Micron Q4 & FY96
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Micron Q4 & FY96
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> FINANCIAL REVIEW
ALEXANDRIA, Va., September 19, 1996/FOOLWIRE/--- Micron Technology, Inc. reported on September 19, 1996 net income of $593 million, or $2.76 per fully diluted share, on net sales of $3,654 million for the fiscal year ended August 29, 1996. Fiscal 1995's net income was $844 million, or $3.90 per fully diluted share, on net sales of $2,953 million. Net income for fiscal 1996 declined 30% from 1995 as the semiconductor memory business was impacted by sharp declines in average selling prices.
Net sales for the fourth quarter of fiscal 1996 were $700 million and net income was $19 million, or $0.09 per fully diluted share, compared to net sales of $771 million and net income of $58 million ($0.27 per fully diluted share) for the third fiscal quarter of 1996, and net sales of $1,028 million and net income of $281 million ($1.29 per fully diluted share) for the fourth fiscal quarter of 1995. The Company incurred a $9 million pretax charge in the fourth quarter for estimated selling costs on personal computer systems. Results for the fourth quarter of fiscal 1996 benefited from 1) a decrease in the estimated effective income tax rate for fiscal 1996, resulting in a reduction of income tax expense of approximately $6 million and 2) the release of previously established accruals upon resolution of product and process rights contingencies for both semiconductor and personal computer operations in the aggregate amount of $34 million after tax. Fully diluted earnings per share for fiscal 1996 benefited by approximately $0.16 from such fourth quarter adjustments. Resolution of product and process rights contingencies will have a modest on-going benefit to cost of goods sold of semiconductor products.
Fiscal 1996 results were adversely affected by a one-time $30 million pre-tax restructuring charge for discontinuing sales of ZEOS brand PC systems and closing the related PC manufacturing operations in Minneapolis, Minnesota, in the second fiscal quarter. The restructuring charge reduced 1996 fully diluted earnings per share by approximately $0.11.
The Company's net sales increased 24% in fiscal 1996 as compared to fiscal 1995 as a result of growth in personal computer sales and a significant increase in megabits of semiconductor memory sold. PC system sales increased primarily due to greater market acceptance of Micron brand desktop systems, a higher level of government sales, and an increase in sales of notebook systems. The effect on net sales of the increase in megabits of semiconductor memory produced was offset by a severe decline (over 75%) in average selling prices for semiconductor memory. Production of semiconductor memory was 95% higher in 1996 as compared to 1995, measured in megabits, primarily as a result of transitions to shrink versions of 4 Meg and 16 Meg DRAMs and conversions of a substantial portion of the Company's fabrication capacity to 8-inch wafer processing. Sales of semiconductor memory products in fiscal 1996 comprised approximately 60% of total net sales (40% in the fourth quarter). Personal computer system sales, excluding the value of the Company's semiconductor memory included therein, represented approximately 31% of total net sales in fiscal 1996 (50% in the fourth quarter).
Steve Appleton, Chairman, President, and CEO, commented on the fiscal 1996 results, saying, "We are extremely proud of our team's outstanding efforts resulting in the second most profitable year in the Company's history. The execution of the conversion to 8-inch wafer processing and the transition to the 16 Meg DRAM as our primary product has been phenomenal. The emergence of Micron Electronics as a major competitor in the personal computer direct sales channel is additionally a significant accomplishment."
In recent years, the Company has been able to fund its capacity enhancement programs and working capital requirements from operations. Given the uncertainty of the length of each downturn, management is evaluating multiple financing alternatives for potential future needs.
Bill Stover, Chief Financial Officer
1996 was the second most profitable year in Micron's history. Gross margin in the fourth quarter was 24% and 56% for the full year, as compared with 65% for FY 1995. The conversion to eight inch and 16 Mbit production were instrumental in increasing unit production (measure in bits) 95% over FY 1995. Total assets are $3.7 billion, comprised of accounts receivable (A/R) of $347 million; inventories of $251 million; and property, plant, and equipment of $2.7 billion. A/R declined approximately $100 million from one year ago, reflecting price declines. Inventories increased $50 million. The $1.7 billion in FY 1996 capital spending includes investments made in the Lehigh, UT facility prior to putting that project on hold and significant investments in new equipment and facility upgrades at the Boise, ID campus. Cash and short-term investments totaled $287 million as of August 29, 1996, down $269 million from FY end 1995. Term debt increased $325 million in 1996, principally to fund capacity expansion programs that were well underway when the inventory correction commenced.
