 million, and net loss attributable to Micron was $170 million.

Liquidity, Capital Resources, and Debt

• Cash and equivalents, short-term investments, and long-term marketable investments totaled $4.812 billion at September 1, 2016, compared with $5.634 billion at the prior fiscal year-end. Cash and equivalents alone were $4.140 billion.
• Total debt carrying value was $9.910 billion, including $756 million current debt and $9.154 billion long-term debt, versus $7.341 billion at September 3, 2015.
• Micron issued $750 million of 2022 Term Loan B debt, $1.25 billion of 2023 Senior Secured Notes, and received $765 million from equipment sale-leaseback financing during FY2016.
• A revolving credit facility had $488 million of availability at year-end, subject to eligible-receivables and other conditions.
• Management stated that cash, operating cash flow, and available financing were expected to satisfy requirements for at least the next 12 months.
• Net FY2017 cash expenditures for property, plant, and equipment were estimated at approximately $4.8 billion to $5.2 billion. Property, plant, and equipment commitments were approximately $780 million at year-end.
• Micron has not paid cash dividends since 1996 and did not expect to pay dividends in the foreseeable future.

Material Changes Versus the Prior Comparable Period

• Revenue fell 23%, gross margin declined from 32% to 20%, and operating income fell from $2.998 billion to $168 million.
• Micron moved from $2.899 billion of net income attributable to Micron to a $276 million loss.
• CNBU and SBU became loss-making segments, while MBU profitability declined sharply. EBU operating income was broadly stable.
• Operating cash flow declined by $2.040 billion, while capital spending increased by $1.796 billion.
• Debt increased by approximately $2.569 billion, partly reflecting new secured financing and equipment sale-leasebacks.
• Inventory increased to $2.889 billion from $2.340 billion, while receivables declined to $2.068 billion from $2.507 billion.
• Micron acquired the remaining interest in MP Mask for $93 million and acquired Tidal Systems, a NAND controller developer, for $148 million.
• Micron revised the estimated useful lives of DRAM fabrication equipment from five to seven years. The FY2016 effect was not material, but management expected future depreciation expense to decline by approximately $100 million per quarter.

Guidance, Outlook, Risks, and Unusual Items

• Management expected continued growth in DDR4, NAND Flash, SSDs, 3D NAND, and 3D XPoint products, including a ramp of 1Xnm DRAM and 64-layer 3D NAND in 2017.
• Micron initiated a restructuring plan in the fourth quarter of FY2016. It expected approximately $80 million of cash restructuring charges, including $58 million recorded in FY2016, and approximately $80 million of quarterly savings in 2017 versus prior spending plans.
• Micron agreed to acquire the remaining 67% of Inotera for approximately $4.1 billion, with a proposed closing date of December 6, 2016. The transaction remained subject to financing and other closing conditions at the reporting date.
• Planned Inotera financing included up to $2.5 billion of variable-rate term debt, up to $991 million of Micron equity, and an optional $396 million of 2.00% convertible notes. The financing would increase leverage and foreign-currency exposure.
• The Inotera facility includes financial covenants. Failure by MSTW to meet required ratios for two consecutive semiannual periods could result in acceleration; Micron-level covenant failures would generally increase the interest rate.
• Major risks include volatile memory pricing, excess industry capacity, intense competition, technology-transition execution, manufacturing disruptions, supply-chain constraints, foreign exchange movements, high capital requirements, and elevated leverage.
• Micron faces patent litigation involving DRAM, NAND, and stacked-die products. The filing states that potential losses cannot presently be estimated.
• A Qimonda insolvency proceeding challenges Micron’s acquisition of Inotera shares. The matter could result in loss of shares, monetary damages, or termination of a patent cross-license; the filing states that the potential loss cannot be estimated.
• Approximately 84% of FY2016 sales were to customers outside the United States. Intel represented 14% of sales; Kingston represented 7%.
• Cash and investments held by foreign subsidiaries, MMJ, and IMFT were subject to repatriation, court, contractual, or partner restrictions. Approximately $919 million was held by foreign subsidiaries whose earnings were considered indefinitely reinvested.

Investor Verification Checklist

• Verify whether the Inotera acquisition closed as planned, its final financing mix, resulting debt and share dilution, and the financial contribution of the acquired operations.
• Track DRAM and NAND average selling prices, gigabit growth, cost per gigabit, inventory levels, and gross margin recovery.
• Assess execution of 3D NAND, 64-layer NAND, 1Xnm DRAM, SSD, and 3D XPoint production ramps.
• Reconcile planned FY2017 capital expenditures with operating cash flow, partner funding, and available liquidity.
• Monitor debt maturities, convertible-note settlement requirements, Inotera financing covenants, and the effect of variable-rate debt.
• Review restructuring savings and remaining cash charges, including the expected FY2017 payments.
• Follow the Qimonda litigation and patent matters for potential losses, licensing costs, or operational restrictions.
• Evaluate customer and geographic concentration, foreign-currency exposure, and restrictions on cash held by MMJ, IMFT, and other foreign subsidiaries.