Micron Technology, Inc. — Fiscal 2015 Second-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 related memory systems. The filing covers the 13-week quarter and 27-week six-month period ended March 5, 2015. The comparable fiscal 2014 quarter had 13 weeks, while the comparable six-month period had 26 weeks.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|
| Net sales | $4.166 billion | $4.107 billion | $8.739 billion | $8.149 billion |
| Gross margin | $1.405 billion; 34% | $1.403 billion; 34% | $3.043 billion; 35% | $2.684 billion; 33% |
| Operating income | $855 million; 21% | $869 million; 21% | $1.940 billion; 22% | $1.420 billion; 17% |
| Net income attributable to Micron | $934 million | $731 million | $1.937 billion | $1.089 billion |
| Diluted EPS | $0.78 | $0.61 | $1.62 | $0.91 |
- Q2 net sales increased 1% year over year, while six-month sales increased 7%.
- Q2 net income attributable to Micron increased 28%; six-month net income increased 78%.
- Q2 net margin was approximately 22%, compared with 18% in the prior-year quarter. Gross margin was approximately 34% in both periods.
- Six-month cash flow from operations was $2.843 billion, compared with $2.897 billion in the prior-year period.
- Capital expenditures were $1.522 billion in the first six months, and 2015 capital spending was estimated at $3.6 billion to $4.0 billion.
- At March 5, 2015, cash and equivalents were $3.547 billion, short-term investments were $932 million, and long-term marketable investments were $1.869 billion, for total cash and marketable investments of approximately $6.35 billion.
- Total debt carrying value was $6.718 billion, including $1.199 billion current debt and $5.519 billion long-term debt. Debt fair value was materially higher than carrying value, particularly for convertible notes.
- Current assets were $9.918 billion versus current liabilities of $4.120 billion. The current ratio was approximately 2.4x.
Segment and product trends
| Segment | Q2 2015 sales | Q2 2015 operating income | Year-over-year sales change |
|---|
| Compute and Networking | $1.822 billion | $493 million | Down 1% |
| Storage | $954 million | $(36) million | Up 6% |
| Mobile | $856 million | $262 million | Down 6% |
| Embedded | $502 million | $115 million | Up 19% |
- DRAM represented $2.697 billion, or 65%, of Q2 sales; NAND Flash represented $1.325 billion, or 32%.
- DRAM sales declined 3% year over year as a 7% decline in average selling price per gigabit more than offset a 3% increase in gigabits sold.
- Trade NAND Flash sales increased 17% year over year, driven by a 44% increase in gigabits sold, partially offset by a 19% decline in average selling price per gigabit.
- Storage generated a Q2 operating loss as NAND pricing declines outpaced manufacturing cost reductions and SSD/controller R&D costs increased.
Material changes versus comparable periods
- Q2 revenue was broadly stable year over year, but operating income declined slightly because lower average selling prices offset manufacturing cost reductions.
- Six-month profitability improved substantially, helped by higher volumes, DRAM cost reductions, the absence of the $233 million Rambus settlement charge recorded in the prior-year period, and lower debt-restructuring losses.
- Q2 revenue declined 9% from the first quarter, primarily because of lower DRAM pricing and volumes and one fewer production week. Gross margin declined from 36% in Q1 to 34% in Q2.
- Equity-method income increased to $208 million in Q2 from $134 million, including a $65 million benefit from Inotera’s release of a valuation allowance.
- Micron issued $1.0 billion of 2023 senior notes, repaid or settled portions of convertible debt, repurchased $125 million principal amount of convertible notes for $125 million cash, and repurchased 6.5 million common shares for approximately $192 million during the quarter.
Guidance, outlook, commentary, and unusual items
- Management expected Q3 SG&A of approximately $180 million to $190 million and R&D, net of partner reimbursements, of approximately $385 million to $395 million.
- Management expected cash, investments, operating cash flow, and available financing to meet requirements for at least the next 12 months.
- Micron entered a 2016 Inotera supply agreement effective January 1, 2016. Pricing will use a formula that equally shares margin between Micron and Inotera; the agreement has an initial two-year term followed by a three-year wind-down period. Current Inotera supply costs were significantly higher than comparable internally manufactured costs under the existing arrangement.
- Micron planned approximately $50 million of initial 2015 spending on a Singapore clean-room expansion intended to support 3D NAND and other memory technologies. Total expansion cost was estimated at approximately $4 billion over several years, with initial output likely in 2017.
- Available revolving credit facilities totaled approximately $1.18 billion, subject to borrowing-base and other conditions; no amounts were drawn at March 5, 2015.
- Convertible notes with aggregate principal of approximately $1.264 billion could require at least $594 million of cash if converted using the minimum-cash settlement assumptions disclosed. If settled entirely in cash, the estimated obligation was approximately $3.594 billion based on the March 5 share price.
- Singapore tax incentives reduced Q2 tax expense by $97 million and benefited diluted EPS by approximately $0.08. The company retained a full valuation allowance against U.S. net deferred tax assets.
Risks and contingencies
- Memory pricing is volatile: six-month DRAM average selling prices per gigabit declined 4%, while trade NAND Flash pricing declined 22% year over year.
- Results depend on continued manufacturing-cost reductions, technology transitions, product yields, demand, and industry supply discipline.
- Substantial capital requirements, debt obligations, convertible-note settlement exposure, and restricted foreign cash could limit financial flexibility. Approximately $1.32 billion was held by the MMJ Group and was subject to restrictions; $115 million held by IMFT was generally unavailable for other operations.
- The Qimonda litigation could result in loss of Inotera shares, equivalent monetary damages, additional damages, or termination of a patent cross-license. The Inotera shares had a $657 million carrying value and approximately $1.70 billion market value at March 5, 2015.
- Other patent, antitrust, securities, tax, foreign-exchange, joint-venture, supply-chain, manufacturing-disruption, cybersecurity, and international-operation risks remain material. The filing states that potential losses for several legal matters cannot be estimated.
Facts investors should verify
- Whether DRAM and NAND average selling prices stabilize or continue to decline relative to per-gigabit cost reductions.
- Whether Storage returns to profitability and whether SSD/controller R&D spending produces expected growth.
- The economic impact of the 2016 Inotera supply agreement and the effect of Inotera’s higher-cost supply on gross margins.
- Actual 2015 capital spending and the financing plan for the Singapore expansion.
- Cash availability after considering MMJ and IMFT restrictions, debt maturities, convertible-note settlements, capital expenditures, and share repurchases.
- Developments in the Qimonda appeal, patent cases, tax matters, and other contingencies that could materially affect results.
