MICRON TECHNOLOGY INC annual report, FY2012

Business Context and Reporting Period

Micron Technology, Inc. filed its Form 10-K for the 52-week fiscal year ended August 30, 2012. The company manufactures and sells NAND Flash, DRAM, NOR Flash, CMOS image sensor components, packaging solutions and related semiconductor systems worldwide. The requested fiscal fourth quarter ended August 30, 2012; quarterly figures below are unaudited.

Micron reported four operating segments: NAND Solutions Group, DRAM Solutions Group, Wireless Solutions Group and Embedded Solutions Group. Sales were concentrated internationally, with approximately 85% of consolidated sales generated outside the United States.

Financial Performance and Key Metrics

Metric	Fiscal 2012	Fiscal 2011	Change
Net sales	$8.234 billion	$8.788 billion	Down 6%
Gross margin	$968 million; 12%	$1.758 billion; 20%	Down 8 percentage points
Operating income (loss)	$(618) million; (8%)	$755 million; 9%	Declined $1.373 billion
Net income (loss) attributable to Micron	$(1.032) billion	$167 million	Returned to loss
Diluted EPS	$(1.04)	$0.17	Declined $1.21
Cash flow from operations	$2.114 billion	$2.484 billion	Down $370 million
Capital expenditures	$1.699 billion	$2.550 billion	Down $851 million

Fiscal fourth-quarter revenue was $1.963 billion, with gross margin of $219 million, operating loss of $140 million, net loss attributable to Micron of $243 million and diluted loss per share of $0.24. Fourth-quarter results improved sequentially in revenue and gross margin from the third quarter, but remained loss-making.

Product revenue was $3.627 billion from NAND Flash, $3.178 billion from DRAM, $977 million from NOR Flash and $452 million from other products. NAND Flash increased to 44% of fiscal 2012 sales from 36% in 2011, while DRAM declined to 39% from 41% and NOR Flash declined to 12% from 18%.

• NAND Solutions Group revenue increased 30% to $2.853 billion; operating income was $198 million.
• DRAM Solutions Group revenue declined 16% to $2.691 billion; operating loss was $500 million.
• Wireless Solutions Group revenue declined 40% to $1.184 billion; operating loss was $370 million.
• Embedded Solutions Group revenue increased 5% to $1.054 billion; operating income was $156 million.

Average selling prices fell sharply: DRAM prices declined 45% per gigabit and trade NAND Flash prices declined 55%. Volume and manufacturing-cost improvements partially offset the pricing pressure. R&D expense increased 16% to $918 million, partly offset by $225 million of partner reimbursements.

Liquidity, Debt and Balance Sheet

• Cash and short-term investments were $2.559 billion at fiscal year-end, including $157 million held by IMFT that was generally unavailable for other operations.
• Total debt was approximately $3.262 billion, including $3.038 billion of long-term debt; debt increased from $2.001 billion at the prior year-end.
• Total assets were $14.328 billion and total equity was $8.417 billion, compared with $14.752 billion and $9.852 billion, respectively, in 2011.
• Operating cash flow of $2.114 billion exceeded capital expenditures of $1.699 billion, but investing cash flow was negative $2.312 billion.
• Fiscal 2012 financing included $1.065 billion of debt issuance and $609 million of equipment sale-leaseback proceeds.
• Contractual obligations totaled $6.280 billion, including $3.225 billion of notes payable, $996 million of capital lease obligations and $1.349 billion of purchase obligations.

Management expected cash, investments, operating cash flow and available financing to meet requirements at least through 2013, while acknowledging that liquidity depends heavily on memory pricing and capital spending. No cash dividend had been paid since 1996, and none was expected in the foreseeable future.

