Micron Technology, Inc. — Fiscal 2015 Q3 Form 10-Q
Business context and reporting period
Micron is a global semiconductor manufacturer focused on DRAM, NAND Flash, and NOR Flash products used in computing, mobile, storage, networking, automotive, and embedded applications. The quarter ended June 4, 2015 and included 13 weeks; the first nine months included 40 weeks, compared with 39 weeks in the prior-year period.
Financial performance and liquidity
| Metric | Q3 FY2015 | Q3 FY2014 | Change |
|---|---|---|---|
| Net sales | $3.853 billion | $3.982 billion | Down 3% |
| Gross margin | $1.202 billion; 31% | $1.368 billion; 34% | Down 3 percentage points |
| Operating income | $631 million; 16% | $839 million; 21% | Down 25% |
| Net income attributable to Micron | $491 million | $806 million | Down 39% |
| Diluted EPS | $0.42 | $0.68 | Down $0.26 |
For the first nine months, sales increased 4% to $12.592 billion, operating income increased 14% to $2.571 billion, and net income attributable to Micron increased 28% to $2.428 billion. Diluted EPS was $2.05 versus $1.58.
- DRAM represented 61% of quarterly sales at $2.359 billion, down 14% year over year; average selling prices per gigabit declined 15%.
- NAND Flash represented 35% of quarterly sales at $1.359 billion, up 24% year over year, primarily from higher gigabit volumes.
- CNBU quarterly sales fell 18% year over year and operating income declined to $266 million from $531 million. MBU sales rose 24% and operating income increased to $296 million from $135 million. SBU sales rose 4%, but operating results declined to a $33 million loss from $55 million of income. EBU sales rose 3% and operating income was $98 million.
- Research and development expense increased 16% year over year to $406 million; SG&A declined 3% to $169 million.
- Equity in earnings of investees was $68 million for the quarter, including $67 million from Inotera.
- Cash flow from operations was $4.178 billion for the first nine months. Investing cash flow was negative $4.722 billion, including $2.256 billion of capital expenditures. Financing cash flow was positive $215 million.
- Cash and equivalents were $3.694 billion at June 4, 2015. Including short-term and long-term marketable investments, total cash and investments were $7.330 billion.
- Debt carrying value was $7.551 billion, comprising $1.148 billion current debt and $6.403 billion long-term debt. The company reported $13.355 billion of total equity.
- Revolving credit facilities provided up to $861 million of additional financing based on eligible collateral; $125 million was drawn as of quarter-end. Management stated that cash, investments, operating cash flow, and available financing were expected to cover requirements for at least the next 12 months.
Material changes versus comparable periods
- Quarterly profitability weakened as DRAM average selling price declines exceeded manufacturing cost reductions, reducing gross margin from 34% to 31%.
- DRAM sales declined while NAND Flash sales increased, shifting product mix toward NAND and mobile-related products.
- R&D spending rose materially because of development wafer activity, depreciation, payroll, and investment in controllers, firmware, SSDs, managed NAND, and Hybrid Memory Cube products.
- The company issued $2.0 billion of senior notes, repurchased or settled convertible notes, and recognized $48 million of debt-restructuring losses during the first nine months.
- Capital spending and property, plant, and equipment increased substantially. Net PP&E reached $9.857 billion versus $8.682 billion at August 28, 2014.
- Micron repurchased 7 million common shares for $192 million during the second quarter; $808 million remained under the $1.0 billion authorization at quarter-end.
Guidance, outlook, commentary, and unusual items
- Management expected fourth-quarter FY2015 SG&A of approximately $175 million to $185 million and R&D, net of partner reimbursements, of approximately $395 million to $405 million.
- 2015 cash capital expenditures were estimated at approximately $3.6 billion to $4.0 billion; approximately $1.83 billion of PP&E purchase commitments remained at quarter-end.
- Micron began expanding its Singapore clean-room capacity to support 3D NAND and other memory technologies. Initial manufacturing output was expected around 2017, with an estimated total project cost of approximately $4 billion over several years.
- A new Inotera supply agreement begins January 1, 2016. Pricing will use a formula that equally shares margin between Inotera and Micron, replacing the existing arrangement under which Inotera supply costs were significantly higher than comparable internally manufactured products.
- The quarter included a $45 million write-down of MMJ deferred tax assets caused by changes in Japanese tax law. Singapore tax incentives reduced the quarter’s tax provision by $52 million, or approximately $0.04 per diluted share.
- The first nine months of 2014 included a $233 million Rambus settlement charge, making the year-to-year operating comparison favorable for the nine-month period but not for the quarter.
- Holders could convert certain 2032 and 2033 convertible notes through September 30, 2015. If all applicable notes were settled entirely in cash, the potential settlement amount was estimated at $2.570 billion based on the June 4 share price of $26.99.
- Key risks include further memory price declines, intense competition and industry oversupply, execution of technology transitions and 3D NAND expansion, significant debt and capital requirements, restricted access to cash held by MMJ and IMFT, foreign-exchange exposure, joint-venture dependence, and intellectual-property litigation.
- The Qimonda litigation could result in loss of some or all of Micron’s Inotera shares, monetary damages, or termination of a patent cross-license. The filing states that the potential loss cannot be estimated.
Most important facts for investors to verify
- Whether DRAM pricing stabilizes and whether manufacturing cost reductions can offset future average selling price declines.
- The financial impact and execution timetable of the Inotera 2016 supply agreement.
- Actual FY2015 capital expenditures and funding for the Singapore expansion.
- Cash availability after considering restricted MMJ and IMFT balances, debt maturities, convertible-note settlements, and capital commitments.
- Progress on 3D NAND, SSD, managed NAND, and other system-level product initiatives, including their effect on SBU profitability.
- Developments in the Qimonda, patent, antitrust, securities, and other legal proceedings.
- Expiration and continued availability of foreign tax incentives and changes in valuation allowances or unrecognized tax benefits.