UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended March
1, 2007
OR
|
|
□
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from to
Commission
file number 1-10658
Micron
Technology, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
75-1618004
|
(State
or other jurisdiction of
|
(IRS
Employer
|
incorporation
or organization)
|
Identification
No.)
|
8000
S. Federal Way, Boise, Idaho
|
83716-9632
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code
|
(208)
368-4000
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer x
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No
x
The
number of outstanding shares of the registrant’s common stock as of April 5, was
756,358,462.
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
MICRON
TECHNOLOGY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Amounts
in millions except per share amounts)
(Unaudited)
|
|
Quarter
ended
|
|
Six
months ended
|
|
|
|
March
1,
2007
|
|
March
2,
2006
|
|
March
1,
2007
|
|
March
2,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,427
|
|
$
|
1,225
|
|
$
|
2,957
|
|
$
|
2,587
|
|
Cost
of goods sold
|
|
|
1,070
|
|
|
989
|
|
|
2,158
|
|
|
2,040
|
|
Gross
margin
|
|
|
357
|
|
|
236
|
|
|
799
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
153
|
|
|
108
|
|
|
333
|
|
|
203
|
|
Research
and development
|
|
|
243
|
|
|
159
|
|
|
426
|
|
|
325
|
|
Other
operating (income), net
|
|
|
(5
|
)
|
|
(219
|
)
|
|
(36
|
)
|
|
(231
|
)
|
Operating
income (loss)
|
|
|
(34
|
)
|
|
188
|
|
|
76
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
35
|
|
|
20
|
|
|
76
|
|
|
31
|
|
Interest
expense
|
|
|
(4
|
)
|
|
(7
|
)
|
|
(5
|
)
|
|
(18
|
)
|
Other
non-operating income (expense), net
|
|
|
5
|
|
|
(1
|
)
|
|
8
|
|
|
--
|
|
Income
before taxes and noncontrolling interests
|
|
|
2
|
|
|
200
|
|
|
155
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (provision)
|
|
|
(6
|
)
|
|
(7
|
)
|
|
(15
|
)
|
|
(7
|
)
|
Noncontrolling
interests in net income
|
|
|
(48
|
)
|
|
--
|
|
|
(77
|
)
|
|
--
|
|
Net
income (loss)
|
|
$
|
(52
|
)
|
$
|
193
|
|
$
|
63
|
|
$
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
$
|
0.29
|
|
$
|
0.08
|
|
$
|
0.39
|
|
Diluted
|
|
|
(0.07
|
)
|
|
0.27
|
|
|
0.08
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
768.7
|
|
|
661.5
|
|
|
767.9
|
|
|
655.8
|
|
Diluted
|
|
|
768.7
|
|
|
714.6
|
|
|
776.3
|
|
|
710.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
MICRON
TECHNOLOGY, INC.
CONSOLIDATED
BALANCE SHEETS
(Amounts
in millions except par value and share amounts)
(Unaudited)
As
of
|
|
March
1,
2007
|
|
August
31,
2006
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
1,566
|
|
$
|
1,431
|
|
Short-term
investments
|
|
|
627
|
|
|
1,648
|
|
Receivables
|
|
|
943
|
|
|
956
|
|
Inventories
|
|
|
1,293
|
|
|
963
|
|
Prepaid
expenses
|
|
|
74
|
|
|
77
|
|
Deferred
income taxes
|
|
|
25
|
|
|
26
|
|
Total
current assets
|
|
|
4,528
|
|
|
5,101
|
|
Intangible
assets, net
|
|
|
416
|
|
|
388
|
|
Property,
plant and equipment, net
|
|
|
7,593
|
|
|
5,888
|
|
Deferred
income taxes
|
|
|
59
|
|
|
49
|
|
Goodwill
|
|
|
522
|
|
|
502
|
|
Other
assets
|
|
|
258
|
|
|
293
|
|
Total
assets
|
|
$
|
13,376
|
|
$
|
12,221
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,376
|
|
$
|
1,319
|
|
Deferred
income
|
|
|
70
|
|
|
53
|
|
Equipment
purchase contracts
|
|
|
148
|
|
|
123
|
|
Current
portion of long-term debt
|
|
|
183
|
|
|
166
|
|
Total
current liabilities
|
|
|
1,777
|
|
|
1,661
|
|
Long-term
debt
|
|
|
639
|
|
|
405
|
|
Deferred
income taxes
|
|
|
26
|
|
|
28
|
|
Other
liabilities
|
|
|
402
|
|
|
445
|
|
Total
liabilities
|
|
|
2,844
|
|
|
2,539
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests in subsidiaries
|
|
|
2,283
|
|
|
1,568
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.10 par value, authorized 3 billion shares,
issued and
outstanding 755.8 million and 749.4 million shares
|
|
|
76
|
|
|
75
|
|
Additional
capital
|
|
|
6,628
|
|
|
6,555
|
|
Retained
earnings
|
|
|
1,548
|
|
|
1,486
|
|
Accumulated
other comprehensive (loss)
|
|
|
(3
|
)
|
|
(2
|
)
|
Total
shareholders’ equity
|
|
|
8,249
|
|
|
8,114
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
13,376
|
|
$
|
12,221
|
|
See
accompanying notes to consolidated financial statements.