Don Baldwin, Vice-President, Finance and CFO
The target going into the quarter was to finish Q4 with 12-15 million units in finished goods -- ending finished goods inventory was 10 million units in 4 and 16 Mb DRAM, graphics RAM, and SRAM. Demand has picked up in the first few weeks of September, especially in the Mb x 4 DRAM and 256 k x 16 graphics RAM. Inventory has now moved down to 7 million units as of September 19. PC makers are very light on inventory as well and are running "hand-to-mouth."
Q&A
Gross margin by quarter was: 70% in Q1, 62% in Q2, 47% in Q3, and 24% in Q4. Although the company cannot predict what gross margin will be, Don Baldwin has indicated that there has been some strength in pricing. The company has historically been able to drive prices down and believes that it is in position to do so in the future with the 8 inch and 16 Mb transitions.
In the last few weeks, pricing has firmed because many customers are going to 32 MB DRAM per machine, which puts a lot of demand on 4 Mb x 32 memory modules, which are built with 4 Mb x 4 DRAM. That part has moved up from the low $8 range in the Far East spot market in early September to the mid-$9 range today. The supply chain and channel is running with very lean inventory and there are several companies that are evaluating whether they want to lay up inventories, which is tightening the market.
Bit shipments were about equal between 4 and 16 Meg DRAM. Unit crossover, favoring the 16 Mbit part, may happen in early 1997.
The company is looking for low double-digit bit sequential growth going forward. For the SDRAM part, Micron hopes to start sampling in Q1 1997 and be in full production in Q2 1997.
The company has completed negotiations on a $400 million credit facility with a bank syndicate. This facility has EBITDA (earnings before interest, taxes, depreciation, and amortization) and net income covenants which have been restructured. Micron is currently in compliance with those covenants. The company considers the Micron Electronics subsidiary to be successful. It would consider looking for partners to move toward critical mass or using that subsidiary as a source of cash.
Work-in-process (WIP) inventory is not materially different from past operating levels, but the company does not have figures on wafers or production WIP inventory. The line is "quite normal."
Steve Appleton, Chair/CEO, said he "couldn't possibly pinpoint" an end-date for the 4 Mb line and anticipates that 4 Meg will be in demand for "quite some time, probably for two to three years, maybe more." Bit crossover (from 4 to 16 Meg) occurred in Q4 and unit crossover should happen, depending on customer demand, in the first part of 1997. Accelerating or decelerating on 16 Mbit is not a problem and is dictated by customer needs.
The net effect of a charge of $9 million and a $34 million after-tax gain was an adjustment of $0.16 EPS for the year. Including that adjustment, EPS for Q4 was $0.09.
The supply/demand equilibrium in the industry cannot be fully ascertained at any one time, as that equilibrium is very sensitive. There is no way to answer when demand will grow to be greater than supply.
Micron is expecting the RFID (radio frequency identification tags) subsidiary to go cash flow positive sometime in late Q1 1997. Technically, they have overcome most of the hurdles and they are working to develop products for the FAA (Federal Aviation Administration). They expect the subsidiary to add to the bottom line by mid-1997. Flat panel displays take a lot of R&D and the products are still in development. Flash has started to "go pretty well." Product has sold, but not in quantities. The shrink version is the one that they want to introduce when it is ready.
Average selling price (ASP) for the 4 Meg DRAM in Q4 was $3, down a little more than 40% from Q3. 16 Meg ASP was about $12, down 50%+ from Q3.
SRAM accounted for less than 1% of total sales in Q4.
Steve Appleton spoke about inventories elsewhere in the world and commented that recent estimates for inventory of 2-3 months are too high. His sense is that other companies are running inventories of 3-5 weeks.
