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Micron Technology Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended February 28, 2002, and the six months ended on that date. Micron Technology, Inc. is a leading designer, developer, manufacturer, and marketer of semiconductor memory products. Following the divestiture of its PC operations and the contribution of its Web-hosting operations to a foundation in late 2001, the Company now operates as a single reportable segment: Semiconductor Operations.

Key Financial Metrics

Note: Q2 2001 Net Loss includes $84.2 million from discontinued PC operations. Q2 2002 Net Loss is from continuing operations only.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 39% in Q2 2002 and 59% for the six months ended Feb 28, 2002, compared to the prior year. This was driven by a 58% and 78% decline in average selling prices (ASP) for memory products, respectively, despite a 55% and 88% increase in megabits sold.
• Profitability: The Company reported a net loss of $30.4 million for Q2 2002, an improvement from the $88.3 million loss in Q2 2001 (which included discontinued operations). However, the six-month loss of $296.3 million reflects a significant deterioration from the $263.9 million profit in the prior year.
• Inventory Write-downs: Gross margin for the six months ended Feb 28, 2002, was negative $69.6 million due to significant inventory write-downs. The Company recorded $172.8 million in write-downs in Q1 2002 and $3.8 million in Q2 2002 to align inventory with market values. Without these write-downs, the gross margin for the six months would have been negative 44%.
• Segment Shift: The Company no longer reports Web-hosting or PC operations as continuing segments following divestitures and contributions to the Micron Technology Foundation in late 2001.

Guidance, Outlook, and Risks

• Toshiba Acquisition: On December 18, 2001, Micron entered a memorandum of understanding to acquire Toshiba's DRAM business (Dominion Semiconductor) for approximately $250 million in cash and 1.5 million shares. The transaction is expected to close in Q2 2002. Management expects a near-term adverse impact on gross margins due to higher per-unit costs at the acquired facility during the transition.
• Production Outlook: The Company expects annual megabit production for fiscal 2002 to increase by approximately 30% compared to fiscal 2001. Sales in Q2 2002 were constrained by low finished goods inventory levels.
• Capital Spending: Capital spending is expected to approximate $1 billion in 2002. As of Feb 28, 2002, the Company had commitments of $480 million for equipment and $65 million for facilities.
• Legal Contingencies: The Company is engaged in significant patent litigation with Rambus, Inc., in the U.S., Germany, France, the U.K., and Italy. An adverse outcome could result in significant liability or require material changes to products and processes.
• Market Risks: The semiconductor memory industry is highly competitive with volatile pricing. If average selling prices remain below manufacturing costs, the Company expects to incur losses. Additionally, the Company relies heavily on the PC market, which has seen slowed growth.

Investor Verification Checklist

• Verify the status and closing timeline of the Toshiba/Dominion Semiconductor acquisition and the associated integration costs.
• Monitor average selling prices (ASP) for DRAM and Flash memory to assess if they will recover above manufacturing costs.
• Review the remaining inventory write-down exposure; management estimates approximately $160 million of cumulative write-downs remain in inventory as of Feb 28, 2002.
• Assess the impact of the ongoing Rambus patent litigation on future cash flows and operational restrictions.
• Confirm the Company's ability to fund the projected $1 billion capital expenditure plan given current cash flow from operations.