Micron Technology, Inc. — Fiscal 2011 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended March 3, 2011; comparable periods ended March 4, 2010. Results are unaudited and stated in millions except per-share amounts. Micron manufactures and markets DRAM, NAND Flash, NOR Flash and related semiconductor products. The company reorganized into DRAM Solutions Group, NAND Solutions Group, Wireless Solutions Group, Embedded Solutions Group and All Other.
Financial performance and position
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|
| Net sales | $2,257 | $1,961 | $4,509 | $3,701 |
| Gross margin | $435; 19% | $642; 33% | $959; 21% | $1,085; 29% |
| Operating income | $179; 8% | $415; 21% | $569; 13% | $616; 17% |
| Net income attributable to Micron | $72 | $365 | $227 | $569 |
| Diluted EPS | $0.07 | $0.39 | $0.22 | $0.61 |
| Operating cash flow | Not separately provided | Not separately provided | $1,541 | $1,130 |
- Quarterly sales increased 15% year over year, but gross margin declined sharply as DRAM average selling prices fell 37%, partially offset by an 18% reduction in DRAM cost per gigabit.
- Six-month sales increased 22%, while Micron-attributable net income declined 60% and diluted EPS declined from $0.61 to $0.22.
- Six-month capital expenditures were $1,189, compared with $155 in the prior-year period. Net cash used in investing activities was $1,238, and net cash used in financing activities was $1,032.
- Cash and equivalents were $2,184 at March 3, 2011, down from $2,913 at September 2, 2010. Restricted cash was $338, including $250 collateralizing a Hynix JV loan guarantee and $60 related to the TECH credit facility.
- Total debt was $1,740, consisting of $420 current debt and $1,320 long-term debt, compared with $2,360 at fiscal year-end. Micron subsequently repaid the remaining $250 TECH credit facility balance in March 2011, releasing $60 of restricted cash.
- Inventories increased to $1,957 from $1,770, with work in process rising to $1,270. Management stated that a 5% change in estimated selling prices would have changed the estimated market value of memory inventory by approximately $168.
Segment and product developments
| Segment | Q2 FY2011 sales | Q2 FY2011 operating income | Key comparison |
|---|
| DRAM Solutions | $841 | $51 | Sales down 30% year over year; operating income down from $347 |
| NAND Solutions | $552 | $72 | Sales up 9% year over year; operating income up from $48 |
| Wireless Solutions | $510 | $10 | Sales up from $72; operating income improved from a $7 loss |
| Embedded Solutions | $252 | $58 | Sales up from $87; operating income up from $40 |
| All Other | $102 | $(12) | Includes CMOS image sensor, microdisplay and solar operations |
- DRAM sales were $950, down 28% year over year, as a 37% price decline outweighed a 20% production increase. NAND Flash sales were $812, up 45%, primarily reflecting Numonyx and higher production. NOR Flash sales were $392, primarily from Numonyx.
- Approximately 30% of sales were to computing markets and 25% to mobile markets. Sales outside the United States represented approximately 85% of first-half sales.
- Numonyx, acquired in May 2010, materially increased Wireless and Embedded sales and contributed to higher SG&A and R&D costs.
- Micron increased its IM Flash Singapore ownership to 78% by March 3 and to 82% after quarter-end through additional contributions. Its share of costs and output is expected to increase with a generally 12-month lag.
Material changes, outlook and unusual items
- Micron received $240 million during the first six months under a 10-year Samsung patent cross-license and received an additional $35 million after quarter-end. The agreement contributed $40 million of other operating income in the second quarter and $240 million year to date, making reported operating results less representative of recurring operations.
- First-half operating cash flow included approximately $200 million after tax from the Samsung agreement. The company expects 2011 capital spending at the top end of approximately $2.6 billion to $2.9 billion and had approximately $800 million of equipment commitments at quarter-end.
- Management expected third-quarter SG&A of approximately $140 million to $150 million and R&D, net of partner reimbursements, of approximately $210 million to $220 million.
- Management expected IM Flash Singapore production to ramp in the second half of 2011, with initial production costs expected to move into inventory in the third quarter after product qualification.
- Interest expense included noncash debt discount and issuance-cost amortization. First-half other non-operating expense included a $111 million loss from convertible-debt restructuring.
- Micron acquired the remaining interests in TECH for $159 million, increasing ownership from 87% to 100%. It also received a $48 million return of capital from MeiYa.
Risks and contingencies
- Memory pricing and supply remain the principal operating risks. First-half DRAM and NAND average selling prices declined 26% and 4%, respectively, and further price declines could exceed manufacturing-cost reductions.
- Liquidity depends heavily on volatile memory pricing, operating cash flow and access to financing. Cash held by IM Flash, including $352 million at quarter-end, is generally unavailable for other operations without partner agreement.
- Micron expects significant future contributions to IM Flash, while Intel made no contributions during the first six months of 2011. This could increase Micron’s cash requirements and ownership exposure.
- The March 2011 Japan earthquake and tsunami affected certain suppliers of materials and equipment. Potential shortages, delays, higher costs or production disruptions could not yet be quantified.
- Micron faces antitrust and price-fixing litigation, including Rambus claims with alleged damages exceeding $1 billion, Oracle litigation and Canadian and other proceedings. The company cannot predict outcomes or estimate possible losses for most matters. A U.S. indirect-purchaser settlement was approximately $67 million, subject to conditions including court approval.
- Patent disputes, particularly Rambus matters involving products representing a significant portion of sales, could result in damages, injunctions, licensing costs or manufacturing changes.
- Micron’s Inotera exposure includes a 29.7% ownership interest, a right and obligation to purchase 50% of wafer production, and maximum exposure to loss of approximately $381 million. The company also disclosed unresolved claims by the Qimonda bankruptcy administrator regarding the Inotera share transfer.
- Micron guarantees a $250 million Hynix JV loan due in installments from 2014 through 2016; the obligation is collateralized by restricted cash.
- Currency, interest-rate, joint-venture, technology-transition, product-quality, supply-chain and Numonyx-integration risks could materially affect results.
Investor verification priorities
- Verify whether DRAM and NAND pricing trends stabilize and whether cost-per-gigabit reductions offset future pricing pressure.
- Assess recurring operating performance excluding Samsung license proceeds and other unusual items.
- Track capital spending, IM Flash contributions, partner funding and the availability of cash held at joint ventures.
- Review the impact of the Numonyx integration on SG&A, R&D, product mix and margins.
- Monitor inventory levels, work-in-process balances and potential inventory write-down sensitivity.
- Follow Rambus, antitrust, Qimonda/Inotera and other litigation developments, including potential settlement or infringement costs.
- Confirm completion and cash-flow effects of the TECH debt repayment and release of restricted cash.