Material Changes Versus the Prior Comparable Period

• Revenue decreased 6%, while gross margin fell from 20% to 12%, primarily because of substantial DRAM and NAND Flash price declines.
• Operating results shifted from $755 million of income to a $618 million loss, and Micron moved from $167 million of net income to a $1.032 billion net loss.
• DRAM profitability deteriorated materially as PC demand weakened and pricing declined. WSG also moved from operating income of $20 million to a $370 million operating loss.
• NAND production volumes increased substantially following the ramp of the Singapore facility and process improvements, but pricing declines limited profitability.
• Micron acquired Intel’s remaining 18% interest in IM Flash Singapore for $466 million and acquired certain IMFT Virginia assets. Intel also made a $300 million deposit toward future NAND purchases.
• Micron increased its Inotera ownership from 29.7% to 39.7% through a $170 million contribution. Inotera supplied approximately 46% of Micron’s DRAM gigabit production in 2012.
• Transform Solar approved liquidation, resulting in a $69 million charge. Micron also recorded a $58 million Oracle antitrust settlement charge and a $58 million charge related to a customer settlement in the DRAM segment.
• The prior-year results included $275 million of gains from a Samsung patent cross-license and $54 million from the sale of the Japan fabrication facility, making year-over-year comparisons less favorable.

Guidance, Outlook, Commentary and Risks

Management expected approximately $1.6 billion to $1.9 billion of capital spending in fiscal 2013, first-quarter 2013 SG&A of approximately $135 million to $145 million and first-quarter R&D expense, net of reimbursements, of approximately $220 million to $230 million. The company expected slower NAND production growth in 2013 after completion of the initial Singapore facility ramp, volume production of DDR4 in 2013, and broader use of 20nm NAND and 30nm DRAM processes.

Micron had agreed to acquire 100% of Elpida and approximately 89% of Rexchip upon closing. The proposed transactions contemplated approximately $1.1 billion of payments at closing, additional Elpida-related creditor payments of approximately $1.75 billion from 2014 through 2019, and possible support for up to $200 million of working capital financing and up to $800 million of capital expenditures. Closing was subject to court, creditor, bankruptcy and regulatory approvals and was not assured.

• The principal operating risk was continued oversupply and further declines in memory average selling prices. Prices could fall below manufacturing costs if cost reductions do not keep pace.
• Inotera reported significant losses, negative working capital of approximately $1.85 billion and covenant noncompliance; failure to obtain waivers or improve liquidity could impair Micron’s investment and disrupt DRAM supply.
• The Elpida and Rexchip transactions could increase leverage, DRAM exposure, integration risk, currency exposure and contingent financing obligations.
• Micron remained exposed to semiconductor cyclicality, weak PC demand, intense competition, technology-transition execution, manufacturing disruptions, limited raw-material and equipment suppliers, and international operating risks.
• Material legal contingencies included Rambus patent and antitrust matters, other patent litigation, the Qimonda action seeking return of Inotera shares or equivalent damages, and various antitrust investigations and settlements. The filing generally did not provide estimable loss ranges for unresolved matters.
• The company had substantial tax loss and credit carryforwards, but maintained a $1.535 billion valuation allowance against deferred tax assets, principally because future realization was uncertain.

PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of August 30, 2012.

Most Important Facts for Investors to Verify

• Whether memory pricing stabilizes and whether process-cost reductions can restore positive gross margins, especially in DRAM.
• The status, final terms, funding requirements and integration results of the Elpida and Rexchip transactions.
• Inotera’s liquidity, covenant waivers, financial performance and ability to maintain expected DRAM supply.
• Micron’s ability to fund $1.6 billion to $1.9 billion of planned fiscal 2013 capital spending while managing increased debt and lease obligations.
• Actual performance of NAND Flash volumes, SSD demand, DDR4 adoption and the 20nm NAND and 30nm DRAM process transitions.
• Resolution and potential financial exposure from the Qimonda litigation, Rambus matters, patent claims and remaining antitrust proceedings.
• Availability and usability of cash held at joint ventures, particularly the $157 million held by IMFT.