Micron Technology, Inc. — Fiscal 2011 Q3 Form 10-Q
Reporting period: Quarter and nine months ended June 2, 2011, compared with June 3, 2010; balance sheet compared with September 2, 2010. Micron manufactures DRAM, NAND Flash, NOR Flash, image sensors and related semiconductor products.
Financial performance and position
| Metric | Q3 FY2011 | Q3 FY2010 | 9M FY2011 | 9M FY2010 |
|---|---|---|---|---|
| Net sales | $2,139 million | $2,288 million | $6,648 million | $5,989 million |
| Gross margin | $478 million; 22% | $848 million; 37% | $1,437 million; 22% | $1,933 million; 32% |
| Operating income | $237 million; 11% | $540 million; 24% | $806 million; 12% | $1,156 million; 19% |
| Net income attributable to Micron | $75 million | $939 million | $302 million | $1,508 million |
| Diluted EPS | $0.07 | $0.92 | $0.30 | $1.55 |
| Operating cash flow | Not separately provided | Not separately provided | $2,130 million | $2,019 million |
- Q3 sales declined 7% year over year and 5% sequentially. Nine-month sales increased 11%, primarily because Numonyx was included for only part of the prior-year comparable period.
- DRAM sales were $883 million in Q3, down 39% year over year, principally because average selling prices per gigabit fell 41%, partly offset by a 20% production increase.
- NAND Flash sales were $770 million, up 13% year over year, mainly reflecting Numonyx and a 30% production increase.
- Q3 research and development expense was $211 million, up 49% year over year; SG&A was $151 million, down 21%.
- Cash and equivalents were $2,395 million at June 2, 2011, including $451 million held by IM Flash and generally unavailable for other operations. Inventories increased to $2,068 million from $1,770 million at fiscal year-end.
- Total debt was $1,572 million, including $184 million current and $1,388 million long term, down from $2,360 million at September 2, 2010.
- Cash flow was supported by $2,130 million of operating cash flow, but investing and financing activities used $1,372 million and $1,276 million, respectively. Cash declined $518 million during the first nine months.
Material changes versus comparable periods
- Gross margin fell to 22% from 37% in Q3 FY2010, driven primarily by lower DRAM and NAND average selling prices. Margin improved from 19% in Q2 FY2011 due mainly to lower DRAM costs per gigabit.
- Operating income declined 56% year over year, while Micron-attributable net income declined 92%. The prior-year quarter included a $437 million gain on the Numonyx acquisition; FY2011 also included unusual Samsung license income and other nonrecurring items.
- DSG revenue fell 42% year over year to $774 million and operating income fell to $109 million from $391 million. NSG revenue fell 13% to $505 million and operating income fell to $68 million from $136 million.
- WSG revenue increased to $493 million from $143 million and ESG revenue increased to $241 million from $102 million, primarily due to Numonyx. WSG and ESG operating income improved to $10 million and $55 million, respectively.
- Micron completed the sale of its Japan fabrication facility to Tower Semiconductor, recording a $54 million gain and a $74 million tax provision. The transaction included Tower shares, cash and future installment payments, plus a supply agreement through approximately May 2014.
- Micron acquired the remaining interests in TECH for $159 million and became its 100% owner. It also continued substantial IM Flash funding; Micron contributed $1,144 million during the first nine months, while Intel contributed none.
Outlook, commentary and risks
- Management expected Q4 FY2011 SG&A of approximately $140–$150 million and R&D of approximately $205–$215 million, net of partner reimbursements.
- Expected capital spending was approximately $2.9 billion for FY2011 and approximately $2 billion for FY2012, subject to market conditions. Capital expenditure commitments were approximately $1 billion at June 2, 2011.
- Management expected higher DRAM supply from Inotera in the second half of calendar 2011 and a ramp of NAND production at IM Flash Singapore. Micron’s IMFS ownership increased to 86% after a $421 million contribution made after quarter-end, with its share of costs and supply expected to rise over time.
- Key risks include volatile memory pricing, industry oversupply, inability to reduce manufacturing costs fast enough, heavy capital requirements, dependence on joint ventures and partners, Japan-related supply disruptions, foreign currency exposure, product defects, and Numonyx integration.
- Significant contingencies include Rambus antitrust and patent litigation, other DRAM price-fixing cases, Oracle litigation, Canadian and Brazilian proceedings, and a Qimonda lawsuit seeking to unwind the Inotera share acquisition. Management could not predict the outcomes of these matters or estimate potential losses in several cases.
- The filing identifies a material inventory sensitivity: a 5% change in estimated selling prices would have changed the estimated market value of memory inventory by approximately $147 million at June 2, 2011.
Important facts for investors to verify
- Whether DRAM and NAND pricing stabilized or continued to decline after the reporting date, and the resulting effect on gross margin.
- The pace, cost and utilization of IM Flash Singapore and the effect of Micron’s increased ownership on future cash needs and supply.
- Actual FY2011 and FY2012 capital spending versus guidance, including the approximately $1 billion equipment commitment.
- Availability of cash held at IM Flash and Micron’s ability to fund operations and capital expenditures without additional financing.
- Potential liabilities and timing associated with Rambus, Oracle, other antitrust matters, patent litigation and the Qimonda claim.
- Progress integrating Numonyx and transitioning externally sourced NAND supply to lower-cost internal production.