Micron Technology, Inc. Fiscal 2012 Second-Quarter Form 10-Q
Business context and reporting period
Micron manufactures and markets DRAM, NAND Flash, NOR Flash, CMOS image sensors and related semiconductor products. The filing covers the quarter and six months ended March 1, 2012; the comparable prior-year periods ended March 3, 2011. The financial statements are unaudited and presented in millions except per-share amounts.
Key financial metrics
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $2,009 | $2,257 | $4,099 | $4,509 |
| Gross margin | $210; 10% | $435; 19% | $515; 13% | $959; 21% |
| Operating income (loss) | $(205) | $179 | $(287) | $569 |
| Net income (loss) attributable to Micron | $(282) | $72 | $(469) | $227 |
| Diluted EPS | $(0.29) | $0.07 | $(0.48) | $0.22 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $978 | $1,541 |
At March 1, 2012, cash and equivalents were $2,094, including $171 held by IM Flash and generally unavailable for other operations. Current assets were $5,659 versus current liabilities of $2,102. Total debt carrying value was $2,315, consisting of $150 current and $2,165 long-term debt; estimated debt fair value was $2,848. Fixed-rate debt represented $2,214 of total debt.
Six-month investing cash use was $1,183, including $1,089 of capital expenditures. Financing activities provided $139, including $340 of equipment sale-leaseback proceeds. Capital spending for fiscal 2012 was expected to be approximately $2 billion, with approximately $425 of property, plant and equipment commitments outstanding at March 1.
Material changes versus the prior comparable period
- Second-quarter sales declined 11% year over year, while six-month sales declined 9%.
- DRAM sales declined 23% in the quarter and six months, principally from lower average selling prices. DRAM average selling prices per gigabit declined 50% for both comparable periods.
- NAND Flash sales increased 11% in the quarter and 15% for six months, supported by higher volumes, although average selling prices per gigabit declined 42% and 38%, respectively.
- Wireless Solutions Group sales declined 40% in the quarter and 33% for six months, primarily due to weakness in wireless NOR Flash and customer migration toward NAND Flash.
- Gross margin fell to 10% from 19% year over year, reflecting pricing pressure in DRAM and wireless products, NOR Flash inventory write-downs and underutilized capacity costs.
- SG&A increased 19% year over year in the quarter, partly due to a $13 contribution to a university program and $9 of former CEO death-related stock compensation and benefits. R&D increased 19%.
- Prior-year results included $40 million of Samsung patent cross-license income in the quarter and $240 million for six months; these benefits were absent in fiscal 2012.
- Q2 FY2012 included a $58 customer legal-settlement charge recorded as a reduction of revenue and a $39 gain from disposing of noncurrent equity investments.
Guidance, outlook, risks and unusual items
- Management expected Q3 SG&A of approximately $155–$165 and net R&D of approximately $220–$230. A $17 charge was expected in Q3 from terminating an IMFT lease at the Virginia facility.
- Management expected fiscal 2012 capital spending of approximately $2 billion. NAND Flash production growth was expected to moderate after completion of the initial Singapore ramp.
- Following the April 6, 2012 effective date of agreements with Intel, Micron acquired Intel’s 18% IMFS interest and specified Virginia IMFT assets, received a $65 promissory-note borrowing from Intel, and became entitled to all output from IMFS and the Virginia facility. Intel deposited $300 with Micron for future NAND purchases or potential refund. Intel sales were expected to approximate Q2 levels in Q3 and decline in Q4.
- In March 2012, Micron contributed $170 to Inotera, increasing ownership from 29.7% to 39.7%; the related $133 loan was repaid with interest. Inotera reported a $737 loss for 2011 and current liabilities exceeded current assets by $2.2 billion, creating significant liquidity risk.
- Micron issued notice to redeem its $139 principal amount of 2013 convertible notes on June 4, 2012. Up to approximately 27.3 million shares could be issued if holders convert.
- Major risks include highly volatile memory pricing and industry oversupply, reliance on joint ventures, Inotera liquidity and supply obligations, substantial capital requirements and debt, technology and manufacturing execution, foreign currency exposure, natural disasters and international operations.
- Pending matters include Rambus patent and antitrust litigation, other patent claims, Canadian and Brazilian antitrust matters, and a Qimonda lawsuit seeking return of the Inotera shares or equivalent damages. Micron stated that outcomes generally could not be predicted or losses estimated.
- Micron agreed to pay Oracle $58 in March 2012 for settlement and release of antitrust claims. It had paid $45 into escrow toward an approximately $67 U.S. indirect-purchaser antitrust settlement. The Panavision litigation was settled without a material financial effect.
Most important facts for investors to verify
- Whether DRAM, NAND and NOR average selling prices stabilize faster than Micron can reduce manufacturing costs.
- The post-April 2012 financial effects of the Intel IM Flash transactions, including ownership, supply pricing, cash access and the $300 Intel deposit.
- Inotera’s liquidity, future equity funding needs, wafer output and the economic effect of Micron’s increased ownership.
- Actual fiscal 2012 capital spending and operating cash generation relative to the approximately $2 billion spending plan.
- The June 2012 redemption or conversion of the 2013 notes and resulting cash use or potential share dilution.
- Developments and potential exposure in Rambus, Qimonda, patent, antitrust and other legal proceedings.
- Inventory valuation sensitivity: management estimated that a 5% change in estimated selling prices would change the market value of memory inventory by approximately $145.