Micron Technology, Inc. — Fiscal 2012 First-Quarter Form 10-Q
Reporting period: Quarter ended December 1, 2011; comparative quarter ended December 2, 2010. Micron manufactures and markets DRAM, NAND Flash, NOR Flash, image sensors and related semiconductor products. The financial statements are unaudited and presented in millions except per-share amounts.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $2,090 | $2,252 | Down 7% |
| Gross margin | $305; 15% | $524; 23% | Down $219 million; margin down 8 points |
| Operating income (loss) | $(82) | $390 | Down $472 million |
| Net income (loss) attributable to Micron | $(187) | $155 | Decrease of $342 million |
| Diluted EPS | $(0.19) | $0.15 | Turned to loss |
| Cash flow from operations | $404 | $732 | Down $328 million |
| Capital expenditures | $697 | $465 | Up $232 million |
- Cost of goods sold increased to $1,785 million from $1,728 million despite lower sales, reducing gross margin to 15% from 23%.
- SG&A was $151 million, up from $140 million, and research and development was $230 million, up from $185 million.
- Equity-method losses increased to $74 million from $26 million, primarily reflecting Inotera losses.
- Cash and equivalents were $1,915 million at December 1, 2011, down from $2,160 million at September 1, 2011. Cash held by IM Flash included $160 million and was generally unavailable for other operations.
- Total debt was $2,119 million, including $146 million classified as current; long-term debt was $1,973 million. Estimated debt fair value was $2,349 million.
- Total assets were $14,211 million and total equity was $9,709 million at quarter-end.
Material changes versus comparable periods
- Sales declined 7% year over year, driven by a 27% decline in DRAM Solutions Group sales and a 27% decline in Wireless Solutions Group sales. NAND Solutions Group sales increased 36%.
- DRAM Solutions Group operating results fell to a $139 million loss from $225 million of operating income, primarily because DRAM average selling prices declined substantially, particularly in PC DRAM.
- Wireless Solutions Group reported a $58 million operating loss versus $56 million of operating income, reflecting lower wireless NOR Flash demand, pricing pressure and customer migration toward NAND Flash.
- NAND Solutions Group operating income increased to $94 million from $57 million, supported by higher volumes, manufacturing cost reductions and the ramp of IM Flash Singapore.
- Average selling prices per gigabit declined approximately 12% for DRAM and 10% to 11% for NAND Flash versus the prior quarter. Cost reductions partially offset pricing pressure.
- Q1 FY2011 benefited from approximately $200 million of Samsung patent cross-license proceeds, of which $191 million was recorded in other operating income, and a $111 million debt-restructuring loss was recorded in other non-operating expense. These unusual items affected year-over-year comparability.
- Net cash used in investing activities increased to $714 million from $436 million, mainly because of higher capital spending. Financing activities provided $65 million versus an $798 million use of cash in the prior-year quarter.
Outlook, commentary and risks
- Management expected fiscal 2012 capital spending of approximately $2 billion, with most spending in the first half of the year. Capital expenditure commitments were approximately $450 million as of December 1, 2011.
- Management expected Q2 FY2012 SG&A of approximately $155 million to $165 million and net R&D expense of approximately $220 million to $230 million.
- Management expected NAND Flash production and Micron’s share of IM Flash Singapore supply to increase as the facility ramped. Micron’s ownership of IMFS was 82% at quarter-end, while its operating cost and supply share was expected to increase from 71% during 2012.
- In December 2011, subsequent to quarter-end, Micron lent Inotera $133 million under a 90-day note bearing 2% annual interest. Inotera had reported a $521 million nine-month loss and a $2.2 billion excess of current liabilities over current assets as of September 30, 2011.
- Micron purchased $156 million of DRAM products from Inotera during the quarter; Inotera supplied 43% of Micron’s DRAM gigabit production. Micron recorded a $40 million loss related to its Inotera purchase commitment.
- Key risks include continued memory-price declines, industry oversupply, weak PC demand, underutilized manufacturing capacity, substantial capital requirements, joint-venture funding and execution risk, foreign currency exposure, and potential difficulty obtaining financing.
- Material legal contingencies include patent litigation, including Rambus matters; antitrust claims, including Oracle and Canadian proceedings; and a Qimonda lawsuit seeking to unwind the acquisition of Inotera shares and terminate a patent cross-license. The filing states that potential losses generally cannot be estimated.
- Rambus’ approximately $3.9 billion California antitrust case resulted in a jury verdict for Micron on November 16, 2011, although post-trial motions and appeals were anticipated. Micron had paid $45 million into escrow toward a $67 million U.S. DRAM antitrust settlement.
Important facts for investors to verify
- Whether DRAM, NAND Flash and NOR Flash pricing trends improve or continue to outpace manufacturing cost reductions.
- The pace, cost and yield of the IM Flash Singapore ramp and the related increase in Micron’s ownership, supply and funding obligations.
- Inotera’s liquidity, operating performance, ability to refinance the $133 million note, and the potential effect on Micron’s investment and DRAM supply.
- Whether operating cash flow can support approximately $2 billion of planned fiscal 2012 capital spending while maintaining adequate liquidity.
- The status and potential financial exposure of Rambus, Oracle, Canadian antitrust, patent and Qimonda litigation.
- The effect of product mix, inventory valuation assumptions and selling-price changes; management noted that a 5% variance in estimated selling prices would have changed the estimated market value of memory inventory by approximately $143 million.