MICRON
TECHNOLOGY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts
in millions)
(Unaudited)
Six
months
ended
|
|
March
1,
2007
|
|
March
2,
2006
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
63
|
|
$
|
256
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
800
|
|
|
595
|
|
Stock-based
compensation
|
|
|
20
|
|
|
10
|
|
Loss
(gain) from write-down or disposition of equipment
|
|
|
(10
|
)
|
|
9
|
|
Gain
from sale of product and process technology
|
|
|
(30
|
)
|
|
--
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
in receivables
|
|
|
59
|
|
|
39
|
|
(Increase)
decrease in inventories
|
|
|
(331
|
)
|
|
86
|
|
Increase
in accounts payable and accrued expenses
|
|
|
62
|
|
|
127
|
|
Deferred
income taxes
|
|
|
(6
|
)
|
|
(12
|
)
|
Other
|
|
|
89
|
|
|
196
|
|
Net
cash provided by operating activities
|
|
|
716
|
|
|
1,306
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Expenditures
for property, plant and equipment
|
|
|
(2,180
|
)
|
|
(455
|
)
|
Purchases
of available-for-sale securities
|
|
|
(1,003
|
)
|
|
(1,274
|
)
|
Proceeds
from maturities of available-for-sale securities
|
|
|
1,723
|
|
|
1,000
|
|
Proceeds
from sales of available-for-sale securities
|
|
|
307
|
|
|
--
|
|
Proceeds
from sale of product and process technology
|
|
|
30
|
|
|
--
|
|
Proceeds
from sales of property, plant and equipment
|
|
|
24
|
|
|
17
|
|
Decrease
in restricted cash
|
|
|
14
|
|
|
36
|
|
Other
|
|
|
(110
|
)
|
|
(18
|
)
|
Net
cash used for investing activities
|
|
|
(1,195
|
)
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Capital
contribution from noncontrolling interest in IMFT
|
|
|
647
|
|
|
500
|
|
Proceeds
from equipment sale-leaseback transactions
|
|
|
309
|
|
|
--
|
|
Proceeds
from issuance of common stock
|
|
|
50
|
|
|
47
|
|
Payments
on equipment purchase contracts
|
|
|
(287
|
)
|
|
(77
|
)
|
Repayments
of debt
|
|
|
(104
|
)
|
|
(70
|
)
|
Other
|
|
|
(1
|
)
|
|
--
|
|
Net
cash provided by financing activities
|
|
|
614
|
|
|
400
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and equivalents
|
|
|
135
|
|
|
1,012
|
|
Cash
and equivalents at beginning of period
|
|
|
1,431
|
|
|
524
|
|
Cash
and equivalents at end of period
|
|
$
|
1,566
|
|
$
|
1,536
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures
|
|
|
|
|
|
|
|
Income
taxes paid, net
|
|
$
|
(25
|
)
|
$
|
(4
|
)
|
Interest
paid, net of amounts capitalized
|
|
|
(4
|
)
|
|
(24
|
)
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
Conversion
of notes to stock, net of unamortized issuance costs
|
|
|
--
|
|
|
623
|
|
Equipment
acquisitions on contracts payable and capital leases
|
|
|
667
|
|
|
144
|
|
See
accompanying notes to consolidated financial statements.
