MICRON TECHNOLOGY INC annual report, FY2013

Micron Technology, Inc. Fiscal 2013 Form 10-K Summary

Business context and reporting period

Micron manufactures and sells DRAM, NAND Flash, NOR Flash and related semiconductor solutions for computing, mobile, consumer, networking, automotive and industrial markets. The filing covers the 52-week fiscal year ended August 29, 2013. The requested fiscal fourth quarter ended August 29, 2013 and includes approximately one month of Elpida operations following the July 31, 2013 acquisition.

Micron completed the acquisition of Elpida Memory and an additional 24% interest in Rexchip for aggregate cash consideration of $949 million, resulting in approximately 89% ownership of Rexchip. Elpida expanded Micron's DRAM and mobile-memory capacity and added facilities in Japan and Taiwan.

Financial metrics

Metric	Fiscal 2013	Fiscal 2012	Change or margin
Net sales	$9.073 billion	$8.234 billion	Up 10%
Gross margin	$1.847 billion	$968 million	20% versus 12%
Operating income (loss)	$236 million	$(612) million	3% operating margin versus negative 7%
Net income (loss) attributable to Micron	$1.190 billion	$(1.032) billion	Diluted EPS of $1.13 versus $(1.04)
Cash flow from operations	$1.811 billion	$2.114 billion	Down $303 million
Capital expenditures	$1.244 billion	$1.699 billion	Cash purchases of property, plant and equipment
Total debt	$6.037 billion	$3.262 billion	Includes $1.644 billion of Elpida creditor installment payments

Fiscal fourth-quarter net sales were $2.843 billion, gross margin was $708 million, operating income was $207 million, and net income attributable to Micron was $1.708 billion, or diluted EPS of $1.51. Fourth-quarter results included the $1.484 billion gain on the Elpida acquisition and a $48 million gain from the issuance of Inotera shares.

At August 29, 2013, Micron reported cash and equivalents of $2.880 billion, short-term investments of $221 million and long-term marketable investments of $499 million. Approximately $1.094 billion of cash held by Elpida and its subsidiaries and substantially all of $556 million of current restricted cash were not generally available for Micron's other operations.

At year-end, total assets were $19.118 billion, current assets were $8.911 billion, current liabilities were $4.125 billion, long-term debt was $4.452 billion and total equity was $10.006 billion. Micron had two undrawn revolving credit facilities providing up to approximately $408 million of additional financing, subject to conditions.

Material changes versus prior comparable period

Revenue increased 10%, primarily from higher DRAM and NAND Flash unit volumes, manufacturing efficiencies, increased Inotera supply and one month of Elpida sales. Average selling prices nevertheless declined 11% for DRAM and 18% for trade NAND Flash.
Gross margin improved to 20% from 12%, mainly because manufacturing cost reductions exceeded the effects of lower selling prices.
DRAM revenue increased to $4.361 billion from $3.178 billion, while NAND Flash revenue was broadly unchanged at $3.589 billion. NOR Flash revenue declined to $792 million from $977 million.
DSG operating income improved to $143 million from a $494 million loss. ESG operating income increased to $271 million from $158 million. WSG remained loss-making, although its operating loss improved to $263 million from $368 million. NSG operating income was approximately flat at $201 million.
Micron recognized $126 million of restructure and asset-impairment costs, including charges related to the sale of the Italy facility, discontinued LED activities and restructuring of an ST consortium agreement.
Debt increased substantially following the Elpida transaction and other financing activities. Micron issued $600 million of 2033 convertible notes and borrowed $312 million under a secured term loan.
Micron's ownership in Inotera decreased from approximately 40% to 35% following a private share issuance, producing a $48 million gain. Micron became obligated to purchase substantially all of Inotera's output through an initial term ending in January 2016.

Guidance, outlook, commentary and risks

Management estimated fiscal 2014 capital spending of approximately $2.6 billion to $3.2 billion, with actual spending dependent on market conditions.
Management expected cash, investments, operating cash flow and available financing to satisfy requirements at least through 2014, while noting that additional financing may be needed for capital investments and Elpida-related obligations.
Management expected a significant increase in DRAM production and mobile DRAM sales in 2014 from Elpida. Elpida facilities were expected to contribute more than half of aggregate DRAM gigabit production in the first quarter of fiscal 2014.
Micron began transitioning its Singapore facility from DRAM to NAND Flash production, expected to take approximately four quarters and temporarily reduce wafer output marginally.
Management expected significant commercial production of DDR4 during 2014 and a transition of NAND Flash production toward 16nm technology.
Elpida remained subject to Japanese court and trustee oversight. The reorganization plan requires approximately 140 billion yen of additional creditor payments in annual installments from 2014 through 2019. Unfixed claims could cause total payments to exceed 200 billion yen.
Micron committed, subject to conditions, to assist Elpida in financing up to 64 billion yen, approximately $655 million, of eligible capital expenditures through June 30, 2014. It had provided guarantees related to approximately 4 billion yen of borrowing as of year-end.
Key risks include severe memory-price volatility, intense competition and oversupply, execution and integration risks from Elpida and Rexchip, increased leverage, foreign-currency exposure, manufacturing disruptions, reliance on Inotera, limited access to restricted subsidiary cash, and litigation involving patents, antitrust matters and the Qimonda acquisition of Inotera.
Inotera had a $1.0 billion excess of current liabilities over current assets, had reported a $541 million net loss for 2012, and was not compliant with certain loan covenants as of June 30, 2013. Micron warned that deterioration could impair its investment or disrupt DRAM supply.
The filing states that Micron did not declare or pay cash dividends and did not expect to do so for the foreseeable future.

Most important facts to verify

Separate recurring operating performance from the $1.484 billion Elpida acquisition gain and the $48 million Inotera-related gain.
Assess whether Elpida integration, mobile DRAM growth and planned synergies offset the acquired debt, creditor payments and court-imposed operating restrictions.
Monitor DRAM and NAND average selling prices, cost-per-gigabit reductions, capacity utilization and the impact of the Singapore production transition.
Reconcile available liquidity with restricted Elpida cash, the $6.037 billion debt balance, near-term convertible-note obligations and approximately $2.6 billion to $3.2 billion of planned capital spending.
Track Inotera's covenant waiver, liquidity improvement and ability to provide substantially all required DRAM output.
Review the status and potential exposure of the Qimonda, Rambus, Elpida shareholder and other intellectual-property or antitrust matters; the filing does not provide a clear estimated loss range for several cases.
Confirm subsequent changes to the provisional fair values and accounting for the Elpida acquisition, including the approximately $200 million inventory fair-value step-up that was expected to affect cost of goods sold primarily in the first quarter of fiscal 2014.
Note that management and the auditor excluded Elpida and its subsidiaries from the fiscal 2013 internal-control assessment because the acquisition closed shortly before year-end; these entities represented approximately 27% of consolidated assets and 4% of consolidated revenue.