Micron Technology Inc. Reports Operating Results (10-Q)

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Jul 15, 2009
Micron Technology Inc. (MU, Financial) filed Quarterly Report for the period ended 2009-06-04.

Micron Technology Inc. has established itself as one of the leading worldwide providers of semiconductor memory solutions. The company's quality memory solutions serve customers in a variety of industries including computer and computer-peripheral manufacturing consumer electronics CAD/CAM telecommunications office automation network and data processing and graphics display. The company's mission is to be the most efficient and innovative global provider of semiconductor memory solutions. Micron Technology Inc. has a market cap of $4.46 billion; its shares were traded at around $5.32 with and P/S ratio of 0.7.

Highlight of Business Operations:

DRAM joint ventures with Nanya Technology Corporation (“Nanya”): The Company has a partnering arrangement with Nanya Technology Corporation (“Nanya”) pursuant to which the Company and Nanya jointly develop process technology and designs to manufacture stack DRAM products. Each party generally bears its own development costs and the Company s development costs are expected to exceed Nanya s development costs in the near term by a significant amount. In addition, the Company has transferred and licensed certain intellectual property related to the manufacture of stack DRAM products to Nanya and licensed certain intellectual property from Nanya. As a result, the Company is to receive an aggregate of $207 million from Nanya through 2010. The Company recognized $25 million and $79 million of license revenue in net sales from this agreement in the third quarter and first nine months of 2009, respectively, and from May 2008 through June 4, 2009 has recognized $115 million of cumulative license revenue. In addition, the Company expects to receive royalties in future periods from Nanya for sales of stack DRAM products manufactured by or for Nanya.

Inotera: In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera, a publicly-traded entity in Taiwan, from Qimonda AG (“Qimonda”) for $398 million. The interest in Inotera was acquired for cash, a portion of which was funded from loan proceeds of $200 million received by the Company from Nan Ya Plastics Corporation, an affiliate of Nanya, and $85 million received from Inotera. The loans were recorded at their fair values, which reflect an aggregate discount of $31 million from their face amounts. This aggregate discount was recorded as a reduction of the Company s basis in its investment in Inotera. The Company also capitalized $10 million of costs and other fees incurred in connection with the acquisition. As a result of the above transactions, total consideration for the Company s equity investment in Inotera was $377 million.

In connection with the acquisition of the shares in Inotera, the Company and Nanya entered into a supply agreement with Inotera (the “Supply Agreement”) pursuant to which Inotera will sell trench and stack DRAM products to the Company and Nanya. In addition, Inotera charges the Company and Nanya for a portion of the costs associated with its underutilized capacity. The Company has rights and obligations to purchase up to 50% of Inotera s wafer production capacity. Inotera s actual wafer production will vary from time to time based on market and other conditions and its trench production capacity is expected to transition to the Company s stack process technology. The pricing formula in the Supply Agreement is based upon manufacturing costs and margins associated with the resale of purchased DRAM products. Under the Supply Agreement, the Company will purchase 50% of Inotera s aggregate trench DRAM production (less the trench DRAM products sold to Qimonda pursuant to a separate supply agreement between Inotera and Qimonda (the “Qimonda Supply Agreement”)) and 50% of the aggregate stack DRAM production. Under the Qimonda Supply Agreement, Qimonda was obligated to purchase trench DRAM products resulting from wafers started for it by Inotera through July 2009 in accordance with a ramp down schedule specified in the Qimonda Supply Agreement. In the second quarter of 2009, Qimonda filed for bankruptcy and defaulted on its obligations to purchase products from Inotera. Pursuant to the Company s obligations under the Supply Agreement, the Company recorded $15 million and $66 million of charges in cost of goods sold in the third quarter and first nine months of 2009 related to underutilized capacity.

The Company s results of operations for the third quarter of 2009 include a loss of $43 million for the Company s share of Inotera s loss for the first calendar quarter of 2009. The Company s results of operations for the first nine months of 2009 includes losses of $99 million for the Company s share of Inotera s losses from the acquisition date through the first calendar quarter of 2009. As of June 4, 2009, the Company had recorded $18 million to accumulated other comprehensive income in the accompanying consolidated balance sheet for cumulative translation adjustments for its investment in Inotera. During the third quarter of 2009, the Company received $50 million from Inotera pursuant to the terms of a technology transfer agreement. As of June 4, 2009, the carrying value of the Company s equity investment in Inotera was $236 million.

Inventory Write-Downs: The Company s results of operations for the second and first quarters of 2009 included charges of $234 million and $369 million, respectively, to write down the carrying value of work in process and finished goods inventories of memory products (both DRAM and NAND Flash) to their estimated market values. For the fourth, second and first quarters of 2008, the Company recorded inventory charges of $205 million, $15 million and $62 million, respectively.

Aptina Imaging Business (“Aptina”): On July 10, 2009, the Company sold a 65% interest in Aptina, a wholly-owned subsidiary of the Company and a significant component of its Imaging segment, to Riverwood Capital (“Riverwood”) and TPG Capital (“TPG”). Under the agreement, the Company received approximately $35 million in cash and retained a 35% minority stake in Aptina after Riverwood and TPG contributed significant debt-free capital to the independent, privately-held, company. The Company also retained all cash held by Aptina and its subsidiaries. The Company will account for its remaining interest in Aptina under the equity method. The Company s Imaging segment will continue to manufacture products for Aptina under a wafer supply agreement and will provide services to Aptina at its worldwide facilities. The Company anticipates that pricing under the wafer supply agreement will generally result in lower gross margins than historically realized on sales of Imaging products to end customers. The Company also anticipates that the sale of Aptina will significantly reduce the Imaging segment s research and development costs and other operating expenses. In the third quarter of 2009, the Company recorded a charge of $53 million, the estimated loss on the transaction, to write down Aptina intangible assets and property, plant and equipments to estimated fair values.

Read the The complete ReportMU is in the portfolios of Charles Brandes of Brandes Investment, PRIMECAP Management.