MICRON
TECHNOLOGY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
tabular dollar amounts in millions except per share amounts)
(Unaudited)
Significant
Accounting Policies
Basis
of presentation:
Micron
Technology, Inc. and its subsidiaries (hereinafter referred to collectively
as
the “Company”) manufacture and market DRAM, NAND Flash memory, CMOS image
sensors and other semiconductor components. The Company has two reportable
segments, Memory and Imaging. The Memory segment’s primary products are DRAM and
NAND Flash and the Imaging segment’s primary product is CMOS image sensors. The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the U.S. and include the
accounts of the Company and its consolidated subsidiaries. In the opinion
of
management, the accompanying unaudited consolidated financial statements
contain
all adjustments necessary to present fairly the consolidated financial position
of the Company and its consolidated results of operations and cash
flows.
The
Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest
to August 31. The Company’s second quarter of fiscal 2007 and 2006 ended on
March 1, 2007, and March 2, 2006, respectively. The Company’s fiscal 2006 ended
on August 31, 2006. All period references are to the Company’s fiscal periods
unless otherwise indicated. These interim financial statements should be
read in
conjunction with the consolidated financial statements and accompanying notes
included in the Company’s Annual Report on Form 10-K for the year ended August
31, 2006.
Recently
issued accounting standards:
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115.” Under SFAS No. 159, the Company may elect to measure
many financial instruments and certain other items at fair value on an
instrument by instrument basis subject to certain restrictions. The Company
may
adopt SFAS No. 159 at the beginning of 2008. The impact of the adoption of
SFAS
No. 159 will be dependent on the extent to which the Company elects to measure
eligible items at fair value.
In
September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” The Company is required to
adopt SAB No. 108 by the end of 2007 and does not expect the adoption to
have a
significant impact on the Company’s financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB
Statements No. 87, 88, 106, and 132(R).” Under SFAS No. 158, the Company is
required to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end
of
2007. The Company does not expect the adoption of SFAS No. 158 to have a
significant impact on its financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements. The Company is required to
adopt
SFAS No. 157 effective at the beginning of 2009.
In
June
2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.” FIN
48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is
to evaluate the tax position for recognition by determining if the weight
of
available evidence indicates it is more likely than not that the position
will
be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate settlement.
The Company is required to adopt FIN 48 effective at the beginning of 2008.
The
Company is evaluating the impact this statement will have on its consolidated
financial statements.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments.” SFAS No. 155 permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation. As of March 1, 2007, the Company did not have
any
hybrid financial instruments subject to the fair value election under SFAS
No.
155. The Company is required to adopt SFAS No. 155 effective at the beginning
of
2008.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
SFAS No. 154 changes the requirements for the accounting for and reporting
of a
change in accounting principle. The Company adopted SFAS No. 154 at the
beginning of 2007. The adoption of SFAS No. 154 did not impact the Company’s
results of operations and financial condition.
Supplemental
Balance Sheet Information
Receivables
|
|
March
1,
2007
|
|
August
31,
2006
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$
|
724
|
|
$
|
811
|
|
Taxes
other than income
|
|
|
30
|
|
|
18
|
|
Other
|
|
|
194
|
|
|
131
|
|
Allowance
for doubtful accounts
|
|
|
(5
|
)
|
|
(4
|
)
|
|
|
$
|
943
|
|
$
|
956
|
|
As
of
March 1, 2007, and August 31, 2006, other receivables include $80 million
and
$51 million, respectively, due from Intel Corporation primarily for amounts
related to NAND Flash product design and process development activities,
and $88
million and $51 million, respectively, due from settlement of litigation.
Long-term receivables due from settlement of litigation of $145 million and
$181
million as of March 1, 2007, and August 31, 2006, respectively, are included
in
other noncurrent assets in the Company’s consolidated balance
sheet.
