MICRON TECHNOLOGY INC quarterly report, Q3 FY2013

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

Business context and reporting period

Micron manufactures and markets DRAM, NAND Flash, NOR Flash and related semiconductor solutions for computing, consumer, networking, automotive, industrial, embedded and mobile applications. The filing covers the unaudited quarter and nine months ended May 30, 2013, compared primarily with the quarter and nine months ended May 31, 2012. The fiscal year ended August 30, 2012.

Key financial metrics

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Net sales	$2,318 million	$2,172 million	$6,230 million	$6,271 million
Gross margin	$556 million; 24%	$234 million; 11%	$1,139 million; 18%	$749 million; 12%
Operating income (loss)	$149 million	$(188) million	$29 million	$(463) million
Net income (loss) attributable to Micron	$43 million	$(320) million	$(518) million	$(789) million
Diluted EPS	$0.04	$(0.32)	$(0.51)	$(0.80)

Q3 revenue increased 7% year over year. Management attributed the improvement primarily to higher gigabit sales in DRAM and Embedded Solutions, while NAND revenue declined partly because Q3 2012 included a $97 million one-time increase from an Intel supply-agreement change.
Q3 gross margin improved to 24% from 11%, primarily from lower cost per gigabit across reportable segments, together with higher DRAM average selling prices.
Q3 operating income included $55 million of restructuring and asset-impairment charges, including $26 million related to the STMicroelectronics consortium restructuring and $25 million for discontinued LED development.
Q3 other non-operating expense was $45 million, including losses on currency hedges associated with the planned Elpida and Rexchip transactions.
Nine-month cash provided by operating activities was $1,094 million, compared with $1,664 million in the prior-year period. Investing cash use was $1,170 million, including $964 million of capital expenditures. Financing cash provided was $57 million.
Cash and equivalents were $2,440 million at May 30, 2013, compared with $2,459 million at August 30, 2012. Short-term investments were $112 million and long-term marketable investments were $347 million.
Total debt was $3,624 million, including $357 million classified as current; long-term debt was $3,267 million. Debt increased from $3,262 million at August 30, 2012, driven partly by new convertible notes and equipment financing.
Total assets were $14,055 million and total equity was $8,026 million at May 30, 2013.

Material changes versus comparable periods

DRAM Solutions Group revenue rose to $924 million from $750 million, and operating results improved to $118 million of income from a $75 million loss. DRAM sales benefited from higher average selling prices, increased gigabits sold and lower cost per gigabit.
NAND Solutions Group revenue declined to $730 million from $760 million, but operating income improved to $58 million from a $2 million loss because of manufacturing cost reductions and better trade-customer pricing.
Embedded Solutions Group revenue increased to $305 million from $265 million, while operating income increased to $65 million from $33 million.
Wireless Solutions Group revenue was unchanged at $276 million, but its operating loss narrowed to $62 million from $103 million, reflecting cost reductions and improved NAND pricing. Nine-month Wireless revenue remained down because of weakness in wireless NOR Flash and lower multi-chip-package sales.
SG&A declined 19% year over year to $127 million in Q3; R&D declined 2% to $226 million. The filing cites lower payroll costs, suspended variable-pay plans and lower legal costs as contributors.
Equity in net loss of equity-method investees improved to $10 million from $115 million, primarily because of improved Inotera results and the absence of the prior-year Transform-related losses.
Micron issued $600 million of 2033 convertible senior notes in February 2013 and repurchased $464 million principal amount of 2014 convertible notes for $477 million, recognizing a $31 million debt-extinguishment charge.
Micron’s ownership in Inotera declined from 39.7% to 35.5% following Inotera’s share issuance to Nanya. Micron expected to recognize an approximately $48 million gain in Q4 2013.

Guidance, outlook, commentary and unusual items

Management expected Q4 2013 SG&A of approximately $135 million to $145 million and net R&D expense of approximately $230 million to $240 million.
Q4 2013 capital spending was estimated at approximately $300 million to $500 million; approximately $500 million of property, plant and equipment commitments were outstanding at May 30, 2013.
Micron was preparing to transition its Singapore fabrication facility from DRAM to NAND Flash over approximately four quarters. Management expected production to be adversely affected during the transition.
Micron was targeting completion of the Elpida acquisition during fiscal Q4 2013, subject to remaining conditions, including closing the Rexchip share purchase. The filing states that closing was not assured.
If completed, the Elpida and Rexchip transactions would require approximately $909 million of cash at closing. Micron also agreed to support up to approximately $633 million of eligible Elpida capital expenditures, subject to conditions, and to support Elpida’s reorganization payments of approximately 200 billion yen.
At May 30, 2013, Micron had guaranteed approximately $50 million of Elpida capital-expenditure financing and approximately $79 million of Elpida working-capital borrowings. The working-capital facility was repaid on June 28, 2013, releasing that guarantee; Micron provided an additional $16 million capital-expenditure guarantee in June 2013.
On June 27, 2013, Micron entered into a senior secured receivables-backed revolving facility with maximum committed availability of approximately $153 million. The existing $255 million receivables facility had not been drawn at May 30, 2013.
Inotera had a $1.68 billion excess of current liabilities over current assets as of March 31, 2013, had previously breached loan covenants and received a waiver. Micron was obligated to purchase substantially all of Inotera’s output under a new three-year supply agreement.

Principal risks and contingencies

Memory pricing is highly cyclical and competitive. Further declines in DRAM, NAND or NOR average selling prices could exceed manufacturing cost reductions and compress margins.
Completion, integration and financing of the Elpida and Rexchip transactions remained uncertain and could increase leverage, capital requirements, foreign-currency exposure and operational complexity.
Inotera’s liquidity condition, covenant history and Micron’s obligation to purchase substantially all of its output create supply, investment and counterparty risks.
Currency volatility affected results materially: nine-month 2013 other non-operating expense included approximately $225 million of losses on Elpida and Rexchip-related currency hedges.
Patent, antitrust and commercial litigation remained outstanding, including Rambus matters and a Qimonda lawsuit that could result in loss of the Inotera shares, equivalent monetary damages or termination of a patent cross-license. The filing does not provide a reliable estimate of potential loss.
Manufacturing transitions, technology development, joint ventures, international operations, supply-chain availability, natural disasters, cybersecurity and product-quality issues could materially affect results.
Management stated that cash, investments, operating cash flow and available financing were expected to satisfy requirements for at least the next twelve months, but noted that liquidity depends heavily on memory pricing, operating cash flow and capital spending.

Important facts for investors to verify

Whether the Elpida and Rexchip acquisitions closed on the anticipated timetable and the final cash, debt, guarantee and integration requirements.
Actual Q4 2013 gross margins, DRAM and NAND pricing, Singapore production impacts and progress in the DRAM-to-NAND transition.
Inotera’s liquidity, covenant compliance, operating performance and ability to sustain Micron’s required supply arrangements.
Whether Micron achieved the stated Q4 SG&A, R&D and capital-spending expectations.
Subsequent settlement or court developments in the Rambus, Qimonda and other intellectual-property or antitrust matters.
The effect of the $3.62 billion debt balance, near-term maturities, convertible-note provisions and new receivables-backed financing on liquidity.
The approximately $48 million expected gain from the Inotera ownership dilution and any further hedge gains or losses after May 30, 2013.