Micron Technology Inc. intends to restructure its balance sheet in a manner that effectively increases its debt.
The chip maker intends to offer $870.0 million notes in two equal parts (A and B), to institutional buyers registered under the U.S. Securities Act of 1933. There was no information regarding the interest rate applicable on the notes, although the repayment is to be made in 2032.
To attract buyers, Micron would also offer an additional $65.0 million over-allotment option (for each part) to the initial purchasers. The decision for conversion into cash or equity will remain with Micron.
The raised amount will enable Micron to solidify its cash position, finance its continuing working capital requirements and capital expenditure, facilitate the repayment of its convertible senior notes due in 2013 and also fund potential acquisitions.
Earlier this month, the company announced that it will redeem its 4.25% convertible senior notes for an aggregate value of $138.0 million. The notes were due in 2013.
While this increases Micron’s financial flexibility, its debt burden necessarily increases. However, debt to capitalization ratio at the end of the last-concluded quarter was just 22.3%, up from 20.4% at the beginning of the quarter. Therefore, the debt level remains very comfortable and the financing actions make sense.
What could be something of a concern is its liquidity, since Micron’s net cash position remains negative despite the $2.09 billion it holds as cash and short-term investments. Particularly so, since growth opportunities look limited in the near term, given the sluggish demand environment.
The recent issues in the PC supply chain have significantly impacted demand for components such as memory chips. This even impacted memory prices, leading to lower-than-expected revenue and a gross margin contraction of 640 basis points in the recently concluded second quarter 2012. As a result, Micron posted a loss per share of 23 cents, as against the Zacks Consensus Estimate of loss per share of 18 cents and earnings per share of 7 cents in the year-ago quarter. Interest expense was $33.0 million, up from $21.0 million in the second quarter of 2011.
We have a Zacks Rank #3 on Micron, implying a short-term Hold rating, on uncertain PC market recovery and competitive pressure from SanDisk Corp. and Microchip Technology Inc. .