Inventories
|
|
March
1,
2007
|
|
August
31,
2006
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
451
|
|
$
|
273
|
|
Work
in process
|
|
|
657
|
|
|
530
|
|
Raw
materials and supplies
|
|
|
237
|
|
|
195
|
|
Allowance
for obsolescence
|
|
|
(52
|
)
|
|
(35
|
)
|
|
|
$
|
1,293
|
|
$
|
963
|
|
Goodwill
and Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1, 2007
|
|
August
31, 2006
|
|
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
and process technology
|
|
$
|
522
|
|
$
|
(244
|
)
|
$
|
460
|
|
$
|
(219
|
)
|
Customer
relationships
|
|
|
127
|
|
|
(11
|
)
|
|
127
|
|
|
(4
|
)
|
Other
|
|
|
29
|
|
|
(7
|
)
|
|
27
|
|
|
(3
|
)
|
|
|
$
|
678
|
|
$
|
(262
|
)
|
$
|
614
|
|
$
|
(226
|
)
|
During
the first six months of 2007 and 2006, the Company capitalized $62 million
and
$18 million, respectively, for product and process technology with
weighted-average useful lives of 9 years and 10 years, respectively. During
the
first six months of 2007, the Company capitalized $2 million of other intangible
assets with a useful life of 4 years.
Amortization
expense for intangible assets was $19 million and $36 million for the second
quarter and first six months of 2007, respectively, and $13 million and $26
million for the second quarter and first six months of 2006, respectively.
Annual amortization expense for intangible assets held as of March 1, 2007,
is
estimated to be $74 million for 2007, $75 million for 2008, $64 million for
2009, $54 million for 2010 and $49 million for 2011.
As
of
March 1, 2007, the Company had goodwill of $472 million for its Memory segment
and $50 million for its Imaging segment. As of August 31, 2006, the Company
had
goodwill of $490 million for its Memory segment and $12 million for its Imaging
segment. (See “Acquisitions” Note.)
Property,
Plant and Equipment
|
|
March
1,
2007
|
|
August
31,
2006
|
|
|
|
|
|
|
|
Land
|
|
$
|
107
|
|
$
|
107
|
|
Buildings
|
|
|
3,425
|
|
|
2,763
|
|
Equipment
|
|
|
11,235
|
|
|
9,528
|
|
Construction
in progress
|
|
|
329
|
|
|
484
|
|
Software
|
|
|
263
|
|
|
251
|
|
|
|
|
15,359
|
|
|
13,133
|
|
Accumulated
depreciation
|
|
|
(7,766
|
)
|
|
(7,245
|
)
|
|
|
$
|
7,593
|
|
$
|
5,888
|
|
Depreciation
expense was $407 million and $782 million for the second quarter and first
six
months of 2007, respectively, and $286 million and $578 million for the second
quarter and first six months of 2006, respectively.
Accounts
Payable and Accrued Expenses
|
|
March
1,
2007
|
|
August
31,
2006
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
835
|
|
$
|
854
|
|
Salaries,
wages and benefits
|
|
|
240
|
|
|
220
|
|
Taxes
other than income
|
|
|
22
|
|
|
23
|
|
Income
taxes
|
|
|
14
|
|
|
20
|
|
Other
|
|
|
265
|
|
|
202
|
|
|
|
$
|
1,376
|
|
$
|
1,319
|
|
Debt
|
|
March
1,
2007
|
|
August
31,
2006
|
|
|
|
|
|
|
|
Capital
lease obligations payable in monthly installments through August
2021,
weighted-average imputed interest rate of 6.5% and 6.6%
|
|
$
|
565
|
|
$
|
264
|
|
Notes
payable in periodic installments through July 2015, weighted-average
interest rate of 1.4% and 1.5%
|
|
|
187
|
|
|
237
|
|
Convertible
subordinated notes payable, interest rate of 5.6%, due April
2010
|
|
|
70
|
|
|
70
|
|
|
|
|
822
|
|
|
571
|
|
Less
current portion
|
|
|
(183
|
)
|
|
(166
|
)
|
|
|
$
|
639
|
|
$
|
405
|
|
As
of
March 1, 2007, notes payable above included $186 million, denominated in
Japanese yen, at a weighted-average interest rate of 1.4%.
In
the
second quarter of 2007, the Company received $309 million in proceeds from
sales-leaseback transactions and in connection with these transactions recorded
capital lease obligations aggregating $300 million with a weighed-average
imputed interest rate of 6.6%, payable in periodic installments through June
2011.
The
Company’s TECH subsidiary has a credit facility that enables it to borrow up to
$400 million at Singapore Interbank Offered Rate (“SIBOR”) plus 2.5% subject to
customary covenants. Amounts borrowed under the facility would be due in
quarterly installments through September 2009. As of March 1, 2007, TECH
had not
borrowed any amounts against the credit facility.
