Micron Technology, Inc. — Fiscal 2013 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended February 28, 2013; comparable quarter and six months ended March 1, 2012. Micron manufactures and sells DRAM, NAND Flash, NOR Flash and related semiconductor solutions.
Financial performance and liquidity
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $2.078 billion | $2.009 billion | $3.912 billion | $4.099 billion |
| Gross margin | $366 million; 18% | $210 million; 10% | $583 million; 15% | $515 million; 13% |
| Operating loss | $23 million | $204 million | $120 million | $275 million |
| Net loss attributable to Micron | $286 million | $282 million | $561 million | $469 million |
| Diluted loss per share | $0.28 | $0.29 | $0.55 | $0.48 |
| Operating cash flow | Not separately provided | Not separately provided | $470 million | $978 million |
- Second-quarter sales increased 3% year over year and 13% sequentially. Six-month sales declined 5% year over year.
- Gross margin improved primarily from lower manufacturing costs, improved product and process technologies, and lower DRAM costs under the revised Inotera supply agreement. Average selling prices continued to decline.
- Operating loss narrowed substantially year over year, but non-operating charges, principally currency-hedge losses and debt extinguishment costs, kept the net loss broadly unchanged.
- Cash and equivalents were $2.061 billion at February 28, 2013, compared with $2.459 billion at August 30, 2012. Short-term investments were $167 million and long-term marketable investments were $546 million.
- Total debt was $3.651 billion, including $350 million classified as current; long-term debt was $3.301 billion. The revolving receivables facility provided up to $255 million, but no amounts were drawn.
- Six-month investing cash outflow was $999 million, including $761 million of capital expenditures. Management estimated fiscal 2013 capital spending of approximately $1.6 billion to $1.9 billion.
Segment and product developments
| Segment | Q2 FY2013 sales | Q2 FY2013 operating income (loss) | Year-over-year sales change |
|---|---|---|---|
| DRAM Solutions | $756 million | $(46) million | +24% |
| NAND Solutions | $713 million | $64 million | (3)% |
| Embedded Solutions | $282 million | $65 million | +17% |
| Wireless Solutions | $213 million | $(87) million | (31)% |
- DRAM revenue increased as gigabits sold rose 43% year over year, while average selling prices per gigabit declined 15%; cost per gigabit declined 26%.
- Trade NAND Flash revenue increased 13% year over year, supported by an 81% increase in gigabits sold, but average selling prices declined 37%.
- Wireless performance remained weak because of lower demand, pricing pressure, reduced NOR Flash sales and customer migration toward NAND Flash.
- Revenue mix in the quarter was approximately 43% DRAM, 42% NAND Flash, 9% NOR Flash and 6% other products.
Material changes and unusual items
- Micron recorded $120 million of second-quarter losses on currency hedges associated with the proposed Elpida and Rexchip transactions and $178 million for the six-month period.
- A $62 million impairment loss was recorded on assets of Micron Technology Italia, which Micron agreed to sell to LFoundry. The transaction was expected to close in the third quarter of fiscal 2013.
- Micron issued $600 million of convertible senior notes due 2033 and repurchased $464 million principal amount of 2014 convertible notes for $477 million, recording a $31 million debt-extinguishment charge.
- SG&A declined 29% year over year to $123 million in the quarter, while R&D declined 4% to $214 million. Management expected third-quarter SG&A of approximately $135 million to $145 million and R&D of approximately $225 million to $235 million, net of partner reimbursements.
- Effective January 1, 2013, Micron began purchasing substantially all of Inotera’s output under a new three-year supply agreement at prices based on a discount to market prices. Nanya ceased participating in the related DRAM joint-development program.
Elpida and Rexchip transactions
Micron continued pursuing the acquisition of Elpida Memory and an additional 24% interest in Rexchip. The proposed transactions would require approximately $1 billion of closing payments, including a 60 billion yen Elpida investment and approximately 10 billion New Taiwan dollars for Rexchip. Micron expected to own 100% of Elpida and approximately 89% of Rexchip if completed.
- Elpida creditors approved the reorganization plans on February 26, 2013, and the Japan Court approved them on February 28, 2013. Certain creditors appealed the approval on March 29, 2013.
- Closing remained subject to court-related conditions, U.S. recognition or equivalent relief, and completion of the Rexchip share purchase. The filing states that completion was not assured.
- Micron had provided guarantees of approximately $38 million and $65 million for Elpida capital-expenditure financing and guaranteed working-capital borrowings of up to approximately $108 million, of which approximately $87 million was outstanding. These obligations could survive failure to close.
- Following closing, Elpida would be responsible for 200 billion yen of creditor payments, but unresolved claims could increase the total amount payable.
Risks, contingencies and outlook
- Memory pricing remains the principal operating risk. Further declines in DRAM, NAND Flash or NOR Flash prices could exceed manufacturing-cost reductions and materially reduce margins and cash flow.
- Inotera reported a $541 million loss for calendar 2012, had current liabilities exceeding current assets by $1.76 billion, and was not in compliance with certain loan covenants. A lender waiver was pending, and Micron could face impairment or supply disruption if Inotera’s liquidity deteriorates.
- Micron expected cash, investments, operating cash flow and available financing to satisfy requirements for at least the next twelve months, but noted that liquidity depends heavily on memory prices, capital spending and access to financing.
- Material legal exposures include Rambus patent litigation, antitrust matters, other patent claims, and a Qimonda lawsuit that could result in loss of the Inotera shares or equivalent monetary damages. The filing does not provide a clear estimate of potential losses for these matters.
- Additional risks include acquisition integration, increased leverage, foreign-currency exposure, manufacturing disruptions, technology-transition execution, joint-venture dependence, customer concentration and international operations.
- Disclosure controls and procedures were deemed effective, with no reported material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Verify the subsequent closing status, purchase accounting and financing impact of the Elpida and Rexchip transactions.
- Reconcile the reported gross-margin improvement with current DRAM, NAND Flash and NOR Flash pricing trends and manufacturing-cost reductions.
- Assess Inotera’s covenant-waiver outcome, liquidity, operating performance and Micron’s exposure under the new supply agreement.
- Review cash generation relative to the $1.6 billion–$1.9 billion fiscal 2013 capital-spending estimate and upcoming debt maturities.
- Track the effect of currency-hedge settlements and any further mark-to-market gains or losses.
- Monitor the MIT disposal, related impairment, and the resulting change in image-sensor revenue and capacity.
- Review developments in Rambus, Qimonda, antitrust and other intellectual-property proceedings, for which the ultimate exposure remains uncertain.