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MU > SEC Filings for MU > Form 10-Q on 3-Jul-2014All Recent SEC Filings

Show all filings for MICRON TECHNOLOGY INC

Form 10-Q for MICRON TECHNOLOGY INC


3-Jul-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used herein, "we," "our," "us" and similar terms refer to Micron Technology, Inc. and its subsidiaries, unless the context indicates otherwise. The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in "Operating Expenses and Other" regarding SG&A expenses, R&D expenses and Restructure and Asset Impairments for the fourth quarter of 2014, regarding our expected gain in our fourth quarter of 2014 on Inotera's issuance of stock and regarding proceeds and gain from On Semiconductor's acquisition of our interest in Aptina; in "Liquidity and Capital Resources" regarding the sufficiency of our cash and investments, cash flows from operations and available financing to meet our requirements for at least the next 12 months, regarding our pursuit of additional financing and debt restructuring, regarding capital spending in 2014 and regarding the timing of payments for certain contractual obligations. Our actual results could differ materially from our historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in "Part II, Item 1A. Risk Factors." This discussion should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended August 29, 2013. All period references are to our fiscal periods unless otherwise indicated. Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31 and fiscal 2014 and 2013 each contain 52 weeks. All production data includes the production of IMFT and Inotera. All tabular dollar amounts are in millions.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. MD&A is organized as follows:

Overview: An overview of our business and operations and highlights of key transactions and events.

Results of Operations: An analysis of our financial results consisting of the following:

Consolidated results;

Operating results by business segment;

Operating results by product; and

Operating expenses and other.

Liquidity and Capital Resources: An analysis of changes in our balance sheet and cash flows and discussion of our financial condition and potential sources of liquidity.

Recently Issued Accounting Standards

Overview

We are one of the world's leading providers of advanced semiconductor solutions. Through our worldwide operations, we manufacture and market a full range of DRAM, NAND Flash and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, automotive, industrial, embedded and mobile products. We market our products through our internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers ("OEMs") and retailers located around the world. Our success is largely dependent on the market acceptance of our diversified portfolio of semiconductor products, efficient utilization of our manufacturing infrastructure, successful ongoing development of advanced product and process technologies and generating a return on research and development ("R&D") investments.

We obtain products from three primary sources: (1) production from our wholly-owned manufacturing facilities, (2) production from our joint venture manufacturing facilities, and (3) to a lesser degree, from third party manufacturers. In recent years, we have increased our manufacturing scale and product diversity through strategic acquisitions and various partnering arrangements, including joint ventures.


We make significant investments to develop the proprietary product and process technologies that are implemented in our worldwide manufacturing facilities and through our joint ventures. These investments enable our production of semiconductor products with increasing functionality and performance at lower costs. We generally reduce the manufacturing cost of each generation of product through advancements in product and process technology such as our leading-edge line-width process technology and innovative array architecture. We continue to introduce new generations of products that offer improved performance characteristics, such as higher data transfer rates, reduced package size, lower power consumption, improved read/ write reliability and increased memory density. To leverage our significant investments in R&D, we have formed, and may continue to form, strategic joint ventures that allow us to share the costs of developing memory product and process technologies with joint venture partners. In addition, from time to time, we also sell and/or license technology to other parties. We continue to pursue additional opportunities to monetize our investment in intellectual property through partnering and other arrangements.

Business Segments

In the third quarter of 2014, we reorganized our business units. All prior period amounts reflect this reorganization. After the reorganization, we have the following four reportable segments:

Compute and Networking Business Unit ("CNBU"): Includes DRAM and NOR Flash products sold to the compute, networking, graphics, and cloud server markets, as well as NAND Flash products sold primarily into the networking market. Storage Business Unit ("SBU"): Includes NAND Flash components and Solid State Drives ("SSDs") sold into enterprise and client storage, and cloud and removable storage markets. SBU also includes NAND Flash products sold to Intel through our IM Flash Technologies, LLC ("IMFT") joint venture.
Mobile Business Unit ("MBU"): Includes DRAM, NAND Flash, and NOR Flash products sold to the smartphone, feature phone, and tablet mobile-device market. Embedded Business Unit ("EBU"): Includes DRAM, NAND Flash and NOR Flash products sold into automotive and industrial applications, as well as the connected home and consumer electronics markets.

