TEXT-S&P revises Micron Technology outlook to negative

Thu Apr 12, 2012 3:52pm EDT

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.
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