Micron Technology, Inc. — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended September 1, 2011, with 52 weeks. The filing also reports fourth-quarter results. Micron manufactures and sells DRAM, NAND Flash, NOR Flash, phase-change memory, image sensors and related semiconductor products. Reportable segments are DRAM Solutions, NAND Solutions, Wireless Solutions and Embedded Solutions.
Financial Performance and Liquidity
| Metric | FY2011 | FY2010 | Change or comment |
|---|---|---|---|
| Net sales | $8.788 billion | $8.482 billion | Increased 4% |
| Gross margin | $1.758 billion; 20% | $2.714 billion; 32% | Margin declined 12 percentage points |
| Operating income | $755 million; 9% of sales | $1.589 billion; 19% | Decreased 52% |
| Net income attributable to Micron | $167 million; $0.17 diluted EPS | $1.850 billion; $1.85 diluted EPS | Substantial decline |
| Cash flow from operations | $2.484 billion | $3.096 billion | Declined $612 million |
| Capital expenditures | $2.550 billion | $616 million | Significant investment increase |
| Cash and equivalents | $2.160 billion | $2.913 billion | Includes $327 million held by IM Flash and generally unavailable for other operations |
| Total debt | $2.001 billion carrying amount | $2.360 billion | Current portion was $140 million; long-term debt was $1.861 billion |
FY2011 cash flow was supported by depreciation and amortization of $2.105 billion and approximately $230 million, net of tax, from the Samsung patent cross-license. Working capital used cash, including a $357 million increase in inventories. Investing cash outflows were $2.201 billion, while financing activities used $1.036 billion after debt repayments, equipment-contract payments, joint-venture distributions and share repurchases.
At September 1, 2011, total current assets were $5.832 billion and current liabilities were $2.480 billion. Contractual obligations totaled $5.089 billion, including $2.136 billion of notes payable, $497 million of capital leases, $1.781 billion of purchase obligations and $559 million of other long-term liabilities.
Fourth-Quarter Results
| Metric | Q4 FY2011 | Q4 FY2010 |
|---|---|---|
| Net sales | $2.140 billion | $2.493 billion |
| Gross margin | $321 million; approximately 15% | $781 million; approximately 31% |
| Operating income (loss) | $(51) million | $433 million |
| Net income (loss) attributable to Micron | $(135) million; $(0.14) diluted EPS | $342 million; $0.32 diluted EPS |
Material Changes Versus the Prior Comparable Period
- DRAM sales fell 28% to $3.620 billion. DRAM average selling prices declined 39%, partially offset by a 19% increase in gigabits sold and a 23% reduction in cost per gigabit.
- DRAM Solutions revenue declined 31% to $3.203 billion and operating income declined to $290 million from $1.269 billion, primarily because of weak PC DRAM demand and pricing pressure.
- NAND Flash sales increased 25% to $3.193 billion and exceeded DRAM sales in the fourth quarter for the first time in Micron’s history. NAND Solutions revenue increased 4% to $2.196 billion and operating income increased to $269 million.
- NOR Flash sales increased to $1.547 billion from $451 million, primarily reflecting the full-year contribution from the May 2010 Numonyx acquisition.
- Wireless Solutions revenue increased 152% to $1.959 billion, while Embedded Solutions revenue increased 92% to $1.002 billion, largely due to Numonyx.
- Overall gross margin declined because average selling prices fell faster than manufacturing costs, particularly in DRAM. NAND Flash average selling prices declined 17% overall; trade-customer prices declined 12% and Intel prices declined 24%.
- Research and development expense increased 27% to $791 million. Net R&D expense was reduced by $236 million through cost-sharing reimbursements from Intel and Nanya.
- Micron sold its Japan wafer fabrication facility to Tower Semiconductor, receiving $40 million in cash, approximately 20 million Tower shares and an additional $20 million payable in installments. The transaction generated a $54 million gain and a related $74 million tax provision.
- Micron issued $690 million of convertible debt in July 2011, repurchased 19.7 million shares for $150 million and prepaid the remaining $250 million TECH credit facility.
- Micron contributed $1.580 billion to IM Flash in FY2011, while Intel made no contributions during the fiscal year. Micron’s IM Flash Singapore ownership reached approximately 86% at year-end, before Intel’s subsequent $131 million contribution reduced Micron’s interest to approximately 82%.
Guidance, Outlook, Commentary and Risks
- Management expected approximately $2 billion of capital spending in 2012, with most spending expected in the first half of the year. Approximately $600 million of property, plant and equipment commitments were outstanding at year-end.
- Management expected IM Flash’s Singapore facility ramp to materially increase NAND Flash production in 2012 and expected underutilized-capacity costs at the facility to decrease significantly.
- Management projected first-quarter FY2012 SG&A expense of approximately $155 million to $165 million and net R&D expense of approximately $200 million to $230 million.
- The principal operating risk is semiconductor-memory cyclicality: excess industry supply and rapid average-selling-price declines may outpace cost reductions. FY2011 DRAM and NAND average selling prices declined 39% and 17%, respectively.
- Inotera reported substantial losses and liquidity stress. Its current liabilities exceeded current assets by $2.3 billion as of June 30, 2011. Micron identified potential impairment risk for its Inotera investment and relies on Inotera for a significant portion of DRAM production.
- Micron was exposed to a Rambus antitrust lawsuit seeking approximately $3.9 billion before trebling and other remedies. A jury verdict was pending at the filing date, no accrual was recorded for a potential adverse judgment, and management stated that a loss could materially affect liquidity.
- Other material legal matters included Oracle’s DRAM antitrust lawsuit, Rambus patent litigation, newly filed patent actions involving DRAM, image sensors and NOR Flash, and Qimonda litigation seeking to unwind the Inotera share purchase or obtain monetary damages.
- International operations, dependence on Singapore manufacturing, limited-source raw materials and equipment, joint-venture funding requirements, foreign-exchange exposure and customer concentration add financial and operating risk.
- Micron had federal, state and foreign net operating loss carryforwards of approximately $2.9 billion, $2.0 billion and $529 million, respectively, but maintained a valuation allowance against substantially all U.S. net deferred tax assets.
Most Important Facts to Verify
- Confirm the sustainability of NAND growth and whether NAND margins can offset continued DRAM pricing pressure.
- Review quarterly trends after the filing date for memory prices, inventory levels, utilization and cost per gigabit.
- Assess the cash burden and returns from the approximately $2 billion FY2012 capital-spending plan and additional IM Flash contributions.
- Verify the availability of cash held by IM Flash and Micron’s ability to fund operations, capital expenditures and contractual obligations under stressed market conditions.
- Monitor Inotera’s liquidity, production contribution and potential impairment of Micron’s investment.
- Track the Rambus, Oracle, patent and Qimonda proceedings, including potential judgments, settlements, appeals and required security or liquidity.
- Evaluate the effect of convertible debt maturities, holder repurchase rights, potential equity dilution and capped-call protections.
- Confirm that the Samsung license revenue and Japan Fab gain are nonrecurring or otherwise separated from underlying operating performance.