Our other operations do not meet the thresholds of a reportable segment and are reported under All Other.

Acquisition of Micron Memory Japan, Inc.

On July 31, 2013, we acquired Elpida Memory, Inc. ("Elpida"), now known as Micron Memory Japan, Inc. ("MMJ"), and 89% of Rexchip Electronics Corporation ("Rexchip''), now known as Micron Memory Taiwan Co., Ltd. ("MMT"), for an aggregate of $949 million in cash (collectively, the "MMJ Acquisition"). In the second and third quarters of 2014, we purchased an additional aggregate 10.6% of MMT's outstanding common stock, after which we owned 99.5% of the outstanding common stock of MMT. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Micron Memory Japan, Inc." note.)

MMJ's assets include, among others, a 300mm DRAM wafer fabrication facility located in Hiroshima, Japan and an assembly and test facility located in Akita, Japan. MMT's assets include a 300mm DRAM wafer fabrication facility in Taichung City, Taiwan. The MMJ and MMT fabrication facilities together represent approximately 30% of our wafer capacity. MMJ's semiconductor memory products include Mobile DRAM targeted toward mobile phones and tablets. MMJ's operations are included primarily in the MBU and CNBU segments. Our results of operations for the fourth quarter 2013 included approximately one month of operating results from the acquired MMJ operations. Our results of operations for the fourth quarter 2013 included a gain of $1.48 billion on the MMJ Acquisition. In the second quarter of 2014, the provisional amounts recorded in connection with the MMJ Acquisition were adjusted, primarily for pre-petition liabilities. As a result, other non-operating expense for the second quarter of 2014 included these measurement period adjustments of $33 million.


MMJ and its wholly-owned subsidiary, Micron Akita, Inc. ("MAI" and, together with MMJ, the "MMJ Companies") are currently subject to corporate reorganization proceedings under the Corporate Reorganization Act of Japan. Because the plans of reorganization of the MMJ Companies provide for ongoing payments to creditors following the closing of the MMJ Acquisition, these proceedings are continuing, and the MMJ Companies remain subject to the oversight of the Tokyo District Court (the "Japan Court") and of the trustees appointed by the Japan Court (including a trustee designated by us, who we refer to as the business trustee, and a trustee designated by the Japan Court, who we refer to as the legal trustee), pending completion of the reorganization proceedings. As a result of this oversight and related consent rights of the Japan Court and the legal trustee, our ability to effectively integrate the MMJ Companies as part of our global operations or to cause the MMJ Companies to take certain actions that we deem advisable for their businesses could be adversely affected if the Japan Court or the legal trustee is unwilling to consent to various actions. For more information, see "Part II, Item 1. Legal Proceedings - Reorganization Proceedings of the MMJ Companies" and "Part II, Item 1A. Risk Factors."

Results of Operations

Consolidated Results

                                             Third Quarter                                 Second Quarter                                   Nine Months
                        2014       % of net sales      2013       % of net sales       2014       % of net sales       2014       % of net sales      2013       % of net sales
                                                                                     (dollar amounts in millions)
Net sales             $ 3,982           100  %       $ 2,318           100  %       $  4,107           100  %       $ 12,131           100  %       $ 6,230           100  %
Cost of goods sold      2,614            66  %         1,762            76  %          2,704            66  %          8,079            67  %         5,091            82  %
Gross margin            1,368            34  %           556            24  %          1,403            34  %          4,052            33  %         1,139            18  %

SG&A                      174             4  %           127             5  %            177             4  %            527             4  %           369             6  %
R&D                       349             9  %           226            10  %            344             8  %          1,013             8  %           664            11  %
Restructure and asset
impairments                 9             -  %            55             2  %             12             -  %             18             -  %            94             2  %
Other operating
(income) expense, net      (3 )           -  %            (1 )           -  %              1             -  %            235             2  %           (17 )           -  %
Operating income          839            21  %           149             6  %            869            21  %          2,259            19  %            29             -  %

