TEXT-S&P revises Micron Technology outlook to negative
Overview -- U.S.-based Micron Technology Inc. is issuing new $1 billion senior convertible notes due 2032. -- It will use the proceeds from the notes will be used for general corporate purposes, which may include capital expenditures, working capital, acquisitions, joint ventures, and repayment of other debt. -- We are assigning a 'BB-'issue rating and '3' recovery rating to Micron Technology's new convertible notes. We are also affirming all ratings, including the 'BB-' corporate credit rating. The recovery ratings remain unchanged as a result of this new issue. -- We are revising our outlook to negative from stable, reflecting weak memory market conditions, potential acquisition spending, and increased leverage. Rating Action On April 12, 2012, Standard & Poor's Rating Services assigned a 'BB-' issue-level rating to Boise, Idaho-based Micron Technology's new $1 billion senior convertible notes due 2032. The recovery rating is '3', reflecting our expectation for meaningful (50% to 70%) recovery in the event of default. All other ratings were affirmed, including the 'BB-' corporate credit rating, and we revised the outlook to negative from stable. Rationale The outlook revision reflects weak memory market conditions, near-term potential acquisition spending in support of industry consolidation, and increased leverage. The rating on Micron Technology Inc. reflects Standard & Poor's Ratings Services' expectation that the memory industry will remain highly volatile and that the company's presence in DRAM and NAND memory markets will remain largely unchanged, despite significant capital spending to increase capacity in both segments. Micron develops and manufactures Dynamic RAM (DRAM), as well as NAND and NOR (each a type of flash memory) semiconductors for the memory industry. We view its business risk profile as "weak" and its financial profile as "significant." Although credit protection measures continue to vary widely through industry cycles, we expect Micron's investments in NAND flash memory under its remaining joint venture partnership with Intel, its emphasis on specialty product sales, and its memory product diversification across DRAM, NAND, and NOR markets to support prospects for less severe earnings volatility over time. We view Micron's business risk profile as weak, reflecting capital intensity, small market shares in key DRAM and NAND segments, and considerable variability in operating performance. Strengths that partly offset these weaknesses are a strong technology position and memory product diversity. The memory industry requires significant capital investment in leading-edge processes to remain cost-competitive, to maintain adequate supply, and to sustain share. We expect Micron's capital expenditures to remain significant, in excess of 20% of revenue for 2012. Although we believe that Micron is well-positioned in leading-edge technology development, we also believe the industry is susceptible to overexpansion, which can lead to rapid price declines and eroding profitability for all participants. We expect competition from larger peers to continue to constrain Micron's prospects for significant market share gains. Micron's market shares in DRAM and NAND are well behind industry leader Samsung Electronics Co. Ltd. (A/Stable/--) and lag behind focused competitors such as SK Hynix Inc. (BB-/Stable/--) and Toshiba Corp. (BBB/Stable/--). We believe that the company's expansion plans in NAND and its source of DRAM supply from Inotera Technology will modestly improve its market position. We also believe that Micron's leading presence in embedded NOR markets will reduce earnings volatility, despite the secular declines in wireless NOR markets. We view the company's financial risk as significant, despite leverage metrics that are currently strong for the rating category, due to its cash flow characteristics. The ratio of debt to EBITDA pro forma for the new notes is 1.9x. Micron maintains a DRAM joint venture partnership with Inotera, accounted for as an equity investment. Because Micron derives over 40% of its DRAM wafers from Inotera and continues to invest in Inotera's leading edge infrastructure, we believe that Micron has a strategic and economic basis for providing continued support to Inotera. However, Micron has no legal obligation to do so, its business is sufficiently diversified across memory markets, and, as such, in a distressed scenario for Inotera, we believe that it would discontinue its support. Therefore, even though we input support in our analysis, we do not consolidate the Inotera's results with Micron's. Were Inotera consolidated, leverage, based on current results, would increase to about 2.3x. In the six months ended March 2012, Micron invested $170 million in Inotera, increasing its equity ownership from about 29% to 39%, bringing its total investment to date to about $570 million. EBITDA has declined over 30% year over year to $2.1 billion for the 12 months ended March 2012. We expect EBITDA to remain at this level for fiscal 2012 and to recover much of the decline in 2013, supported by solid state drive (SSD) spending, DRAM sector consolidation, recovery of the hard disk drive sector, and industry inventory replacement. In line with our expectations for highly variable operating trends, we expect credit measures to vary widely over a cycle. For fiscal 2012, we anticipate a modest decline in revenues, capital spending of nearly $2 billion, and free cash flow to be minimal to slightly negative. Liquidity We view Micron's liquidity as "adequate." Cash on hand represented about $2 billion as of March 1, 2012. We expect current debt maturities to be modest, at about $200 million this year. Micron purchased the remaining 18% stake of the Intel Flash Singapore JV in April 2012 for $600 million, which it partly funded with a prepayment for Intel's future service and a note to Intel, collectively amounting to $365 million. Our assessment of Micron's liquidity profile incorporates the following expectations, assumptions, and factors: -- We expect coverage of uses to be in excess of 1.2x for the next 12 to 24 months. -- We believe that net sources would be positive in the near term, even with a 15% to 20% decline in EBITDA. -- We note that higher EBITDA declines are not unusual--and from August 2008 to August 2009, the average decline was 48%. Although we believe sources would exceed uses even with a 50% EBITDA decline, cash would be significantly depleted in such a scenario. -- Debt maturities are modest until fiscal 2014. -- We would expect the company to moderate capital spending, in the event of a slowdown in anticipated demand, to preserve liquidity. Recovery analysis See Standard & Poor's recovery report on Micron, published Aug. 4, 2011, on RatingsDirect. Outlook We are revising Micron's rating outlook to negative from stable, reflecting currently weak memory market conditions, potential near-term acquisition spending, and increased leverage. If revenue and earnings performance stabilize in the second half of 2012 and acquisition spending remains modest, such that leverage does not increase materially from current levels, we could revise the outlook to stable. Conversely, if acquisition spending materially increases and weak market conditions do not improve, such that weak to negative free cash flow persists and leverage approaches 3x or more, we could lower the ratings. Related Criteria And Research -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 29, 2012 -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012 -- Industry Economic Outlook: Slow Global IT Spending Growth Is Likely To Continue Into 2012, Jan. 12, 2012 -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, Dec. 22, 2011 -- Reshuffling The Debt: Global High-Tech M&A Activity Accelerates, Oct. 13, 2011 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action Micron Technology Inc. To From Corporate Credit Rating BB-/Negative/-- BB-/Stable/-- New Rating Micron Technology Inc. Senior Unsecured US$500 mil sr nts ser 2032A due 2032 BB- Recovery Rating 3 US$500 mil sr nts ser 2032B due 2032 BB- Recovery Rating 3 Ratings Affirmed Micron Technology Inc. Senior Unsecured BB- Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.