The
Company’s $70 million 5.625% convertible notes (“Notes”) assumed in the
acquisition of Lexar Media, Inc. are convertible into the Company’s common stock
any time at the option of the holders of the Notes at a price equal to
approximately $11.28 per share and are subject to customary covenants. The
Notes are redeemable for cash at the Company’s option beginning on April 1,
2008, at a price equal to the principal amount plus accrued interest. The
Company may only redeem the Notes if its common stock has exceeded 175% of
the
conversion price for at least 20 trading days in the 30 consecutive trading
days
prior to delivery of a notice of redemption. Upon redemption, the Company
will
be required to make a payment equal to the net present value of the remaining
scheduled interest payments through April 1, 2010.
Contingencies
As
is
typical in the semiconductor and other high technology industries, from time
to
time, others have asserted, and may in the future assert, that the Company’s
products or manufacturing processes infringe their intellectual property
rights.
In this regard, the Company is engaged in litigation with Rambus, Inc.
(“Rambus”) relating to certain of Rambus’ patents and certain of the Company’s
claims and defenses. Lawsuits between Rambus and the Company are pending
in the
U.S. District Court for the District of Delaware, U.S. District Court for
the
Northern District of California, Germany, France, and Italy. The Company
also is
engaged in patent litigation with Tadahiro Ohmi (“Ohmi”) in the U.S. District
Court for the Eastern District of Texas, with Massachusetts Institute of
Technology (“MIT”) in the U.S. District Court for the District of Massachusetts
and with Mosaid Technologies, Inc. (“Mosaid”) in both the U.S. District Court
for the Northern District of California and the U.S. District Court for the
Eastern District of Texas. Among other things, the above lawsuits pertain
to
certain of the Company’s SDRAM, DDR SDRAM, DDR2 SDRAM, RLDRAM, and image sensor
products, which account for a significant portion of net sales.
The
Company is unable to predict the outcome of assertions of infringement made
against the Company. A court determination that the Company’s products or
manufacturing processes infringe the intellectual property rights of others
could result in significant liability and/or require the Company to make
material changes to its products and/or manufacturing processes. Any of the
foregoing could have a material adverse effect on the Company’s business,
results of operations or financial condition.
On
June
17, 2002, the Company received a grand jury subpoena from the U.S. District
Court for the Northern District of California seeking information regarding
an
investigation by the Antitrust Division of the Department of Justice (the
“DOJ”)
into possible antitrust violations in the “Dynamic Random Access Memory” or
“DRAM” industry. The Company is cooperating fully and actively with the DOJ in
its investigation. The Company’s cooperation is pursuant to the terms of the
DOJ’s Corporate Leniency Policy, which provides that in exchange for the
Company’s full, continuing and complete cooperation in the pending
investigation, the Company will not be subject to prosecution, fines or other
penalties from the DOJ. Subsequent to the commencement of the DOJ investigation,
at least eighty-four (seven of which have been dismissed) purported class
action
lawsuits have been filed against the Company and other DRAM suppliers in
various
federal and state courts in the United States and in Puerto Rico by direct
and
indirect purchasers alleging price-fixing in violation of federal and state
antitrust laws, violations of state unfair competition law, and/or unjust
enrichment relating to the sale and pricing of DRAM products. The complaints
seek treble damages sustained by purported class members, in addition to
restitution, costs and attorneys’ fees, as well as an injunction against the
allegedly unlawful conduct. The direct purchaser cases were consolidated
in the
U.S. District Court for the Northern District of California and the Court
granted plaintiffs’ motion to certify the proposed class of direct purchasers.
On January 9, 2007, the Company entered into a settlement agreement with
the
class of direct purchasers (“Direct Purchaser Settlement”). Under terms of the
Direct Purchaser Settlement, the Company agreed to pay $91 million and will
be
dismissed with prejudice from the direct purchaser consolidated class-action
suit. The Direct Purchaser Settlement is subject to approval by the U.S.
District Court for the Northern District of California. The Direct Purchaser
Settlement does not resolve the indirect purchaser suits. As a result of
the
Direct Purchaser Settlement, the Company recorded a $50 million charge to
revenue and $31 million net charge to selling, general and administrative
expenses for the first quarter of 2007. The Company recorded the costs of
the
Direct Purchaser Settlement attributable to current customers as a charge
to
revenue in accordance with generally accepted accounting
principles.
