MICRON TECHNOLOGY INC annual report, FY2014

Micron Technology, Inc. — Fiscal 2014 Form 10-K Summary

Reporting period: Fiscal year ended August 28, 2014. Fiscal 2014 comprised 52 weeks. The filing also provides unaudited fourth-quarter results for the quarter ended August 28, 2014.

Business context

Micron manufactures and sells DRAM, NAND Flash and NOR Flash memory, SSDs, managed NAND, memory modules and related semiconductor solutions. Products serve computing, networking, mobile, storage, automotive, industrial and embedded markets. Reportable segments are Compute and Networking, Mobile, Storage and Embedded.

Fiscal 2014 results included a full year of operations from the July 2013 acquisition of Elpida, now Micron Memory Japan, Inc. and related interests in Rexchip, now MMT. The acquisition added significant mobile and computing DRAM capacity and represented approximately 30% of Micron's total wafer capacity in 2014.

Key financial metrics

Metric	Fiscal 2014	Fiscal 2013	Change
Net sales	$16.358 billion	$9.073 billion	Up 80%
Gross margin	$5.437 billion; 33%	$1.847 billion; 20%	Up 13 percentage points
Operating income	$3.087 billion; 19% margin	$236 million; 3% margin	Significant improvement
Net income attributable to Micron	$3.045 billion	$1.190 billion	Up 156%
Diluted EPS	$2.54	$1.13	Up $1.41
Cash flow from operations	$5.699 billion	$1.811 billion	Up $3.888 billion
Capital expenditures	$2.658 billion	$1.244 billion	Up $1.414 billion

Fiscal 2014 product sales were $11.164 billion from DRAM, $4.468 billion from NAND Flash, $505 million from NOR Flash and $221 million from other products. DRAM increased to 68% of sales from 48% in 2013, while NAND Flash declined to 27% from 40%.

Fourth-quarter 2014 results were net sales of $4.227 billion, gross margin of $1.385 billion, operating income of $828 million, net income attributable to Micron of $1.150 billion and diluted EPS of $0.96.

Liquidity, debt and balance sheet

Cash and equivalents were $4.150 billion, short-term investments were $384 million and long-term marketable investments were $819 million at August 28, 2014.
Total debt had a carrying value of $6.593 billion, including $1.638 billion current debt and $4.955 billion long-term debt. Convertible notes had a conversion value exceeding principal by approximately $2.986 billion.
Total assets were $22.498 billion and total equity was $11.573 billion.
Net cash used in financing activities was $1.948 billion, reflecting substantial debt repayments and convertible-note settlements partially offset by $2.212 billion of new debt issuance.
Approximately 90% of fiscal 2014 free cash flow was used for dilution-management activities, including convertible-note exchanges, conversions, repurchases and settlements. These actions eliminated convertible notes that otherwise could have converted into approximately 118 million shares.
Two undrawn revolving credit facilities provided up to $408 million of additional financing, subject to receivables and other conditions.
Management stated that cash and investments, operating cash flow and available financing were expected to satisfy requirements at least through fiscal 2015.

Material changes versus the prior comparable period

Sales rose 80%, primarily because fiscal 2014 included a full year of MMJ operations, higher DRAM and NAND Flash volumes, improved manufacturing efficiency and increased Inotera output.
CNBU sales increased to $7.333 billion from $3.462 billion, with operating income increasing to $1.957 billion from $160 million.
MBU sales increased to $3.627 billion from $1.214 billion, and the segment moved from a $265 million operating loss to $683 million of operating income.
SBU sales increased 23% to $3.480 billion, while EBU sales increased 39% to $1.774 billion.
DRAM gigabits sold increased 142%, average selling prices increased 6% and cost per gigabit declined 20%. Trade NAND Flash average selling prices declined 23%, but cost per gigabit also declined 23% and gigabits sold increased 65%.
R&D expense increased 47% to $1.371 billion, and SG&A increased 26% to $707 million, principally due to MMJ-related costs, higher payroll costs and increased development activity.
Equity income from investees improved to $474 million from an $83 million loss, primarily because of improved Inotera results.
Micron increased its ownership in MMT to 99.5% and its ownership in Inotera declined from 35% to 33% following Inotera's share issuance.