Interest income
(expense), net            (75 )          (2 )%           (52 )          (2 )%            (77 )          (2 )%           (248 )          (2 )%          (159 )          (3 )%
Other non-operating
income (expense), net     (21 )          (1 )%           (45 )          (2 )%           (122 )          (3 )%           (223 )          (2 )%          (263 )          (4 )%
Income tax
(provision) benefit       (72 )          (2 )%             1             -  %            (63 )          (2 )%           (215 )          (2 )%            (3 )           -  %
Equity in net income
(loss) of equity
method investees          135             3  %           (10 )           -  %            134             3  %            355             3  %          (120 )          (2 )%
Net income
attributable to
noncontrolling
interests                   -             -  %             -             -  %            (10 )           -  %            (33 )           -  %            (2 )           -  %
Net income (loss)
attributable to
Micron                $   806            20  %       $    43             2  %       $    731            18  %       $  1,895            16  %       $  (518 )          (8 )%


Net Sales

                                    Third Quarter                        Second Quarter                         Nine Months
                                % of net                % of net                   % of net                 % of net                % of net
                      2014        sales       2013        sales         2014         sales        2014        sales       2013        sales
CNBU                $ 1,857       47 %      $   902       39 %      $    1,835       45 %      $  5,436       45 %      $ 2,244       36 %
SBU                     867       22 %          725       31 %             901       22 %         2,573       21 %        2,044       33 %
MBU                     757       19 %          269       12 %             908       22 %         2,717       22 %          744       12 %
EBU                     467       12 %          338       15 %             422       10 %         1,298       11 %          925       15 %
All Other                34        - %           84        3 %              41        1 %           107        1 %          273        4 %
                    $ 3,982      100 %      $ 2,318      100 %      $    4,107      100 %      $ 12,131      100 %      $ 6,230      100 %

Total net sales for the third quarter of 2014 decreased 3% as compared to the second quarter of 2014 as a result of declines in MBU and SBU gigabit sales volumes. Total net sales for the third quarter and first nine months of 2014 increased 72% and 95%, respectively, as compared to the corresponding periods of 2013 primarily due to higher CNBU and MBU sales resulting from the MMJ Acquisition. Net sales for the third quarter and first nine months of 2014 also benefitted, as compared to the corresponding periods of 2013, from increases in DRAM and NAND Flash sales volumes driven primarily by higher manufacturing output as a result of improvements in product and process technology and an increased share of output from Inotera Memories, Inc. ("Inotera").

Gross Margin

Our overall gross margin percentage of 34% for the third quarter of 2014 was substantially unchanged from the second quarter of 2014 as the gross margins for all of our reportable segments were relatively stable.

Our overall gross margin percentage improved to 34% for the third quarter of 2014 from 24% for the third quarter of 2013 primarily due to improvements in the gross margin percentage for MBU and CNBU as a result of higher margins for DRAM products. Our overall gross margin percentage improved to 33% for the first nine months of 2014 from 18% for the first nine months of 2013 primarily due to improvements in the gross margin percentage for CNBU and MBU as a result of higher margins for DRAM products. The gross margin improvements for CNBU and MBU for the third quarter and first nine months of 2014 as compared to the corresponding periods of 2013 resulted from the MMJ Acquisition, manufacturing cost reductions and higher average selling prices for CNBU.

We purchase substantially all of the DRAM output of our Inotera joint venture at a discount from market prices for our comparable components. Our costs for Inotera product for the third quarter of 2014 decreased from the second quarter of 2014 but were significantly higher than for the third quarter of 2013 due to changes in average selling prices for our DRAM products and to changes in the terms of our supply agreement with Inotera. In the second quarter of 2013, we entered into a new supply agreement with Inotera under which we are obligated to purchase substantially all of Inotera's DRAM output at a discount from market prices for our comparable components over an initial three-year term (the "Inotera Supply Agreement"). The Inotera Supply Agreement replaced a previous supply agreement under which Inotera sold product at pricing based on a margin-sharing formula among Nanya, Inotera and us. The Inotera Supply Agreement contemplates annual negotiations with respect to potential successive one-year extensions and in the second quarter of 2014, we renewed our supply agreement with Inotera, which extended the initial period that we will purchase substantially all of Inotera's DRAM output through December 2016. For the third quarter of 2014, our costs for Inotera product were significantly higher than our manufacturing costs for similar products at our wholly-owned fabrication facilities.

