Micron Technology, Inc. — Fiscal 2017 First-Quarter Form 10-Q
Reporting period: Quarter ended December 1, 2016; comparable quarter ended December 3, 2015. Micron develops and manufactures DRAM, NAND Flash, NOR Flash, solid-state drives, modules, and related memory solutions for computing, mobile, storage, networking, automotive, and embedded markets. Financial statements are unaudited.
Financial Highlights
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|
| Net sales | $3.970 billion | $3.350 billion | +19% |
| Gross margin | $1.011 billion; 25% | $849 million; 25% | Gross profit +19%; margin essentially flat |
| Operating income | $359 million; 9% | $232 million; 7% | +55% |
| Net income attributable to Micron | $180 million | $206 million | -13% |
| Diluted EPS | $0.16 | $0.19 | Declined |
| Operating cash flow | $1.138 billion | $1.120 billion | +2% |
| Capital expenditures | $1.264 billion | $990 million | +28% |
- Revenue growth was driven by higher gigabits sold, stronger market demand, improved manufacturing output, customer qualifications, and technology improvements. DRAM revenue was $2.421 billion, or 61% of sales; trade Non-Volatile Memory revenue was $1.272 billion, or 32%.
- Gross margin benefited from manufacturing cost reductions and higher DRAM average selling prices. Depreciation expense was reduced by approximately $100 million per quarter in fiscal 2017 following the extension of estimated DRAM equipment lives from five to seven years.
- Net income was pressured by $31 million of income tax expense, $14 million of other non-operating expense, a $2 million loss from equity-method investees, and substantially higher interest expense of $139 million versus $96 million.
- Foreign-exchange contract losses without hedge accounting designation were $178 million, largely offset by revaluations of monetary assets and liabilities; net currency-related losses included in other non-operating expense were $12 million.
Segment and Operating Changes
| Segment | Q1 FY2017 Sales | Q1 FY2017 Operating Income/(Loss) | Q1 FY2016 Sales | Q1 FY2016 Operating Income/(Loss) |
|---|
| Compute and Networking | $1.470 billion | $204 million | $1.139 billion | $40 million |
| Mobile | $1.032 billion | $89 million | $834 million | $148 million |
| Storage | $860 million | $(45) million | $884 million | $(14) million |
| Embedded | $578 million | $178 million | $479 million | $121 million |
- Compared with Q1 FY2016, Compute and Networking and Embedded improved materially, while Mobile profitability declined because average selling price reductions outpaced cost reductions and R&D expense increased.
- Storage remained loss-making, primarily reflecting lower Non-Volatile Memory average selling prices relative to manufacturing cost reductions.
- Compared with Q4 FY2016, sales increased 23% from $3.217 billion and gross margin increased from 18% to 25%; operating income improved from a $32 million loss to $359 million.
- SG&A declined 11% year over year to $159 million, while R&D increased 12% to $470 million. Restructuring and asset impairment charges were $29 million, compared with $15 million in the prior-year quarter; management stated that no additional material charges were expected under the 2016 Restructuring Plan.
Cash, Debt, Liquidity, and Capital Investment
- Cash and equivalents were $4.139 billion at December 1, 2016, compared with $4.140 billion at September 1, 2016. Cash, short-term investments, and long-term marketable investments totaled $4.324 billion, down from $4.812 billion.
- Total debt carrying value was $9.645 billion, consisting of $1.155 billion current debt and $8.490 billion long-term debt, versus $9.910 billion at September 1, 2016. Contractual obligations totaled $14.021 billion, including debt, capital leases, and operating leases.
- Operating cash flow of $1.138 billion was substantially offset by $1.264 billion of capital expenditures, $212 million of financing cash outflows, and a $37 million currency effect, resulting in a $1 million decrease in cash.
- Management estimated fiscal 2017 net capital expenditures of approximately $4.8 billion to $5.2 billion, after expected partner funding. Approximately $550 million of property, plant, and equipment commitments were outstanding at quarter-end.
- Available liquidity included a $675 million receivables-based revolving facility and an $800 million equipment-backed variable-rate facility. Micron drew $450 million under the latter facility on December 2, 2016, immediately after quarter-end.
- Management stated that cash, investments, operating cash flow, and available financing were expected to meet requirements for at least the next 12 months. However, $723 million of cash and short-term investments was held by foreign subsidiaries considered indefinitely reinvested, and $77 million held by IMFT was generally unavailable for other operations.
Material Subsequent Events, Outlook, and Unusual Items
- Inotera acquisition: On December 6, 2016, Micron acquired the remaining 67% of Inotera for $4.1 billion in cash. Funding included a $2.5 billion five-year Taiwan-dollar term loan, $981 million from selling 58 million Micron shares to Nanya, and cash on hand. Inotera results would be consolidated beginning December 6, 2016; purchase accounting remained provisional at the filing date.
- The acquisition is expected to provide greater operational flexibility, control over Inotera cash flows, and increased ability to adapt DRAM products to market conditions. It also increases leverage, DRAM exposure, Taiwan-dollar operating exposure, capital requirements, and integration risk.
- The new 2021 Term Loan is collateralized by specified Inotera and Micron assets and includes financial covenants. Failure by MSTW to satisfy required ratios for two consecutive semiannual periods could trigger an event of default; certain covenant failures can also increase the interest rate.
- Convertible notes were eligible for conversion during the quarter following the filing period. Based on the December 1 share price, complete cash settlement of the identified 2032 and 2033 notes could have required approximately $1.556 billion, including $473 million of principal-related cash and $1.083 billion of excess conversion value.
- Key industry risks include volatile DRAM and NAND pricing, excess industry capacity, intense competition, technology-transition execution, manufacturing disruptions, foreign-currency exposure, financing needs, and dependence on continued cost-per-gigabit reductions.
- Material legal contingencies include patent infringement actions involving DRAM and NAND products and the Qimonda litigation, which could result in loss of Inotera shares, monetary damages, or termination of a patent cross-license. Micron stated that potential losses could not be estimated.
- Customer concentration was significant: Apple and Intel each represented 11% of Q1 FY2017 net sales.
- Micron adopted share-based payment, cloud-computing, and consolidation accounting updates in Q1 FY2017 without material effects. The filing states that revenue-recognition, lease, credit-loss, financial-instrument, and restricted-cash standards remained under evaluation or had future adoption dates.
Investor Verification Checklist
- Verify the finalized purchase accounting, goodwill or intangible assets, and earnings impact of the Inotera acquisition in subsequent filings.
- Track post-acquisition leverage, covenant compliance, interest expense, Taiwan-dollar exposure, and cash available after the $4.1 billion acquisition.
- Assess whether DRAM and NAND average selling prices remain favorable relative to cost-per-gigabit reductions and whether Storage returns to profitability.
- Reconcile fiscal 2017 capital expenditures with the $4.8 billion to $5.2 billion estimate and monitor operating cash flow after acquisition-related funding needs.
- Review convertible-note conversion activity and potential cash or share settlement, including dilution and the effect of capped calls.
- Monitor patent litigation, the Qimonda appeal, MMJ reorganization restrictions, and the availability of foreign and joint-venture cash.
