Micron Technology, Inc. — Fiscal 2016 Third-Quarter Form 10-Q
Business context and reporting period
Micron is a global semiconductor manufacturer focused on DRAM, NAND Flash, NOR Flash, solid-state drives, modules, and other memory solutions serving computing, networking, mobile, storage, embedded, automotive, and consumer markets. The unaudited quarterly report covers the 13 weeks ended June 2, 2016; the comparable quarter ended June 4, 2015, and the nine months ended June 2, 2016, are also presented. Fiscal 2016 contains 52 weeks.
Financial performance and liquidity
| Metric | Q3 FY2016 | Q3 FY2015 | Change |
|---|---|---|---|
| Net sales | $2.898 billion | $3.853 billion | Down 25% |
| Gross profit | $498 million | $1.202 billion | Down 59% |
| Gross margin | 17% | 31% | Down 14 percentage points |
| Operating income (loss) | $(27) million | $631 million | Declined to a loss |
| Net income (loss) attributable to Micron | $(215) million | $491 million | Declined to a loss |
| Diluted EPS | $(0.21) | $0.42 | Declined |
For the first nine months of FY2016, sales were $9.182 billion, gross profit was $1.926 billion, operating income was $200 million, and net loss attributable to Micron was $106 million, compared with $12.592 billion of sales, $4.245 billion of gross profit, $2.571 billion of operating income, and $2.428 billion of net income in the prior-year period.
- Cash flow: Operating cash flow was $2.272 billion for the first nine months, versus $4.178 billion in the prior-year period. Capital expenditures were $3.894 billion, producing net investing cash use of $1.642 billion.
- Cash and investments: Cash and equivalents were $4.627 billion at June 2, 2016. Short-term and long-term marketable investments totaled $1.025 billion, for combined cash and investments of approximately $5.652 billion.
- Debt: Current debt was $712 million and long-term debt was $8.919 billion, or $9.631 billion in total carrying value, up from $7.341 billion at September 3, 2015. New financing included a $750 million 2022 senior secured term loan and $1.25 billion of 2023 senior secured notes.
- Liquidity: Management stated that cash, investments, operating cash flow, and available financing were expected to meet requirements for at least the next 12 months. A revolving credit facility provided up to $412 million of additional financing, subject to borrowing conditions.
- Capital intensity: Estimated FY2016 net capital expenditures were approximately $5.0 billion to $5.5 billion. Commitments for property, plant, and equipment were approximately $2.26 billion at quarter-end.
Material changes versus comparable periods
- Results deteriorated primarily because memory average selling prices fell faster than manufacturing costs. DRAM average selling prices per gigabit declined 35% year over year in the quarter and 34% for the first nine months; Trade Non-Volatile Memory prices declined 26% and 18%, respectively.
- DRAM sales decreased 27% year over year in the quarter and 36% for the first nine months. Trade Non-Volatile Memory sales decreased 27% and 14%, respectively.
- By segment, Q3 sales declined year over year in CNBU to $1.090 billion, SBU to $719 million, and MBU to $561 million; EBU sales were relatively unchanged at $487 million. CNBU, SBU, and MBU reported operating losses of $64 million, $67 million, and $18 million, respectively, while EBU generated $107 million of operating income.
- Inventory increased to $2.920 billion from $2.340 billion at fiscal year-end, while receivables declined to $2.073 billion from $2.507 billion, partly reflecting lower sales.
- Property, plant, and equipment, net, increased to $13.209 billion from $10.554 billion, reflecting substantial manufacturing investment.
- Equity in earnings from investees declined to a $40 million loss in Q3 from $68 million of income in the prior-year quarter. The quarter included a $25 million impairment charge for the Tera Probe investment.
- On May 5, 2016, Micron acquired Photronics’ remaining interest in MP Mask for $93 million, eliminating the associated noncontrolling interest.
Guidance, outlook, commentary, risks, and unusual items
- Management cited continued pricing pressure, competitive industry supply, PC-sector weakness, manufacturing transitions to 20nm DRAM and 3D NAND, and equipment downtime as factors affecting volumes, costs, and margins.
- Micron initiated a restructuring plan in the fourth quarter of FY2016. It expected approximately $80 million of quarterly savings in 2017 and approximately $70 million of mostly cash restructuring charges, primarily in Q4 FY2016 and early FY2017.
- Micron agreed to acquire the remaining 67% of Inotera for an estimated $4.1 billion. Closing was subject to financing and other conditions and was not determinable at the filing date. Planned funding included approximately $2.5 billion of Taiwan debt financing, up to $964 million of Micron equity, up to $386 million of 2.00% convertible notes to Nanya, additional borrowings, and cash.
- The Inotera transaction would increase exposure to DRAM pricing, Taiwan-dollar costs, integration risk, and leverage. Micron also entered technology transfer and license-option agreements with Nanya that could require transfer of future DRAM process technology after closing.
- Material contingencies included patent litigation involving stacked-die and NAND products and the Qimonda litigation, which could result in loss of Inotera shares, monetary damages, or termination of a patent cross-license. The filing states that potential losses could not be estimated.
- Cash availability was constrained by restrictions on approximately $598 million held by the MMJ Group and $100 million held by IMFT. Approximately $798 million of cash and short-term investments was held by foreign subsidiaries considered indefinitely reinvested.
- Other unusual items included a $30 million write-off of indemnification receivables related to resolved tax positions and tax benefits of $52 million in the quarter from favorable resolution of prior-year tax matters. The U.S. deferred tax assets remained subject to a full valuation allowance.
Most important facts for investors to verify
- Whether memory pricing stabilizes sufficiently for cost reductions to restore gross margins and profitability.
- The timing, financing, regulatory status, dilution, leverage impact, and eventual closing of the proposed Inotera acquisition.
- Actual FY2016 capital expenditures, cash generation, and the ability to fund capital needs while servicing approximately $9.6 billion of debt.
- Execution of the 3D NAND, 20nm DRAM, 3D XPoint, SSD, and controller technology transitions, including related production downtime and yield risks.
- The magnitude and timing of restructuring charges and whether the targeted $80 million of quarterly 2017 savings are achieved.
- Developments in the Qimonda and patent matters, as well as restrictions on cash held by MMJ and IMFT.
- Customer concentration and market exposure, including Intel’s 14% share of first-nine-month sales and the company’s substantial international operations.