From the fourth quarter of 2013 through the second quarter of 2014, our costs of goods sold for DRAM products were adversely impacted by the sale of inventories obtained in the MMJ Acquisition. In accounting for the MMJ Acquisition, inventories were recorded at fair value (based on their estimated future selling prices, estimated costs to complete and other factors), which was approximately $200 million higher than the manufacturing cost of such inventories. As a result, our costs of goods sold were adversely affected by approximately $42 million for the second quarter of 2014, $111 million for the first quarter of 2014 and $41 million for the fourth quarter of 2013 as those inventories were sold.


Operating Results by Business Segments

Compute and Networking Business Unit ("CNBU")

                      Third Quarter       Second Quarter         Nine Months
                      2014       2013          2014            2014       2013
Net sales          $   1,857    $ 902    $          1,835    $ 5,436    $ 2,244
Operating income         531      129                 504      1,462          1

CNBU sales and operating results track closely with our average selling prices, gigabit sales volumes and cost per gigabit for our sales of DRAM products. (See "Operating Results by Product - DRAM" for further detail.) CNBU sales for the third quarter of 2014 were relatively unchanged from the second quarter of 2014 as slight increases in gigabit sales volumes due to higher production output were offset by declines in average selling prices. Increases in production output for the third quarter of 2014 reflect a shift in DRAM production from mobile DRAM to computing DRAM and improvements in product and process technologies, partially offset by the transition of one of our Singapore wafer fabrication facilities from DRAM to NAND Flash. CNBU operating income for the third quarter of 2014 improved from the second quarter of 2014 primarily due to higher gross margins for DRAM products.

CNBU sales for the third quarter and first nine months of 2014 increased 106% and 142%, respectively, as compared to the corresponding periods of 2013 primarily due to (1) the MMJ Acquisition, (2) higher average selling prices, (3) increased DRAM supply from Inotera as a result of the restructuring of our supply agreement and (4) higher output due to improvements in product and process technologies. CNBU sales for the third quarter and first nine months of 2014 as compared to the corresponding periods of 2013 were adversely impacted by the transition of one of our Singapore wafer fabrication facilities from DRAM to NAND Flash. CNBU operating income for the third quarter and first nine months of 2014 improved from the corresponding periods of 2013 primarily due to the MMJ Acquisition, higher average selling prices and manufacturing cost reductions.

Storage Business Unit ("SBU")

                       Third Quarter         Second Quarter         Nine Months
                       2014         2013          2014            2014       2013
Net sales          $    867        $ 725    $            901    $ 2,573    $ 2,044
Operating income         55           55                  79        228        127

SBU sales and operating results track closely with our average selling prices, gigabit sales volumes and cost per gigabit for our sales of NAND Flash products. (See "Operating Results by Product - NAND Flash" for further detail.) SBU sales for the third quarter of 2014 decreased 4% from the second quarter of 2014 primarily due to decreases in gigabits sold. Decreases in gigabits sold for the third quarter of 2014 were primarily due to a shift to a higher mix of products sold in the form of SSDs which have longer manufacturing cycle times. SBU sells a portion of its products to Intel through our IMFT joint venture at long-term negotiated prices approximating cost. SBU sales to Intel under this arrangement were $107 million for the third quarter of 2014, $104 million for the second quarter of 2014 and $89 million for the third quarter of 2013. All other SBU products are sold to OEMs, resellers, retailers and other customers (including Intel), which we collectively refer to as "trade customers."

SBU sales of NAND Flash products to trade customers for the third quarter of 2014 decreased 5% as compared to the second quarter of 2014 primarily due to decreases in gigabits sold. SBU operating income for the third quarter of 2014 declined from the second quarter of 2014 primarily due to higher research and development costs.

