Micron Technology, Inc. — Fiscal 2015 First-Quarter Form 10-Q
Reporting period: Quarter ended December 4, 2014. Fiscal 2015 included 53 weeks, and the first quarter contained 14 weeks versus 13 weeks in the comparable fiscal 2014 quarter. Micron is a global semiconductor manufacturer focused on DRAM, NAND Flash and NOR Flash products serving computing, networking, storage, mobile, embedded and automotive markets.
Financial Performance and Position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $4.573 billion | $4.042 billion | Up 13% |
| Gross margin | $1.638 billion; 36% | $1.281 billion; 32% | Up $357 million; margin expanded 4 points |
| Operating income | $1.085 billion; 24% of sales | $551 million; 14% | Up $534 million |
| Net income attributable to Micron | $1.003 billion | $358 million | Up $645 million |
| Diluted EPS | $0.84 | $0.30 | Up $0.54 |
| Cash flow from operations | $1.592 billion | $1.507 billion | Up $85 million |
| Capital expenditures | $669 million | $669 million | Flat |
Net sales benefited primarily from higher DRAM and NAND Flash bit volumes, increased manufacturing output, process improvements and the additional week. Average selling prices declined in several product categories, but manufacturing cost reductions more than offset the pressure in aggregate.
- Product sales: DRAM revenue was $3.110 billion, or 68% of sales; NAND Flash revenue was $1.303 billion, or 28%.
- Segment sales and operating income: CNBU sales were $2.088 billion and operating income was $623 million; SBU sales were $984 million and operating income was $26 million; MBU sales were $940 million and operating income was $306 million; EBU sales were $539 million and operating income was $118 million.
- Operating expenses: SG&A was $193 million and R&D was $376 million. R&D was reduced by $54 million of Intel reimbursements.
- Equity-method earnings: Equity in net income of investees was $124 million, including $129 million from Inotera, partly offset by a $10 million Tera Probe impairment charge.
- Tax: The effective tax rate was 7.9%. Singapore tax incentives reduced the provision by $140 million, or $0.12 per diluted share. The company maintained a full valuation allowance against its U.S. net deferred tax assets.
Liquidity, Debt and Capital Allocation
- Cash and equivalents were $3.764 billion at December 4, 2014, compared with $4.150 billion at August 28, 2014. Cash, equivalents and short-term investments totaled $4.230 billion; long-term marketable investments were $1.077 billion.
- Total debt carrying value was $5.776 billion, consisting of $1.168 billion current debt and $4.608 billion long-term debt. Debt declined from $6.593 billion at fiscal year-end.
- Operating cash flow of $1.592 billion funded capital expenditures, debt repayments and investment purchases. Investing cash flow was negative $1.076 billion and financing cash flow was negative $806 million.
- Micron repaid or restructured debt using $654 million of cash during the quarter, including conversions, repurchases and an early repayment. These actions reduced principal by $277 million and eliminated notes convertible into approximately 4 million shares.
- A new secured five-year revolving credit facility replaced an unused $153 million facility. Availability was $500 million at quarter-end, with no borrowings outstanding. The company reported available credit facilities of up to $755 million, subject to conditions.
- Management stated that cash, marketable investments, operating cash flow and available financing should be sufficient to meet requirements for at least the next 12 months.
- Cash and investments included $1.53 billion held by the MMJ Group and $79 million held by IMFT that were generally unavailable for Micron’s other operations. Approximately $2.84 billion was held by foreign subsidiaries considered indefinitely reinvested.
Material Changes and Unusual Items
- Results benefited from the absence of the $233 million Rambus settlement charge recorded in Q1 FY2014.
- Gross margin improved from 32% to 36%, primarily from manufacturing cost reductions and process improvements. The prior-year comparison also benefited from the absence of the Rambus charge, while the fourth-quarter comparison benefited from the absence of approximately $100 million of Tessera license and legacy mobile PCM costs.
- DRAM sales increased 11% year over year, with gigabits sold up 13% and average selling price per gigabit down 2%. Trade NAND Flash sales increased 26%, with gigabits sold up 72%, average selling price per gigabit down 27% and cost per gigabit down 19%.
- Micron purchased $729 million of DRAM products from Inotera. The company stated that Inotera supply costs were significantly higher than comparable costs at wholly owned facilities and that it was negotiating an extension of the supply agreement.
- In December 2014, Micron announced plans to add approximately 255,000 square feet of clean-room space in Singapore to support 3D NAND and other memory technologies. Initial output was expected in 2017; total project cost was estimated at approximately $4 billion over multiple years, with approximately $50 million expected to be spent in 2015.
Guidance, Outlook and Key Risks
- Q2 FY2015 SG&A guidance was approximately $180 million to $190 million.
- Q2 FY2015 R&D guidance, net of partner reimbursements, was approximately $385 million to $395 million.
- Fiscal 2015 capital spending was estimated at approximately $3.6 billion to $4.0 billion, with approximately $740 million of property, plant and equipment commitments at quarter-end.
- Primary business risks include volatile memory pricing, excess industry capacity, intense competition, manufacturing execution and technology-transition risk, reliance on joint ventures, foreign-exchange exposure and the need to sustain cost reductions as average selling prices decline.
- The Inotera Supply Agreement runs through December 2016 and includes extension negotiations. Failure to extend could reduce capacity over a subsequent wind-down period.
- Legal contingencies include patent infringement matters, antitrust investigations, securities litigation and the Qimonda lawsuit challenging Micron’s acquisition of Inotera shares. Micron could not estimate potential losses for several matters.
- The Qimonda litigation could result in loss of Inotera shares, monetary damages or termination of a patent cross-license. A hearing was scheduled for April 24, 2015.
- MMJ remains subject to Japanese reorganization proceedings and creditor payments scheduled through December 2019, limiting access to certain cash and requiring court or trustee consent for specified actions.
Investor Verification Checklist
- Verify whether DRAM and NAND Flash pricing trends remain manageable relative to manufacturing cost reductions.
- Track renewal negotiations and economics under the Inotera Supply Agreement.
- Reconcile projected $3.6 billion to $4.0 billion fiscal-year capital spending with operating cash generation and debt obligations.
- Assess the cash actually available to the parent after restrictions on MMJ and IMFT funds.
- Monitor conversion, repurchase and settlement activity for convertible notes, including potential cash requirements and dilution.
- Evaluate the timing, cost and returns of the Singapore clean-room and 3D NAND expansion.
- Review developments in the Qimonda, patent, antitrust and other legal proceedings, as the filing states that potential losses are not estimable for several matters.