A 4 Meg flash device was just qualified and will be put into fabrication at the tens of thousands of units per month in calendar Q4.
Tax rate ran at 37.6% during the year; they expect the rate to run slightly higher next year. Sales, general, and administrative (SG&A) in Q4 ran about $80 million. They expect that expense to increase about $5 million per quarter due to higher advertising in the computer business.
The computer side continues to look very strong with average selling price (ASP) remaining stable. The notebook system continues to look very strong since its introduction last spring. In general, units are up, mainly due to the fact that they've been able to redesign their manufacturing outlets.
The tax adjustment taken in the quarter came through the tax provision line while the other adjustments came through the Cost of Goods Sold (gross expenses) line on the income statement. Cost of goods sold would have been about $50 million higher without the one-time adjustment.
Depreciation and amortization ran about $110 million in Q4 1996. FY 1997 depreciation and amortization could run up to $475 million. Capital expenditures in fiscal 1996 were $1.7 billion. With uncertainty in pricing in 1997, Micron's capital expenditure budget is about $500 million for FY 1997.
At the beginning of the calendar year, the company had $380 million invested in the Lehigh facility. Over the course of the year, approximately $220 million more was invested, principally during the spring.
Sequential bit growth from Q3 to Q4 1996 was 19%.
The company wouldn't discuss the average variable cost for 4 Meg in the fourth quarter. They finished up negotiations with IBM on the licensing issue, the conservative accounting accrual for which is the source of the extraordinary gain in Q4.
The company continues to reduce its costs/unit each quarter except for quarters where they are making large production transitions. If prices (ASPs) were to stay flat, then gross margin would actually improve.
32 MB SIMMS represent about half of the DRAM business right now (as compared to six months ago).
Since the bit output of Micron is so large right now, any small movement in pricing can be worrisome from the standpoint of cash flow. The company is looking at all cash generating possibilities available should that pricing move to an unfavorable point.
Gross margins on semiconductors, backing out non-recurring items, was somewhat less than 10%.
On wafers, they are using, almost exclusively, D-28. They are also using D-42, which removes a mask step. With the 4 Meg, almost all the wafer starts are on D-37. 100% of the production is on 8 inch wafer starts. Wafer starts per week have not changed significantly since last quarter.
Cash cost per unit on 16 Meg is "all over the map" in the industry.
Cutbacks in the industry are cutbacks in bit growth rate. In 16 Mbit, Steve Appleton has heard of cutbacks in the low 20% range and in 4 Meg, 15%. This isn't scaling back wafer starts in the current fabs but restriction of additional fab capacity coming online in the near future. Micron is aiming to shrink some of its capacity and increase yield. Equipment will not go into Lehigh unless the market demands that capacity. If demand were to pick up, it would take six to twelve months to bring on Lehigh, but they plan on being conservative with cash and would need to see a significant shift in supply/demand to bring up Lehigh.
With the 8 inch conversion, the operation ran a little more smoothly than projected, which gave them more output than they thought they would have. Wafer growth is not likely to grow that much once the cycle time for 8 inch is fine-tuned.
90% of 16 Mb starts are 0.35 micron and 100% of 16 Meg starts should happen within five to six weeks. Micron is unusual in the high number there. They will next work on 0.30 and 0.25 micron starts. 5-10% of the world is running on 0.35 micron right now for DRAM. Flash chips are not at 0.35 right now, but as soon as those devices shake out, they can be shrunk to that size.
Average pricing is above spot. Spot on 4 Meg x 4 has not descended to the $8 range that is seen in the spot market.
Expenditures at Lehigh are capitalized. Maintenance expenditures on the facility are expensed, not capitalized. Capitalized expenditures in Q4 were less than $100 million.
Transactions between Micron Electronics and the parent company are arms-length. Micron Electronics is not given preferential treatment by Micron Technology. About 60% of revenues are OEM sales.
SDRAM is planned for customer engineering samples in calendar Q4. These devices should be in the fab in calendar Q1 1997 and be selling in volume by calendar Q2 1997. The company hopes to receive a premium on SDRAM but cannot dictate prices. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |