MICRON TECHNOLOGY INC annual report, FY2015

Micron Technology, Inc. Fiscal 2015 Form 10-K Summary

Business context and reporting period

Micron is a global semiconductor-memory manufacturer focused on DRAM, NAND Flash, NOR Flash, solid-state drives, modules, multi-chip packages, and related system solutions. Reportable segments are Compute and Networking, Mobile, Storage, and Embedded. The filing covers the 53-week fiscal year ended September 3, 2015; fiscal 2014 had 52 weeks. The requested fourth-quarter fiscal 2015 results are included below.

Financial performance and key metrics

Metric	Fiscal 2015	Fiscal 2014	Change
Net sales	$16.192 billion	$16.358 billion	Down 1%
Gross margin	$5.215 billion; 32.2%	$5.437 billion; 33.2%	Margin down approximately 1 percentage point
Operating income	$2.998 billion; 18.5%	$3.087 billion; 18.9%	Down 3%
Net income attributable to Micron	$2.899 billion	$3.045 billion	Down 5%
Diluted EPS	$2.47	$2.54	Down 3%
Cash flow from operations	$5.208 billion	$5.699 billion	Down 9%
Capital expenditures, cash basis	$4.021 billion	$3.107 billion	Up 29%

Fiscal 2015 fourth-quarter results were net sales of $3.600 billion, gross margin of $970 million, operating income of $427 million, net income attributable to Micron of $471 million, and diluted EPS of $0.42. Fourth-quarter sales declined from $4.227 billion in the comparable fiscal 2014 quarter, while gross margin declined from $1.385 billion.

DRAM generated $10.339 billion, or 64% of fiscal 2015 sales, versus 68% in 2014. DRAM average selling prices declined 11%, while gigabits sold increased 4% and cost per gigabit declined 12%.
Non-volatile memory generated $5.274 billion, or 33% of sales, versus 27% in 2014. Trade NAND Flash sales increased 20%, reflecting a 45% increase in gigabits sold, partly offset by a 17% decline in average selling prices.
CNBU sales declined 8% to $6.725 billion and operating income declined to $1.481 billion, primarily because DRAM price declines outpaced cost reductions.
MBU sales increased 2% to $3.692 billion and operating income increased to $1.126 billion.
SBU sales increased 6% to $3.687 billion, but the segment recorded an operating loss of $89 million versus operating income of $255 million in 2014.
EBU sales increased 13% to $1.999 billion and operating income increased to $435 million.

Balance sheet, debt, liquidity, and cash deployment

Cash and equivalents plus short-term and long-term marketable investments totaled $5.634 billion at September 3, 2015, compared with $5.353 billion at August 28, 2014. Cash and short-term investments alone totaled $3.521 billion.
Total debt carrying value was $7.341 billion, including $1.089 billion current debt and $6.252 billion long-term debt, compared with $6.511 billion in 2014.
Total assets were $24.143 billion and total equity was $13.239 billion. Net property, plant, and equipment increased to $10.554 billion from $8.682 billion.
Fiscal 2015 investing cash outflows were $6.232 billion, including $4.021 billion of property, plant, and equipment spending and $2.144 billion of net purchases of available-for-sale securities. Financing cash outflows were $718 million.
Micron issued $2.0 billion of senior notes, repaid $2.329 billion of debt, and paid $1.019 billion to repurchase convertible notes. It repurchased 42 million common shares for $831 million during the year.
Management expected cash, investments, operating cash flow, and available financing to satisfy requirements for at least the next 12 months. However, approximately $748 million held by the MMJ Group and $134 million held by IMFT were generally unavailable for other Micron operations.
2016 cash expenditures for property, plant, and equipment were estimated at $5.3 billion to $5.8 billion, including approximately $1.93 billion related to the Singapore 3D NAND expansion. The company had approximately $1.62 billion of property, plant, and equipment purchase commitments.

