MICRON TECHNOLOGY INC quarterly report, Q1 FY2013

Micron Technology, Inc. — Fiscal 2013 First-Quarter Form 10-Q

Reporting period: Quarter ended November 29, 2012; comparable quarter ended December 1, 2011. Micron manufactures and sells NAND Flash, DRAM, NOR Flash, image-sensor components and related semiconductor products. The filing was signed January 7, 2013.

Financial performance and position

Metric	Q1 FY2013	Q1 FY2012	Change
Net sales	$1.834 billion	$2.090 billion	Down 12%
Gross margin	$217 million; 12%	$305 million; 15%	Down $88 million; margin down 3 points
Operating loss	$157 million	$82 million	Loss increased $75 million
Net loss attributable to Micron	$275 million	$187 million	Loss increased $88 million
Loss per diluted share	$0.27	$0.19	Loss increased $0.08
Cash flow from operations	$236 million	$404 million	Down $168 million
Capital expenditures	$434 million	$697 million	Down $263 million

Operating expenses were $119 million of SG&A, $224 million of R&D and $31 million of other operating expense. Interest expense was $57 million, including approximately $29 million of noncash amortization of debt discount and other costs.
Cash and equivalents were $2.102 billion, short-term investments were $169 million and long-term marketable investments were $527 million at November 29, 2012. Total cash and investments were approximately $2.798 billion, including $56 million held by IMFT that was not generally available for Micron’s other operations.
Total debt was $3.435 billion, including $266 million classified as current. Debt increased from $3.262 billion at August 30, 2012, primarily reflecting a $173 million equipment-backed term loan.
Net cash decreased $357 million during the quarter to $2.102 billion. Investing activities used $639 million, financing activities provided $46 million, and operating activities provided $236 million.
Total assets were $14.067 billion and total equity was $8.186 billion at quarter-end.

Material changes versus comparable periods

Revenue declined primarily because of lower average selling prices for NAND Flash, DRAM and NOR Flash, partially offset by higher unit volumes and manufacturing cost reductions.
NAND Flash revenue was $803 million, down 7% from Q4 FY2012 and down 12% from Q1 FY2012. Trade NAND average selling prices increased 8% sequentially but were down 51% year over year.
DRAM revenue was $720 million, down 9% sequentially and 7% year over year. DRAM average selling prices declined 11% sequentially and 26% year over year, while gigabits sold increased 2% sequentially and 26% year over year.
NOR Flash revenue was $228 million, down from $287 million in the prior-year quarter, primarily due to weakness in wireless demand and continued migration from NOR Flash to NAND Flash.
Segment operating income or loss was: NAND Solutions Group $12 million, versus $94 million; DRAM Solutions Group loss of $112 million, versus $139 million; Embedded Solutions Group $78 million, versus $38 million; Wireless Solutions Group loss of $64 million, versus $58 million.
Gross margin improved from 11% in Q4 FY2012 to 12%, as cost reductions and improved NAND Flash pricing offset lower DRAM pricing, but remained below the 15% recorded in Q1 FY2012.
Other operating expense included a $62 million loss on yen hedges related to the planned Elpida transaction and a $25 million gain from termination of a Transform lease. Equity in losses of investees declined to $52 million from $74 million, principally due to Inotera.

Guidance, outlook and management commentary

Management expected second-quarter FY2013 SG&A of approximately $135 million to $145 million.
Management expected second-quarter FY2013 R&D expense, net of partner reimbursements, of approximately $220 million to $230 million.
Fiscal 2013 capital spending was estimated at approximately $1.6 billion to $1.9 billion; the filing states that actual spending could vary with market conditions. Capital expenditure commitments were approximately $325 million at November 29, 2012.
Management expected cash, investments, operating cash flow and available financing to be sufficient to meet requirements for at least the next twelve months, while noting that liquidity depends heavily on memory selling prices and capital spending.
Micron anticipated closing the Elpida and Rexchip transactions in the first half of calendar 2013, subject to court, creditor, bankruptcy and regulatory approvals. Elpida creditor voting was scheduled to conclude February 26, 2013.
The planned transactions would require approximately $1.07 billion of initial payments, including approximately $731 million for Elpida and $343 million for Rexchip, plus support for up to approximately $780 million of eligible Elpida capital expenditures and future creditor installment payments.

Risks, contingencies and unusual items

Memory markets remained highly cyclical and oversupplied. Further declines in DRAM, NAND Flash or NOR Flash pricing could outpace cost reductions and materially reduce margins and cash flow.
Inotera reported a $410 million net loss for the nine months ended September 30, 2012, had a $1.8 billion working-capital deficit and had received a waiver for certain loan-covenant noncompliance. Micron’s Inotera investment had a $270 million net carrying value and a $167 million market value at quarter-end; management did not record an impairment.
Micron had committed to support Elpida financing, including potential guarantees for working capital and capital expenditures. A $38 million capital-expenditure guarantee was outstanding at quarter-end; an additional $73 million guarantee was issued in December 2012.
Currency options related to the planned Elpida and Rexchip payments generated a $62 million first-quarter loss. A 10% adverse movement in the relevant yen and New Taiwan dollar exchange rates was estimated to produce approximately $109 million of losses on the options.
Pending litigation includes patent matters involving Rambus and other parties, antitrust matters and a Qimonda lawsuit seeking to unwind the acquisition of Inotera shares. The filing states that potential losses for major unresolved matters cannot be estimated and could be material.
Micron’s international exposure is substantial: approximately 85% of Q1 FY2013 sales were to customers outside the United States. Manufacturing disruptions, supply constraints, technology-transition challenges, counterparty defaults and access to financing were identified as additional risks.
Disclosure controls and procedures were considered effective, and no material change in internal control over financial reporting was reported.

Important facts for investors to verify

Whether memory pricing, particularly DRAM pricing, stabilizes sufficiently to offset continuing industry supply and demand pressure.
The timing and final terms of the Elpida and Rexchip transactions, including required approvals, guarantees, funding sources and post-closing leverage.
Inotera’s liquidity, covenant compliance, operating performance and potential effect on Micron’s investment and wafer supply.
Actual FY2013 capital spending and operating cash flow relative to the $1.6 billion to $1.9 billion capital-spending estimate.
Near-term maturities, especially the $949 million principal amount of convertible notes due in 2014, and Micron’s ability to refinance or repay them.
Developments in the Rambus, Qimonda and other patent or antitrust proceedings, including any required payments, licensing changes or restrictions on products.