Micron Technology, Inc. — Fiscal 2017 Third-Quarter Form 10-Q
Business Context and Reporting Period
Micron is a global semiconductor-memory manufacturer supplying DRAM, NAND, NOR Flash, and 3D XPoint products for computing, data center, mobile, storage, automotive, industrial, and consumer applications. The unaudited report covers the quarter and nine months ended June 1, 2017; comparable periods ended June 2, 2016. Fiscal 2017 contains 52 weeks.
Micron began consolidating Inotera, now Micron Technology Taiwan, Inc., after acquiring the remaining 67% interest on December 6, 2016. The acquisition materially affects period comparability.
Financial Performance and Key Metrics
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Net sales | $5.566 billion | $2.898 billion | $14.184 billion | $9.182 billion |
| Gross margin | $2.609 billion; 47% | $498 million; 17% | $5.324 billion; 38% | $1.926 billion; 21% |
| Operating income | $1.963 billion; 35% margin | $(27) million; (1)% | $3.366 billion; 24% | $200 million; 2% |
| Net income attributable to Micron | $1.647 billion | $(215) million | $2.721 billion | $(106) million |
| Diluted EPS | $1.40 | $(0.21) | $2.38 | $(0.10) |
- Q3 sales increased 92% year over year and 20% sequentially. Management attributed the increase to higher DRAM and Trade NAND volumes, stronger demand, and higher DRAM average selling prices.
- Q3 gross margin expanded to 47%, reflecting higher DRAM pricing, manufacturing cost reductions, improved product and process technologies, and approximately $100 million of quarterly depreciation savings from extending DRAM equipment lives from five to seven years.
- Q3 product sales were DRAM $3.559 billion, Trade NAND $1.706 billion, Non-Trade $138 million, and Other $163 million. DRAM represented 64% of sales.
- Q3 segment sales and operating income were: CNBU $2.389 billion and $1.219 billion; SBU $1.316 billion and $276 million; MBU $1.129 billion and $304 million; and EBU $700 million and $256 million.
- Q3 SG&A was $204 million and R&D was $434 million. Interest expense was $153 million, compared with $109 million in the prior-year quarter.
Cash Flow, Liquidity, Debt, and Balance Sheet
- For the first nine months, operating cash flow was $4.950 billion, compared with $2.272 billion in the prior-year period.
- Investing cash flow was $(6.239) billion, including $3.469 billion of capital expenditures and $2.634 billion of net cash paid for the Inotera acquisition.
- Financing cash flow was $1.207 billion. Debt proceeds included $2.48 billion from the 2021 MSTW Term Loan and $620 million from the 2021 MSAC Term Loan; Micron also paid $1.00 billion to repurchase portions of its 2025 and 2026 notes.
- Cash and equivalents were $4.048 billion at June 1, 2017, compared with $4.140 billion at September 1, 2016. Total cash and marketable investments were $4.801 billion.
- Receivables increased to $3.497 billion from $2.068 billion, and inventories increased to $3.064 billion from $2.889 billion.
- Total debt carrying value was $11.646 billion, consisting of $1.161 billion current debt and $10.485 billion long-term debt, versus $9.910 billion at September 1, 2016.
- Total equity was $17.019 billion, compared with $12.928 billion at September 1, 2016. Property, plant, and equipment increased to $19.014 billion from $14.686 billion.
- Management expects cash, operating cash flow, and available financing to meet requirements for at least the next 12 months. As of June 1, 2017, credit facilities provided up to $925 million of additional financing; $175 million was drawn on June 5, 2017.
Material Changes Versus Prior Comparable Period
- Revenue, profitability, and margins improved sharply, driven principally by favorable DRAM market conditions, higher DRAM average selling prices, increased bit shipments, and manufacturing cost reductions.
- DRAM Q3 sales increased 106% year over year, with average selling prices up 37%, gigabits sold up 51%, and cost per gigabit down 22%. Trade NAND sales increased 88%, with gigabits sold up 94%, while average selling prices declined 4% and cost per gigabit declined 31%.
- The Inotera acquisition increased DRAM production capacity and operating exposure, but also increased leverage, capital needs, foreign-currency exposure, and integration requirements. Acquired Inotera facilities produced 39% of aggregate DRAM gigabits in Q3.
- Interest expense rose 44% year over year in Q3, primarily because of additional acquisition and secured debt.
- Cash flow benefited from higher earnings but was more than offset by capital spending and the Inotera acquisition, resulting in a $92 million decrease in cash during the first nine months, compared with a $2.340 billion increase in the prior-year period.
Guidance, Outlook, Commentary, and Unusual Items
- Management estimated 2017 cash expenditures for property, plant, and equipment of approximately $4.8 billion to $5.2 billion, net of amounts expected to be funded by partners. Capital-expenditure commitments were approximately $770 million at June 1, 2017.
- Management cited strong demand in enterprise, cloud, networking, SSD, smartphone, connected-home, industrial, consumer, and automotive markets, while noting that future results remain highly dependent on memory pricing, product mix, demand, yields, and cost reductions.
- Tax incentive arrangements reduced Q3 tax expense by $250 million and benefited diluted EPS by $0.21. The Q3 effective tax rate was 5.3%.
- Micron recorded a $60 million loss on repurchasing portions of its 2025 and 2026 notes, a $71 million gain in the first half from remeasuring its previously held Inotera interest, and $12 million of Q3 restructuring and asset-impairment charges.
- Micron recognized an $11 million Q3 loss related to the sale of its Tera Probe interest and planned sale of its Akita, Japan assembly and test facility. The Akita sale was expected to close in Q4 FY2017.
- Convertible notes were convertible during the following quarter. If all relevant notes were converted, the filing estimated potential cash settlement requirements of approximately $2.582 billion if settled entirely in cash, based on the June 1 share price.
- Key risks include memory-price declines, industry oversupply and competition, manufacturing disruptions, technology-transition execution, high capital intensity and leverage, Inotera integration, foreign-currency movements, restricted foreign cash, joint-venture limitations, tax incentives, intellectual-property litigation, and the Qimonda litigation concerning historical Inotera shares.
Most Important Facts for Investors to Verify
- Whether DRAM and NAND pricing, demand, and gross margins remain favorable as industry capacity expands.
- Progress integrating Inotera, realizing expected synergies, and managing its additional debt, capital spending, and Taiwan-related currency exposure.
- Actual 2017 capital expenditures versus the $4.8 billion–$5.2 billion estimate and the effect on free cash flow.
- Liquidity available after the June 5, 2017 draw, debt maturities, convertible-note settlement obligations, and compliance with MSTW financial covenants.
- Availability of cash held by foreign subsidiaries, MMJ, MSTW/MTTW, and IMFT, given legal, contractual, tax, and partner restrictions.
- Potential outcomes and financial exposure from Qimonda, patent-infringement, tax, and other contingencies; the filing does not provide a clear maximum loss estimate for the principal litigation matters.
- Sustainability of tax incentives and the resulting unusually low effective tax rate.