Material changes versus the prior comparable period

Revenue was broadly stable, but profitability declined as DRAM and NAND pricing fell faster than manufacturing-cost reductions in key businesses.
Gross margin decreased to 32% from 33%, while R&D expense increased 12% to $1.540 billion, driven by development wafers, depreciation, personnel, and investment in SSD, managed NAND, firmware, controllers, HMC, 3D NAND, and 3D XPoint products.
Operating cash flow decreased by $491 million, while capital expenditures increased by $914 million, producing materially higher investment intensity.
Debt increased by approximately $830 million despite significant note repayments and repurchases, primarily reflecting new senior-note issuance and capital-lease activity.
Sales mix shifted toward NAND and mobile products. DRAM sales declined 7%, while non-volatile-memory sales increased 18% year over year.
Micron began sampling 3D NAND products and announced 3D XPoint technology in the fourth quarter. Commercial-volume production of 3D XPoint was planned for 2016, and 3D NAND production was expected to ramp in calendar 2015-2016.
Beginning January 1, 2016, a new Inotera supply agreement was scheduled to replace the existing arrangement. The new pricing formula was designed to share margin equally between Inotera and Micron, with a two-year initial term followed by a three-year wind-down period.

Guidance, outlook, management commentary, risks, and unusual items

Management expected continued demand growth for NAND Flash, SSDs, DDR4, 3D NAND, and new memory technologies, but actual results remained highly sensitive to semiconductor supply, demand, and pricing cycles.
The company expected the majority of DRAM production to transition to 20nm technology by the second half of 2016 and the majority of NAND production to use 16nm or 3D NAND technology in 2016.
Key risks include substantial declines in average selling prices, intense competition and industry overcapacity, manufacturing yield and technology-transition risks, dependence on capital spending, supply-chain constraints, foreign-currency exposure, international operations, cybersecurity, and customer and product concentration.
Inotera supplied approximately 35% of Micron’s aggregate DRAM gigabit production in 2015. Micron purchased $2.37 billion of DRAM from Inotera, and the current pricing arrangement resulted in costs materially above comparable production costs at Micron-owned facilities.
The MMJ Companies remained subject to Japanese court oversight and restrictions on dividends, loans, advances, and certain capital decisions. Creditor payments were scheduled through December 2019.
A Qimonda insolvency action challenged Micron’s acquisition of Inotera shares. The litigation could result in loss of shares, monetary damages, or termination of a patent cross-license. The filing states that the possible loss could not be estimated; the disputed Inotera interest had a reported carrying value of $683 million and market value of $846 million.
Patent-infringement lawsuits involving stacked-die and NAND Flash products were pending, and the filing states that potential losses could not be estimated.
Fiscal 2015 included $49 million of debt-restructuring losses and $27 million of foreign-currency losses. Fiscal 2014 included a $233 million Rambus settlement charge, which did not recur in 2015.
The effective tax rate was 6.0%. Tax incentives reduced the 2015 tax provision by $338 million, or approximately $0.29 per diluted share. The company maintained substantial valuation allowances against U.S. and foreign deferred tax assets.
Micron had no cash-dividend plans for the foreseeable future. Price volatility and convertible-note settlements could affect future dilution and cash requirements.

Important facts for investors to verify

Confirm subsequent DRAM and NAND pricing, gigabit growth, cost-per-bit trends, and the effect of the 2016 Inotera pricing agreement on margins.
Assess whether the planned $5.3 billion to $5.8 billion of 2016 capital spending and Singapore expansion were funded without materially increasing leverage.
Review the maturity, conversion, and potential cash-settlement requirements of the convertible notes, including the $553 million conversion value in excess of principal reported at year-end.
Monitor the Qimonda litigation, MMJ reorganization proceedings, patent cases, and any related accruals or restrictions on cash access.
Evaluate the commercial production, yield, cost, and customer adoption of 3D NAND, SSD, DDR4, and 3D XPoint products.
Reconcile consolidated liquidity with restricted or foreign-held cash, including the $748 million held by MMJ and $134 million held by IMFT.
Verify customer concentration, particularly Kingston at 11% of fiscal 2015 sales and Intel at 8%, and the effect of PC-sector weakness on CNBU results.