MICRON TECHNOLOGY INC quarterly report, Q3 FY2014

Micron Technology, Inc. — Fiscal 2014 Third-Quarter Form 10-Q

Reporting period: Quarter and nine months ended May 29, 2014; comparable periods ended May 30, 2013. Micron manufactures and sells DRAM, NAND Flash, NOR Flash and related semiconductor solutions. Fiscal 2014 includes the acquired Micron Memory Japan and Micron Memory Taiwan operations.

Financial performance and position

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Net sales	$3.982 billion	$2.318 billion	$12.131 billion	$6.230 billion
Gross margin	$1.368 billion; 34%	$556 million; 24%	$4.052 billion; 33%	$1.139 billion; 18%
Operating income	$839 million; 21%	$149 million; 6%	$2.259 billion; 19%	$29 million
Net income attributable to Micron	$806 million	$43 million	$1.895 billion	$(518) million
Diluted EPS	$0.68	$0.04	$1.58	$(0.51)

Third-quarter sales increased 72% year over year, while nine-month sales increased 95%. Sequentially, sales declined 3% from the second quarter, primarily because of lower MBU and SBU gigabit volumes.
Gross margin improved principally from stronger DRAM pricing, manufacturing cost reductions and the MMJ acquisition. DRAM represented 69% of third-quarter sales; NAND Flash represented 28%.
Third-quarter operating expenses included $174 million of SG&A and $349 million of R&D. Nine-month R&D was $1.013 billion, up 53% year over year.
Equity in earnings of investees was $135 million in the quarter and $355 million year to date, compared with losses of $10 million and $120 million, respectively, in the comparable periods. Inotera contributed $134 million in the quarter.
Nine-month cash flow from operations was $4.352 billion, compared with $1.094 billion in the prior-year period. Capital expenditures were $1.518 billion, and net cash used in investing was $923 million.
Cash and equivalents were $4.062 billion, short-term investments were $202 million and long-term marketable investments were $545 million at May 29, 2014. Total debt carrying value was $5.645 billion, consisting of $1.508 billion current debt and $4.137 billion long-term debt.
Net cash used in financing was $2.234 billion, including $3.134 billion of debt repayments, partially offset by $1.062 billion of new debt issuance. The company had up to $408 million of additional credit facilities available, subject to conditions.
Total contractual obligations disclosed were $7.579 billion, including $6.403 billion of notes payable, capital lease obligations and operating leases.

Material changes versus prior comparable periods

The July 2013 acquisition of MMJ and MMT substantially expanded DRAM and mobile exposure. CNBU third-quarter sales rose to $1.857 billion from $902 million, and MBU sales rose to $757 million from $269 million.
CNBU operating income increased to $531 million from $129 million; MBU improved to $135 million of operating income from a $62 million operating loss. SBU operating income was $55 million in both periods, while EBU operating income increased to $96 million from $56 million.
DRAM sales increased 149% year over year in the quarter, with gigabits sold up 142%; average selling prices per gigabit increased 2% and cost per gigabit declined 17%. Trade NAND Flash sales increased 18%, although average selling prices declined 29%.
Micron purchased an additional 10.6% of MMT during the second and third quarters, increasing ownership to 99.5%. Noncontrolling interests in MMT declined to less than 1%.
Debt restructuring activities included $1.446 billion of cash settlements for $770 million principal amount of convertible notes and $660 million of cash repurchases for $263 million principal amount of convertible notes. Micron also issued $600 million of 5.875% senior notes due 2022.
Rambus litigation was settled in December 2013. Micron recorded a $233 million charge in the first nine months of 2014 for the discounted value of payments under a seven-year cross-license arrangement.

Guidance, outlook and management commentary

Management expected fourth-quarter 2014 SG&A of approximately $175 million to $185 million and R&D, net of partner reimbursements, of approximately $355 million to $365 million.
2014 capital spending was estimated at approximately $2.8 billion to $3.2 billion; property, plant and equipment commitments were approximately $1.33 billion, substantially payable within one year.
Management expected cash, investments, operating cash flow and available financing to meet requirements for at least the next 12 months, while noting that liquidity depends heavily on memory pricing, demand and capital spending.
Micron anticipated fourth-quarter restructuring charges of $15 million to $25 million for employee termination benefits related to Italy operations.
Inotera extended the initial term of its supply agreement through December 2016. Micron expected an approximately $90 million non-operating gain in the fourth quarter from Inotera's share issuance and ownership dilution from 35% to 33%.
ON Semiconductor announced an agreement to acquire Aptina. Subject to closing and adjustments, Micron expected approximately $100 million of proceeds and a gain approximately equal to the proceeds.
ASU 2014-09, the new revenue-recognition standard, will be effective for Micron in the first quarter of fiscal 2018. The company was evaluating the transition method and potential effects.

Risks, contingencies and unusual items

Memory markets remain highly cyclical and competitive. Declines in DRAM, NAND and NOR average selling prices could outpace manufacturing-cost reductions and materially reduce margins.
The Inotera supply agreement requires Micron to purchase substantially all of Inotera's DRAM output. Inotera products represented approximately 40% of Micron's DRAM gigabit production in the quarter and cost more than comparable internally manufactured products.
MMJ remained subject to Japanese corporate reorganization proceedings. Micron was obligated to fund approximately 142 billion yen, or $1.40 billion at May 29, 2014, in creditor installments through 2019. MMJ cash was restricted from general use by Micron.
Qimonda litigation could result in loss of Inotera shares, monetary damages or termination of a patent cross-license. The Inotera investment had a $381 million carrying value and $1.66 billion market value for financial-reporting purposes.
Other unresolved patent, antitrust, securities and litigation matters could result in material liabilities, although the filing states that outcomes and potential losses generally could not be estimated.
An earthquake temporarily disrupted the Hiroshima facility and reduced mobile DRAM production. Micron also continued transitioning a Singapore facility from DRAM to NAND Flash.
Foreign-exchange exposure, manufacturing disruptions, technology transitions, reliance on joint ventures, customer concentration and potential product-quality or intellectual-property claims remain material risks.
At quarter-end, the company had $2.66 billion of conversion value in excess of principal on outstanding convertible notes, creating potential cash requirements and dilution considerations.

Investor verification priorities

Verify whether DRAM and NAND pricing, volumes and manufacturing-cost trends sustain the substantial margin improvement.
Assess the availability of cash held by MMJ and the timing and funding of the remaining approximately $1.40 billion of MMJ creditor payments.
Review debt maturities, convertible-note settlement obligations, conversion dilution and the effect of continued debt restructuring on liquidity.
Monitor Inotera performance, supply-agreement economics, the expected $90 million dilution gain and exposure to the Qimonda litigation.
Confirm the timing and economics of the Aptina transaction and the expected approximately $100 million proceeds.
Evaluate whether the $2.8 billion to $3.2 billion capital-spending plan and approximately $1.33 billion of purchase commitments are consistent with expected operating cash flow.
Track semiconductor demand, average selling prices, competitive capacity additions and the effect of the Hiroshima disruption and Singapore product transition.