SBU sales of NAND Flash products to trade customers for the third quarter and first nine months of 2014 increased 21% and 29%, respectively, as compared to the corresponding periods of 2013 primarily due to an increase in gigabits sold partially offset by declines in average selling prices. SBU operating income for the first nine months of 2014 improved from the corresponding period of 2013 primarily due to increased gross margins generated from higher gigabit sales.


Mobile Business Unit ("MBU")

                              Third Quarter        Second Quarter        Nine Months
                             2014        2013           2014            2014      2013
Net sales                 $   757       $ 269     $            908    $ 2,717    $ 744
Operating income (loss)       135         (62 )                178        479     (212 )

In the third quarter of 2014, MBU sales were comprised primarily of DRAM, NAND Flash and NOR Flash, in decreasing order of revenue, with mobile DRAM products accounting for a significant majority of the sales. MBU sales for the third quarter of 2014 decreased 17% as compared to the second quarter of 2014 primarily due to decreases in gigabit sales and declines in average selling prices for mobile DRAM products. The decline in gigabits sold in the third quarter of 2014 was primarily due to a shift in DRAM production from mobile DRAM to computing DRAM and reduced production because of an earthquake, which temporarily disrupted our Hiroshima wafer fabrication facility. MBU operating income for the third quarter of 2014 declined from the second quarter of 2014 primarily due to the lower sales volumes.

MBU sales for the third quarter and first nine months of 2014 increased 181% and 265%, respectively, as compared to the corresponding periods of 2013 primarily due to the MMJ Acquisition. MBU operating margin for the third quarter and first nine months of 2014 also improved from the corresponding periods of 2013 primarily due to the MMJ Acquisition.

Embedded Business Unit ("EBU")

                       Third Quarter         Second Quarter        Nine Months
                       2014         2013          2014            2014      2013
Net sales          $    467        $ 338    $            422    $ 1,298    $ 925
Operating income         96           56                  80        254      174

In the third quarter of 2014, EBU sales were comprised of DRAM, NAND Flash and NOR Flash in decreasing order of revenue. EBU sales for the third quarter of 2014 increased 11% as compared to the second quarter of 2014 primarily due to increases in sales volumes partially offset by declines in average selling prices. EBU operating income for the third quarter of 2014 improved from the second quarter of 2014 primarily due to increased margins from sales of NOR Flash and DRAM products as a result of higher sales volumes, partially offset by declines in average selling prices.

EBU sales for the third quarter and first nine months of 2014 increased 38% and 40%, respectively, as compared to the corresponding periods of 2013 primarily due to increased sales volumes of DRAM and NAND Flash products partially offset by declines in average selling prices. EBU operating income for the third quarter and first nine months of 2014 improved as compared to the corresponding periods of 2013 primarily due to higher margins on sales of DRAM and NAND Flash products as a result of cost reductions.

Operating Results by Product

Net Sales by Product

                                    Third Quarter                        Second Quarter                         Nine Months
                                % of net                % of net                   % of net                 % of net                % of net
                      2014        sales       2013        sales         2014         sales        2014        sales       2013        sales
DRAM                $ 2,729       69 %      $ 1,098       47 %      $    2,785       68 %      $  8,308       68 %      $ 2,709       43 %
NAND Flash            1,097       28 %          936       40 %           1,154       28 %         3,309       27 %        2,609       42 %
NOR Flash               116        3 %          194        8 %             116        3 %           377        3 %          619       10 %
Other                    40        - %           90        5 %              52        1 %           137        2 %          293        5 %
                    $ 3,982      100 %      $ 2,318      100 %      $    4,107      100 %      $ 12,131      100 %      $ 6,230      100 %


In order to balance our future product mix in anticipation of the closing of the MMJ Acquisition, in the fourth quarter of 2013, we began to transition production at one of our wafer fabrication facilities in Singapore from DRAM to NAND Flash. This transition to NAND Flash production is substantially complete. During this period of transition, there was a marginal reduction in wafer production.

DRAM

                                                                                   First Nine
                                                       Third Quarter 2014         Months 2014
                                                             Versus                  Versus
                                                     Second           Third        First Nine
                                                    Quarter          Quarter         Months
. . .
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