Micron Technology, Inc. Fiscal 2016 First-Quarter 10-Q
Business context and reporting period
Micron is a global semiconductor memory company producing DRAM, NAND Flash, NOR Flash, solid-state drives, modules, and related system solutions for computing, storage, mobile, embedded, automotive, and networking markets. The filing covers the 13-week quarter ended December 3, 2015, compared primarily with the 14-week quarter ended December 4, 2014 and the quarter ended September 3, 2015.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $3.350 billion | $4.573 billion | Down 27% |
| Gross margin | $849 million; 25% | $1.638 billion; 36% | Down 11 percentage points |
| Operating income | $232 million; 7% | $1.085 billion; 24% | Down 79% |
| Net income attributable to Micron | $206 million | $1.003 billion | Down 79% |
| Diluted EPS | $0.19 | $0.84 | Down $0.65 |
| Cash flow from operations | $1.120 billion | $1.592 billion | Down $472 million |
- DRAM revenue was $1.945 billion, or 58% of sales, down 37% year over year. DRAM average selling price per gigabit declined 32% and gigabits sold declined 8%.
- Non-volatile memory revenue was $1.269 billion, or 38% of sales, down 3% year over year. Trade NAND average selling prices declined 11%, partly offset by a 9% increase in gigabits sold.
- Operating income by segment was $14 million for CNBU, a $33 million loss for SBU, $135 million for MBU, and $113 million for EBU.
- Research and development expense increased to $421 million from $376 million, reflecting higher development-wafer volumes, depreciation, and payroll costs.
- Net income included a $41 million tax benefit from a U.S. valuation allowance release related to the Tidal Systems acquisition. The effective tax rate was negative 2.8%.
- Cash, cash equivalents, and marketable investments totaled $5.412 billion at December 3, 2015, including $2.605 billion of cash and equivalents.
- Total debt carrying value was $7.377 billion, consisting of $1.051 billion current debt and $6.326 billion long-term debt. Debt fair value was higher at approximately $7.529 billion.
- Capital expenditures paid in cash were $990 million; property, plant, and equipment additions were $1.241 billion.
- Cash increased by $318 million during the quarter to $2.605 billion, after $660 million of investing outflows and $140 million of financing outflows.
Material changes versus comparable periods
- Revenue and profitability deteriorated sharply because memory average selling prices declined faster than manufacturing costs, especially in DRAM. The prior-year comparison was also affected by one fewer reporting week.
- Gross margin fell to 25% from 36% year over year and from 27% in the immediately preceding quarter.
- CNBU revenue fell 45% year over year, primarily because of weaker PC demand, lower DRAM pricing, and lower gigabit volumes. CNBU operating income fell to $14 million from $623 million.
- MBU revenue declined 11% year over year and operating income declined to $135 million from $306 million, primarily due to lower mobile DRAM pricing and volume.
- SBU posted a $33 million operating loss versus $26 million of operating income in the prior-year quarter, reflecting NAND pricing pressure and increased development spending.
- Operating cash flow declined year over year, while capital spending increased to support technology transitions and manufacturing capacity.
- Micron repurchased 7 million shares for $125 million and repurchased $57 million principal amount of 2033E convertible notes for $94 million of cash, reducing potential dilution by approximately 5 million shares.
Guidance, outlook, commentary, and unusual items
- Management estimated fiscal 2016 cash expenditures for property, plant, and equipment of approximately $5.3 billion to $5.8 billion, including amounts expected to be funded by partners.
- Management stated that cash, investments, operating cash flow, and available financing were expected to satisfy requirements for at least the next 12 months.
- Micron entered into a framework agreement to acquire the remaining Inotera shares for estimated consideration of approximately $4.1 billion, with expected closing around mid-calendar 2016. The proposed funding included approximately $2.5 billion of Taiwan debt, up to approximately $1.0 billion of Micron equity issued to Nanya, and cash on hand.
- The Inotera transaction remained subject to definitive agreements, regulatory approvals, shareholder approval, and debt financing. Micron held 33% of Inotera at quarter-end.
- Following December 2015 amendments, Intel obtained a right beginning in January 2016 to put its IMFT interest to Micron at the then-applicable noncontrolling-interest balance; Micron obtained a call right beginning in January 2019.
- Micron acquired Tidal Systems for $148 million, recognizing $108 million of in-process research and development, $81 million of goodwill, and $41 million of deferred tax liabilities.
- Micron recorded $15 million of restructuring and impairment charges, primarily related to manufacturing activities in Agrate, Italy and closure of its Aguadilla, Puerto Rico facility. No significant additional costs were anticipated for those activities.
- 2032 and 2033 convertible notes were convertible through March 31, 2016. If all applicable notes had been converted, the filing estimated minimum cash requirements of $473 million or approximately $1.314 billion if settled entirely in cash.
- Major risks include continued memory-price declines, excess industry supply, technology-transition execution, high capital requirements, leverage, foreign-currency exposure, joint-venture dependencies, manufacturing disruptions, intellectual-property litigation, and the risks associated with the proposed Inotera acquisition.
Important facts for investors to verify
- Whether DRAM and NAND average selling prices stabilize or continue to decline faster than Micron can reduce manufacturing costs.
- Progress, financing, approvals, definitive agreements, and ultimate completion terms for the Inotera acquisition, including the planned debt and potential equity issuance.
- Actual fiscal 2016 capital expenditures relative to the $5.3 billion to $5.8 billion estimate and the effect on free cash flow and leverage.
- Liquidity availability after considering restricted cash held by the MMJ Group and IMFT, foreign reinvestment constraints, debt maturities, and convertible-note settlement obligations.
- The potential effect of the Qimonda litigation, which could involve loss of Inotera shares, monetary damages, or termination of a patent cross-license; the filing does not provide a clear estimate of possible loss.
- Exposure to Intel through IMFT, including Intel’s put right beginning in January 2016 and the contractual limitations on access to IMFT cash.
- Changes in tax valuation allowances, tax incentives, and potential reductions in unrecognized tax benefits, which were estimated at $0 to $68 million over the following 12 months.