A Turnaround Is Imminent For Micron Technology, Inc

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Micron Technology, Inc. (NSDQ:MU) has become saddled with debt after the acquisition of Inotera; its total and net debt aggregated to $9.63 billion and $3.48 billion as on 02 June 2016, respectively. The situation was so bleak merely 6 months ago that Micron was downgraded as analysts weren’t sure if the chipmaker would be able to service its debt. Its outstanding debt has remained pretty much unchanged since then but the light at the end of the tunnel is starting to appear. In fact, I’m of the opinion that Micron’s debt situation would vastly improve over the next few years. Let’s take a closer look to have a better understanding of the matter.

The Debt Situation

  • Let’s get privy with Micron’s debt situation first. I’d like to point to readers that Micron’s overall debt-to-equity ratio currently stands about 79%, out of which only 6% is short-term, while the remaining 73% is long-term in nature. These debt levels are pretty high considering that most of the other chipmakers operating in the segment carry much lower leverage levels on their books. This is evident in the table below. Granted that Seagate and Western Digital operate with a higher leverage, but we also have to take into account that their diverse businesses rake-in a stable stream of cash flows, unlike Micron. 
  • Company Short Term Debt/Equity Long-Term Debt/Equity Micron 6% 73% Intel 6% 39% Seagate 0% 259% Western Digital 1% 152% Rambus 0% 30% SunEdison Semiconductor 5% 46%
  • I went through Micron’s SEC filings to see what was really going on with its debt situation. The thing to note here is that the bulk of Micron’s debt has been raised at very high-interest rates, with its 2023 notes carrying a coupon rate as high as 7.5%. So I think it’s safe to say that interest payments on Micron’s liabilities alone bring down the chipmaker’s profitability by a great deal. To put things in perspective, Micron’s interest expense over the past 12 months stood at $359 million which is pretty high considering the fact that the chipmaker generated just $645 million in EBIT over the period. This goes to show that about 55% of the company’s EBIT (Earnings Before Interest and Taxes) gets watered down due to interest payments. And we haven’t even started talking about debt repayments yet.

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    Author: Travis Esquivel

    Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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