Micron’s cash flows and balance sheet
During its fiscal 4Q17[1. fiscal 4Q17 ended August 31, 2017] earnings call, Micron’s (MU) CFO, Ernie Maddock, stated that the company plans to become net cash positive in fiscal 2018 despite higher capex. This announcement sent a wave of optimism among analysts and investors. This announcement seems to show that Micron is determined to take advantage of its high FCF (free cash flows) to reduce its leverage.
Operating cash flow
Micron’s operating cash flow rose 168% YoY (year-over-year) from $3.2 billion in fiscal 2016 to $8.2 billion in fiscal 2017. This cash flow was driven by increasing DRAM[2. dynamic random access memory] and NAND [3. negative AND] prices over the last four quarters.
If we look at the company’s fiscal 4Q17 operating cash flow of $3.2 billion and annualize it, its annual operating cash flow comes in at ~$13 billion. This means Micron can generate at least $13.0 billion in operating cash flow in fiscal 2018 if memory demand and prices remain at their current levels. Its cash flow can grow even higher if memory prices continue to increase.
With such high operating cash flows, Micron can increase its capital spending while generating higher FCF. However, these estimates assume that the memory industry tailwinds would exist for another year.
Free cash flow
Micron (MU) improved from FCF of -$2.7 billion in fiscal 2016 to FCF of $3.3 billion in fiscal 2017, of which $1.6 billion was used to repay debt. Although Micron’s earnings and cash flow have improved significantly, its balance sheet has not improved at the same pace.
Micron has a net debt position of $4.4 billion, as its long-term debt of $10.0 billion is higher than its cash reserves of $5.4 billion.
Why is debt repayment a priority for Micron?
Micron’s leverage is not at a dangerous level. In fact, Intel (INTC) has a higher net debt of $8.0 billion. Micron’s current priority for its FCF is to reduce its debt. A lower debt level would reduce its annual interest expense by several hundred million dollars and would improve its net earnings. This move would also improve Micron’s financial stability in a downtrend, which would benefit the stability of its stock.
Micron aims to reduce its gross debt to $8.0 billion–$9.0 billion by the end of fiscal 2018 and improve its cash reserves. At its current debt rate of $10.0 billion, the company only has to reduce its debt $1.0 billion–$2.0 billion. With high operating cash flows, this goal looks achievable even with capital spending of $7.5 billion.
By reducing leverage, the company expects to improve its annual EPS (earnings per share) between $0.18–$0.23. The company also sees the potential to become net cash positive by the end of fiscal 2018.
Next, we’ll look at Micron’s stock performance.