Micron Technology, Inc. Form 10-Q Summary
Business context and reporting period
Micron is a global semiconductor-memory company offering DRAM, NAND Flash, NOR Flash, solid-state drives, modules, and related systems for computing, mobile, storage, networking, embedded, automotive, and consumer markets. This report covers the fiscal second quarter and six months ended March 3, 2016. Fiscal 2016 quarters contained 13 weeks; the comparable fiscal 2015 second quarter also contained 13 weeks.
Financial performance and liquidity
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $2.934 billion | $4.166 billion | $6.284 billion | $8.739 billion |
| Gross margin | $579 million; 20% | $1.405 billion; 34% | $1.428 billion; 23% | $3.043 billion; 35% |
| Operating income (loss) | $(5) million | $855 million | $227 million | $1.940 billion |
| Net income (loss) attributable to Micron | $(97) million | $934 million | $109 million | $1.937 billion |
| Diluted EPS | $(0.09) | $0.78 | $0.10 | $1.62 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.883 billion | $2.843 billion |
Second-quarter sales declined 30% year over year, while six-month sales declined 28%. The gross margin fell to 20% from 34% year over year, primarily because declines in average selling prices exceeded manufacturing-cost reductions. Net loss in the quarter reflected lower gross profit, higher interest expense, and sharply lower equity-method income, including Inotera income.
At March 3, 2016, cash and equivalents were $3.078 billion, short-term investments were $957 million, and long-term marketable investments were $1.108 billion, for total cash and marketable investments of approximately $5.143 billion. Total debt was $7.619 billion, including $1.125 billion current debt and $6.494 billion long-term debt. The company reported $746 million of available revolving-credit capacity, subject to borrowing-base and other conditions.
Six-month investing cash outflows were $1.026 billion, including $2.209 billion of property, plant, and equipment expenditures and the $148 million acquisition of Tidal Systems, partly offset by securities sales and maturities. Financing cash flow was negative $68 million. Cash increased by $791 million from September 3, 2015, to $3.078 billion.
Material changes versus the prior comparable period
- DRAM sales declined 41% in the quarter and 39% for the first six months. DRAM average selling prices per gigabit decreased 35% and 33%, respectively, while gigabits sold decreased 9% in both comparisons.
- Trade non-volatile-memory sales declined 11% in the quarter and 7% for the first six months. Average selling prices per gigabit declined 17% and 14%, while gigabits sold increased 7% and 8%, respectively.
- CNBU sales fell 42% year over year in the quarter and its operating result shifted to a $56 million loss from $493 million of income, primarily due to PC-market weakness, lower DRAM pricing, and lower volumes.
- MBU sales fell 41% in the quarter and its operating result shifted to a $21 million loss from $262 million of income, reflecting lower mobile DRAM pricing and volumes and timing of 20nm mobile DDR4 qualifications.
- SBU generated an $18 million operating loss in the quarter, an improvement from a $36 million loss, as cost reductions and lower development-wafer activity partly offset pricing pressure.
- R&D expense increased 6% in the quarter and 9% for the six months, reflecting higher payroll, depreciation, development-wafer, and technology-amortization costs. SG&A declined 6% in the quarter and 7% for the six months.
- Equity in net income of investees declined to $5 million in the quarter from $208 million, and to $64 million for the six months from $332 million. Inotera contributed only $2 million in the quarter versus $206 million in the prior-year quarter; the prior period included a $65 million tax valuation-allowance release at Inotera.
Guidance, outlook, commentary, and unusual items
- Management expected to complete most customer qualifications for 20nm mobile DDR4 products in the third quarter of fiscal 2016 and expected memory demand across smartphone categories to support substantial MBU growth in the fourth quarter.
- Management estimated approximately $5 billion of net 2016 capital expenditures, based on gross expenditures of approximately $5.3 billion to $5.8 billion, partially offset by partner funding. Capital-expenditure commitments were approximately $2.5 billion at March 3, 2016.
- Micron agreed to acquire the remaining 67% of Inotera for approximately $4.0 billion. Closing was anticipated in the fourth quarter of 2016, subject to regulatory approvals, at least $2.4 billion of Taiwan debt financing, and other conditions. Micron also had an option to issue up to approximately $950 million of shares to Nanya; the company was considering substituting up to $500 million of unsecured debt for part of that equity financing.
- The Inotera transaction would increase leverage and exposure to DRAM pricing, Taiwan-dollar operating costs, integration execution, and capital expenditures. Micron held a 33% Inotera interest at the reporting date, with a $1.303 billion carrying value.
- On April 8, 2016, after the reporting date, Micron began syndicating a proposed $500 million six-year secured term loan and indicated it might also issue up to $1.0 billion of senior secured notes. Completion was subject to market and customary closing conditions.
- Micron recorded $15 million of restructuring charges during the first six months, primarily related to manufacturing activities in Agrate, Italy, and closure of its Aguadilla, Puerto Rico facility. Management did not anticipate significant additional costs for these activities.
- Micron acquired Tidal Systems for $148 million and recognized $108 million of in-process research and development and $81 million of goodwill.
- Key risks include continued memory-price declines, excess industry capacity, manufacturing and technology-transition execution, high capital requirements, debt service and refinancing needs, foreign-currency exposure, joint-venture restrictions, intellectual-property litigation, and the pending Inotera acquisition.
- Material legal contingencies include the Qimonda litigation, which could result in loss of Inotera shares or monetary damages, and patent-infringement claims for which the company could not estimate a possible loss range.
Most important facts for an investor to verify
- Whether DRAM and NAND average selling prices stabilize sufficiently to restore gross margins above the reported 20% quarterly level.
- Progress and customer qualification timing for 20nm mobile DDR4 products and whether MBU growth materializes in the fourth quarter of fiscal 2016.
- Regulatory approvals, financing, final funding mix, closing timing, and integration risks for the approximately $4.0 billion Inotera acquisition.
- Actual 2016 capital expenditures and the effect of approximately $2.5 billion of committed equipment purchases on free cash flow.
- Debt maturities, incremental financing costs, potential dilution from convertible notes or the Nanya private placement, and availability of revolving credit.
- Accessibility of foreign subsidiary cash, including restricted MMJ and IMFT funds, and the tax consequences of repatriation.
- Developments in the Qimonda litigation and patent proceedings, including potential effects on Inotera ownership, licensing, and liabilities.