Micron Technology, Inc. — Fiscal 2012 Third-Quarter Form 10-Q
Business Context and Reporting Period
Micron manufactures and markets DRAM, NAND Flash and NOR Flash memory, image sensors and related semiconductor products. The report covers the quarter and nine months ended May 31, 2012, compared with periods ended June 2, 2011. The filing was signed July 9, 2012.
Micron reported through NAND Solutions, DRAM Solutions, Wireless Solutions, Embedded Solutions and All Other segments. Semiconductor memory pricing and demand remained highly volatile, with substantial year-over-year average selling price declines.
Financial Performance and Key Metrics
| Metric | Q3 FY2012 | Q3 FY2011 | 9M FY2012 | 9M FY2011 |
|---|---|---|---|---|
| Net sales | $2,172 million | $2,139 million | $6,271 million | $6,648 million |
| Gross margin | $234 million; 11% | $478 million; 22% | $749 million; 12% | $1,437 million; 22% |
| Operating income (loss) | $(191) million | $237 million | $(478) million | $806 million |
| Net income (loss attributable to Micron) | $(320) million | $75 million | $(789) million | $302 million |
| Diluted EPS | $(0.32) | $0.07 | $(0.80) | $0.30 |
- Q3 sales increased 2% year over year and 8% sequentially, primarily from higher sales volumes and inventory reductions. Average selling prices generally declined.
- NAND Flash revenue was $948 million, up 23% year over year; DRAM revenue was $875 million, down 1%; NOR Flash revenue was $228 million, down 37%.
- Q3 segment operating results were: NAND Solutions $(1) million, DRAM Solutions $(76) million, Wireless Solutions $(103) million, Embedded Solutions $32 million and All Other $(43) million.
- Research and development expense increased to $231 million from $211 million year over year; SG&A increased to $156 million from $151 million.
- Equity in losses of equity-method investees rose to $115 million in Q3 and $262 million for the first nine months, including losses associated with Inotera and the $69 million charge related to Transform's liquidation.
Cash Flow, Liquidity and Capital Structure
- Net cash provided by operating activities was $1,664 million for the first nine months, compared with $2,130 million in the prior-year period.
- Net cash used in investing activities was $1,980 million, including $1,367 million of capital expenditures and net purchases of available-for-sale securities.
- Net cash provided by financing activities was $347 million, including $1,065 million of debt issuance proceeds and $403 million from equipment sale-leaseback transactions.
- Cash and equivalents were $2,191 million at May 31, 2012, compared with $2,160 million at September 1, 2011. Short-term investments were $134 million and long-term marketable investments were $361 million.
- Total debt carrying value was $3,198 million, including $262 million of current debt and $2,936 million of long-term debt, compared with total debt of $2,001 million at September 1, 2011.
- Micron issued $1.0 billion of convertible senior notes due 2032 and purchased capped calls for $103 million to partially offset potential equity dilution. The remaining $116 million principal amount of the 2013 convertible notes was converted into shares in June 2012.
- Management expected 2012 capital spending of approximately $1.8 billion and 2013 capital spending of approximately $1.6 billion to $1.9 billion. Approximately $450 million of property, plant and equipment commitments remained at May 31, 2012.
Material Changes Versus Prior Comparable Period
- Gross margin fell to 11% from 22% in Q3 and to 12% from 22% for the first nine months, primarily because DRAM, NAND and NOR average selling prices declined faster than cost reductions.
- Operating results shifted from profitability to losses: Q3 operating income of $237 million became a $191 million loss, and nine-month operating income of $806 million became a $478 million loss.
- First-nine-month DRAM and NAND average selling prices per gigabit declined approximately 50% and 46%, respectively, from the prior-year period.
- Wireless Solutions revenue declined 44% year over year in Q3, reflecting weak demand, lower NOR Flash pricing and continued customer migration from NOR Flash to NAND Flash.
- Micron acquired Intel's remaining 18% interest in IM Flash Singapore and certain Virginia assets for $466 million, received a $300 million Intel deposit for future NAND purchases, and changed certain revenue-recognition timing. The change produced a one-time $97 million increase in Q3 NAND sales from backend inventory.
- Micron increased its Inotera ownership from 29.7% to 39.7% through a $170 million contribution and expects a higher share of future 30-nanometer output.
- Transform approved a liquidation plan, resulting in a $69 million charge and a zero carrying value for Micron's investment.
Guidance, Outlook, Risks and Unusual Items
- Management expected slower NAND production growth in Q4 FY2012 after completion of the first phase of the Singapore facility ramp and expected IMFT sales to Intel to decline from Q3 levels because of the revenue-recognition change.
- Expected Q4 FY2012 SG&A was $145 million to $155 million. Expected Q4 R&D expense, net of partner reimbursements, was $225 million to $235 million.
- Micron entered into agreements to acquire 100% of Elpida and approximately 24% of Rexchip, which would result in approximately 89% beneficial ownership of Rexchip. The transactions were expected to close in the first half of calendar 2013, subject to court, creditor, regulatory and other approvals.
- The Elpida arrangements contemplated approximately $750 million of cash at closing, approximately $334 million for the Rexchip share purchase and additional Elpida creditor payments of approximately $1.75 billion from 2014 through 2019. Micron also agreed to potential financing or guarantees for Elpida debtor-in-possession financing and capital expenditures.
- Inotera reported a $155 million loss for the quarter ended March 31, 2012, and current liabilities exceeded current assets by approximately $2 billion. Micron identified potential impairment and supply-agreement risks if Inotera's liquidity plans fail.
- Major risks include memory oversupply and pricing pressure, inability to reduce manufacturing costs, high capital requirements, increased debt, joint-venture dependence, foreign currency exposure, acquisition integration and financing risks, and possible manufacturing or supply disruptions.
- Patent and antitrust proceedings remained outstanding, including Rambus litigation, multiple patent cases and Canadian and Brazilian antitrust matters. The filing states that potential losses generally could not be estimated. Micron had agreed to pay approximately $67 million under U.S. indirect-purchaser settlements and settled the Oracle litigation for $58 million.
- Management identified inventory valuation as particularly sensitive: a 5% change in estimated selling prices would have changed the estimated market value of memory inventory by approximately $131 million at May 31, 2012.
Most Important Facts to Verify
- Whether semiconductor pricing and gross margins stabilized after the substantial Q3 and year-to-date declines.
- The timing, approvals, financing and final economics of the Elpida and Rexchip transactions, including Micron's contingent guarantees and capital commitments.
- Inotera's liquidity improvement, operating performance, potential investment impairment and ability to deliver contracted DRAM capacity.
- Actual Q4 FY2012 SG&A, R&D, NAND production and Intel sales relative to management's expectations.
- Capital spending, debt-service capacity and liquidity after incorporating acquisition-related payments and ongoing technology investments.
- Resolution and financial exposure from remaining Rambus, patent, antitrust and Qimonda litigation.