Micron Technology, Inc. — Fiscal 2014 First-Quarter 10-Q Summary
Business Context and Reporting Period
Micron manufactures and markets DRAM, NAND Flash, NOR Flash and related semiconductor solutions for computing, mobile, consumer, networking, automotive, industrial and embedded applications. The fiscal quarter ended November 28, 2013; the comparable prior-year quarter ended November 29, 2012.
The quarter included the first full quarter of operations following the July 31, 2013 acquisition of Elpida Memory and an additional 24% interest in Rexchip, now Micron Memory Taiwan. Micron owns approximately 89% of MMT and is entitled to 100% of its output.
Key Financial Metrics
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $4,042 million | $1,834 million |
| Gross margin | $1,281 million; 32% | $217 million; 12% |
| Operating income (loss) | $551 million; 14% of sales | $(97) million; (5)% |
| Net income (loss) attributable to Micron | $358 million | $(275) million |
| Diluted earnings (loss) per share | $0.30 | $(0.27) |
| Net cash provided by operating activities | $1,507 million | $236 million |
- Revenue increased 120% year over year and 42% from the immediately preceding quarter, primarily from Elpida-related DRAM and mobile sales, higher DRAM and NAND volumes, and improved manufacturing productivity.
- Product revenue was $2,794 million from DRAM, $1,058 million from NAND Flash, $145 million from NOR Flash and $45 million from other products.
- Segment revenue and operating income were: DSG $1,785 million and $432 million; WSG $1,054 million and $176 million; NSG $806 million and $95 million; ESG $366 million and $66 million.
- Cash and equivalents were $3,654 million, short-term investments were $216 million and long-term marketable investments were $538 million at November 28, 2013. Approximately $1,402 million of cash and short-term investments was held by Elpida and its subsidiaries and was subject to use restrictions.
- Total debt carrying value was $5,803 million, including $1,543 million current and $4,260 million long term. Debt fair value was $7,756 million.
- Total assets were $19,794 million and total equity was $10,146 million at quarter end.
Material Changes Versus the Prior Comparable Period
- DRAM revenue increased from $720 million to $2,794 million, reflecting Elpida, higher average selling prices, increased Inotera supply and improved production output. DRAM gigabits sold increased 253% year over year, while cost per gigabit decreased 27%.
- NAND Flash revenue increased 32% year over year to $1,058 million. Trade NAND gigabits sold increased 48%, while average selling prices declined 8% and cost per gigabit declined 20%.
- Gross margin expanded to 32% from 12%, driven by improved DRAM pricing, Elpida production, manufacturing cost reductions and product mix. The quarter included approximately $111 million of expense from the Elpida acquisition inventory fair-value step-up; substantially all of the remaining step-up was expected in the following quarter.
- Equity income from investees improved to $86 million from a $52 million loss, primarily due to Inotera's improved results.
- Cash from operations increased by $1,271 million year over year. The quarter benefited from approximately $250 million of customer receipts for future product deliveries, partly offset by approximately $315 million from changed payment terms for certain Elpida customers.
- Micron paid $737 million of debt and $143 million under equipment purchase contracts. It also made the first $534 million installment payment to Elpida creditors using restricted cash.
Outlook, Unusual Items and Management Commentary
- Management expected 2014 capital spending of approximately $2.6 billion to $3.2 billion, with approximately $875 million of property, plant and equipment commitments at quarter end, including $700 million expected within one year.
- Expected second-quarter FY2014 SG&A was $185 million to $195 million; expected R&D, net of partner reimbursements, was $355 million to $365 million.
- Micron expected DRAM production and sales volumes to increase significantly in 2014 because of Elpida. The Singapore DRAM facility was being transitioned to NAND Flash, with substantial completion expected by the end of 2014.
- A $233 million Rambus settlement charge was recorded in other operating expense. The subsequent December 2013 settlement ended pending litigation and established payments of up to $10 million per quarter for seven years, or $280 million in total.
- November 2013 convertible-note restructuring generated a $75 million non-operating loss in the quarter. Management estimated an additional $68 million of related losses in the second quarter from cash settlements of the 2027 and 2031A notes.
- On December 20, 2013, Micron issued $462 million of 1.258% secured notes due 2019, guaranteed by the Export-Import Bank of the United States and collateralized by equipment.
- Management stated that cash, investments, operating cash flow and available financing were expected to meet requirements for at least the next 12 months, while noting that memory pricing and capital spending could materially affect liquidity.
Principal Risks and Contingencies
- Memory pricing is cyclical and highly competitive; declines in average selling prices could outpace manufacturing cost reductions.
- Elpida remains subject to Japanese court and trustee oversight through completion of creditor payments, scheduled for December 2019. Its assets are generally unavailable to fund Micron's other operations, and Micron has remaining Elpida creditor obligations of approximately $1,388 million, payable through 2019.
- Inotera had a $766 million excess of current liabilities over current assets as of September 30, 2013 and had previously breached loan covenants, although it received a waiver. Micron purchased $587 million of Inotera DRAM products during the quarter and had a $437 million carrying value in the investment.
- Micron had significant exposure to convertible debt settlements, foreign exchange movements, capital requirements, joint ventures, manufacturing disruptions, intellectual-property claims and customer concentration. Apple represented 13% of first-quarter sales.
- Pending legal matters included patent litigation, antitrust matters, securities claims related to former Elpida directors and Qimonda's challenge to Micron's acquisition of Inotera shares. The filing states that potential losses for several matters cannot be estimated; an adverse Qimonda outcome could result in loss of Inotera shares or equivalent monetary damages.
Important Facts for Investors to Verify
- Whether DRAM and NAND pricing, production volumes and cost reductions sustain the reported 32% gross margin.
- The timing and cash impact of the remaining Elpida creditor installments, convertible-note settlements and other debt maturities.
- Whether Elpida and MMT integration, court oversight and restrictions on subsidiary cash affect expected synergies and liquidity.
- Actual 2014 capital spending relative to the $2.6 billion–$3.2 billion estimate and the associated financing needs.
- Inotera's liquidity, covenant compliance and continued ability to supply DRAM under the amended supply agreement.
- The resolution and financial impact of the Qimonda litigation, patent matters and other unresolved contingencies.