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What Does Micron’s Cash and Debt Position Say about the Company?

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Jul. 12 2016, Updated 5:04 a.m. ET

Balance sheet

Amid what looks to be a run of quarterly losses, Micron Technology (MU) announced the acquisition of Inotera and a $4 billion investment in its Singapore (EWS) fabrication facility. The company is also spending on R&D (research and development) to bring its 1X and 1Y nodes, 3D NAND Generation 2, and 3D XPoint initiatives into production. These high expenses have put pressure on the company’s balance sheet.

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Cash and debt

As of March 3, 2016, Micron’s cash reserves stood at $5.1 billion, as compared to its long-term debt of $6.5 billion. This indicates that the company does not have sufficient cash to meet its long-term liabilities, thus limiting its capacity to make large investments.

Despite this challenge, the company is acquiring DRAM (dynamic random access memory) manufacturing partner Inotera for $3.2 billion and plans to fund this by raising a new debt of $2.5 billion.

DRAM has lower profit margins than NAND, and so Micron has been running against the current. While Samsung (SSNLF) and SK Hynix are lowering their DRAM investments, Micron is increasing them—and with a debt of $2.5 billion. (Its current $6.5 billion debt does not include the $2.5 billion debt that it plans to raise.) This has raised questions on Micron’s current management with some analysts favoring the idea of a change in the management.

New debt

Micron recently announced $1 billion worth of senior notes with maturity in 2023. Surprisingly, this new debt is not meant for Inotera but for general corporate purposes. If we add up all the long-term debt, it reaches $10 billion, and if cash reserves remain unchanged, the company’s debt-to-cash ratio would be 2x. Intel (INTC) and Avago (AVGO) also raised their leverage, but this was in lieu of a massive acquisition.

Micron already consumes 100% manufacturing proceeds of Inotera and the acquisition is expected to add $600 million towards Micron’s FCF (free cash flow) in the first 12 months after the closure of the deal. This would ease Micron’s negative FCF of $467 million in fiscal 2Q16.

But the losses posted by Inotera in its past quarter have raised questions about Micron’s ability to deliver that FCF. We’ll examine investor reactions to Micron’s current earnings and future growth prospects in the next part.

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