Guidance, outlook and unusual items

Management estimated fiscal 2015 capital spending of approximately $3.6 billion to $4.0 billion, compared with $2.658 billion in fiscal 2014. Approximately $1.18 billion of property, plant and equipment commitments were outstanding at year-end.
For the first quarter of fiscal 2015, management expected SG&A of approximately $195 million to $205 million and R&D, net of partner reimbursements, of approximately $395 million to $405 million.
Micron expected sales of DDR4 products to increase significantly in fiscal 2015 as they replace DDR3 in various applications. It expected most DRAM production to use 25nm and 20nm processes and most NAND Flash production to use 16nm processes in 2015.
Micron expected to begin sampling 3D NAND products in the fourth calendar quarter of 2014 and volume production in the second half of calendar 2015.
Fiscal 2014 included a $233 million Rambus settlement accrual, $205 million of debt-restructuring losses, a $119 million gain on the sale of Aptina, a $93 million gain from Inotera's share issuance, a $66 million Tessera license-related charge in the fourth quarter and a $190 million fourth-quarter deferred-tax benefit related to MMJ.
In October 2014, the board authorized discretionary repurchases of up to $1.0 billion of common stock; the authorization did not require any purchases.
Micron had not paid cash dividends since 1996 and did not intend to pay dividends for the foreseeable future.

Risks and contingencies

Memory markets remain highly cyclical and competitive. Excess industry supply can drive sharp declines in average selling prices, potentially below manufacturing cost.
Micron relies heavily on Inotera, purchasing $2.68 billion of DRAM output in fiscal 2014, representing 38% of aggregate DRAM gigabit production. The supply agreement runs through December 2016, with extension negotiations ongoing and a possible three-year wind-down if no extension is reached.
MMJ remains subject to Japanese court and trustee oversight through scheduled creditor payments, currently extending to December 2019. Approximately $1.60 billion of cash and investments held by MMJ was not generally available to fund Micron's other operations.
The Qimonda litigation could result in loss of Inotera shares, monetary damages or termination of a patent cross-license. As of year-end, the Inotera shares at issue had a reported carrying value of $505 million and market value of $2.06 billion; Micron could not estimate a possible loss.
Micron faces substantial technology, manufacturing, raw-material, equipment, foreign-currency, geographic concentration, customer concentration, intellectual-property and joint-venture risks.
Debt service, convertible-note settlement obligations and planned capital expenditures require sustained operating cash flow and continued access to financing.
Fiscal 2014 contractual obligations totaled approximately $12.002 billion, including $7.959 billion of notes payable, $998 million of capital leases, $1.869 billion of purchase obligations and $1.060 billion of other long-term liabilities.

Investor verification checklist

Verify whether DRAM pricing, NAND Flash pricing and per-gigabit cost reductions remain favorable enough to sustain the 33% fiscal 2014 gross margin.
Review fiscal 2015 capital spending, 3D NAND production timing and the pace of DDR4, 20nm/16nm and other technology transitions.
Monitor Inotera supply-agreement negotiations, purchase costs and the effect of any extension or wind-down.
Assess the availability of cash held by MMJ and IMFT and the timing of MMJ creditor installment payments.
Track convertible-note cash settlements, dilution, debt maturities and the effect of the announced stock-repurchase authorization.
Follow the Qimonda appeal and remaining patent, antitrust and securities matters, for which the filing states that potential losses generally cannot be estimated.
Separate recurring operating performance from unusual items, including the Rambus settlement, Tessera charge, Aptina gain, Inotera gain, debt-restructuring losses and MMJ tax benefit.