Micron Technology, Inc. — Fiscal 2011 First-Quarter 10-Q
Business context and reporting period
Micron manufactures and markets DRAM, NAND Flash, NOR Flash, CMOS image sensors and related semiconductor products. The quarter ended December 2, 2010, contained 13 weeks and is compared primarily with the 13-week quarter ended December 3, 2009 and the quarter ended September 2, 2010. The filing reports Memory and Numonyx segments, with Numonyx acquired on May 7, 2010.
Key financial metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $2,252 million | $1,740 million | Up 29% |
| Gross margin | $524 million; 23% | $443 million; 25% | Margin down 2 percentage points |
| Operating income | $390 million; 17% | $201 million; 12% | Up $189 million |
| Net income attributable to Micron | $155 million | $204 million | Down $49 million |
| Diluted EPS | $0.15 | $0.23 | Down $0.08 |
| Operating cash flow | $732 million | $326 million | Up $406 million |
Net income attributable to Micron represented approximately 7% of sales, versus approximately 12% in the prior-year quarter. Results included a $200 million gain from a Samsung patent cross-license agreement, a $111 million loss from debt restructuring, a $48 million income-tax provision, and a $26 million loss from equity-method investees.
Memory sales were $1,611 million, essentially unchanged from the prior-year quarter and down 12% sequentially. Numonyx contributed $573 million of sales and $17 million of operating income. Approximately 30% of sales served the computing market and 25% served the mobile market; approximately 84% of consolidated sales were outside the United States.
Liquidity, cash flow and capital structure
- Cash and equivalents were $2,411 million at December 2, 2010, down from $2,913 million at September 2, 2010. Cash included $385 million at TECH and $481 million at IM Flash, which generally was not available for other operations.
- Restricted cash was $337 million, including $250 million collateralizing a guarantee of Hynix JV debt and $60 million related to the TECH credit facility.
- Capital expenditures were $465 million in the quarter. Management expected fiscal 2011 capital spending of approximately $2.4 billion to $2.9 billion, with approximately $800 million of property, plant and equipment commitments outstanding at quarter-end.
- Financing cash use was $798 million, including $635 million of debt repayments, $105 million of equipment-contract payments and $49 million of distributions to joint-venture partners.
- Debt carrying value was $1,816 million, including $468 million current and $1,348 million long-term. The company completed convertible-note exchanges and repurchases and recognized a $111 million related loss.
- Net property, plant and equipment increased to $7,044 million from $6,601 million, reflecting continued investment in manufacturing capacity.
Material changes versus comparable periods
- Revenue increased year over year primarily because Numonyx was included for the full quarter, but declined 10% sequentially as Memory average selling prices fell.
- DRAM average selling prices declined 23% sequentially, while NAND Flash average selling prices declined 15%. DRAM sales fell 19% sequentially, partly offset by higher units sold; NAND Flash sales increased 2% sequentially.
- Overall gross margin declined from 31% sequentially and 25% year over year to 23%, primarily due to lower Memory pricing. Memory gross margin declined to 26% from 37% sequentially.
- SG&A increased 44% year over year to $140 million, primarily because of Numonyx-related costs. R&D increased 35% to $185 million, partially offset by cost-sharing reimbursements from Nanya and Intel.
- Operating cash flow improved substantially, but cash declined because of capital expenditures, debt repayments, equipment payments and joint-venture contributions.
- Micron contributed $392 million to IM Flash Singapore during the quarter, increasing its ownership interest from 57% to 71%; Intel made no contribution. A further $343 million contribution was made in the second quarter of fiscal 2011.
- Micron acquired HP's interest in TECH on December 17, 2010, increasing its ownership from approximately 87% to 90%, and was negotiating to acquire Canon's remaining 10% interest.
Guidance, outlook, risks and unusual items
- Management expected second-quarter fiscal 2011 SG&A of approximately $140 million to $150 million and R&D of approximately $195 million to $205 million, net of partner reimbursements.
- Management expected DRAM supply from Inotera to increase significantly in the second half of fiscal 2011 following completion of its transition to Micron technology. The IM Flash Singapore facility was expected to increase NAND Flash production in the second half of fiscal 2011.
- Numonyx acquisition accounting increased inventory costs and was expected to reduce Numonyx gross margin by approximately 10% through the remainder of 2011 as acquired inventory was sold.
- TECH's shareholder agreement was scheduled to expire in April 2011. Failure to reach agreement with Canon could have resulted in asset sales, a significant disruption to DRAM production and repayment of TECH's $299 million credit facility. Micron guaranteed 100% of that facility.
- Material litigation included Rambus antitrust and patent matters, DRAM price-fixing claims, Oracle litigation, Canadian and Brazilian proceedings, and Panavision patent litigation. The company stated that adverse outcomes could create significant liabilities, but it could not estimate potential losses except for disclosed settlements.
- Micron agreed to pay approximately $67 million to resolve U.S. indirect-purchaser and state-attorney-general DRAM antitrust claims, subject to conditions including court approval, and agreed to contribute $6 million toward settlement of securities class actions, also subject to court approval.
- Key operating risks included volatile Memory pricing, industry oversupply and competition, inability to reduce manufacturing costs sufficiently, dependence on joint ventures and partners, international operations and currency exposure, limited access to financing, manufacturing disruptions, equipment constraints, and Numonyx integration.
Most important facts for investors to verify
- Whether DRAM and NAND Flash pricing pressure continues to offset unit growth and manufacturing-cost reductions.
- The timing and cost of the IM Flash Singapore ramp and the extent of future Micron capital contributions relative to Intel's participation.
- The outcome of negotiations concerning TECH and the potential effect on DRAM capacity, debt repayment and asset values.
- Actual fiscal 2011 capital spending and liquidity available after restricted and joint-venture cash is excluded.
- Progress integrating Numonyx and the remaining acquisition-related inventory cost effects.
- Developments and potential financial exposure in Rambus, antitrust, patent, securities and Qimonda-related matters.
- Whether the $200 million Samsung license payment and related future receipts are nonrecurring and how much they affect reported operating performance.