Three
purported class action lawsuits also have been filed in Canada, alleging
violations of the Canadian Competition Act. The substantive allegations in
these
cases are similar to those asserted in the cases filed in the United States
and
Puerto Rico. The Direct Purchaser Settlement does not resolve these
suits.
In
addition, various states, through their Attorneys General, have filed suit
against the Company and other DRAM manufacturers. On July 14, 2006, and on
September 8, 2006 in an amended complaint, the following states filed suit
in
the U.S. District Court for the Northern District of California: Alaska,
Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Idaho,
Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,
South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West
Virginia, Wisconsin and the Commonwealth of the Northern Mariana Islands.
The
amended complaint alleges, among other things, violations of the Sherman
Act,
Cartwright Act, and certain other states’ consumer protection and antitrust laws
and seeks damages, and injunctive and other relief. Additionally, on July
13,
2006, the State of New York filed a similar suit in the U.S. District Court
for
the Southern District of New York. That case was subsequently transferred
to the
U.S. District Court for the Northern District of California for pre-trial
purposes. The Direct Purchaser Settlement does not resolve these
suits.
In
February and March 2007, three cases were filed against the Company and other
manufacturers of DRAM in the U.S. District Court for the Northern District
of
California by parties that opted-out of the direct purchaser class action.
The
complaints allege, among other things, violations of federal and state antitrust
and competition laws in the DRAM industry, and seek damages, injunctive relief,
and other remedies. The Direct Purchaser Settlement does not resolve these
suits.
On
October 11, 2006, the Company received a grand jury subpoena from the U.S.
District Court for the Northern District of California seeking information
regarding an investigation by the DOJ into possible antitrust violations
in the
“Static Random Access Memory” or “SRAM” industry. The Company believes that it
is not a target of the investigation and is cooperating with the DOJ in its
investigation of the SRAM industry.
Subsequent
to the issuance of subpoenas to the SRAM industry, a number of purported
class
action lawsuits have been filed against the Company and other SRAM suppliers.
Six cases have been filed in the U.S. District Court for the Northern District
of California asserting claims on behalf of a purported class of individuals
and
entities that purchased SRAM directly from various SRAM suppliers during
the
period from January 1, 1998 through December 31, 2005. Additionally, at least
seventy-two cases have been filed in various U.S. District Courts asserting
claims on behalf of a purported class of individuals and entities that
indirectly purchased SRAM and/or products containing SRAM from various SRAM
suppliers during the time period from January 1, 1998 through December 31,
2005.
The complaints allege price fixing in violation of federal antitrust laws
and
state antitrust and unfair competition laws and seek treble monetary damages,
restitution, costs, interest and attorneys’ fees.
In
the
first calendar quarter of 2007, at least fifteen purported class action lawsuits
were filed against the Company and other suppliers of flash memory products.
Thirteen of these were filed in the U.S. District Court for the Northern
District of California. These cases assert claims on behalf of a purported
class
of individuals and entities that purchased Flash memory directly or indirectly
from various Flash memory suppliers during the period from January 1, 1999
through the date the various cases were filed. The complaints generally allege
price fixing in violation of federal antitrust laws and various state antitrust
and unfair competition laws and seek monetary damages, restitution, costs,
interest, and attorneys’ fees.
On
May 5,
2004, Rambus filed a complaint in the Superior Court of the State of California
(San Francisco County) against the Company and other DRAM suppliers. The
complaint alleges various causes of action under California state law including
conspiracy to restrict output and fix prices on Rambus DRAM (“RDRAM”) and unfair
competition. The complaint seeks treble damages, punitive damages, attorneys’
fees, costs, and a permanent injunction enjoining the defendants from the
conduct alleged in the complaint.
The
Company is unable to predict the outcome of these lawsuits and investigations.
The final resolution of these alleged violations of antitrust laws could
result
in significant liability and could have a material adverse effect on the
Company’s business, results of operations or financial condition.
On
February 24, 2006, a putative class action complaint was filed against the
Company and certain of its officers in the U.S. District Court for the District
of Idaho alleging claims under Section 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.
Four
substantially similar complaints subsequently were filed in the same Court.
The
cases purport to be brought on behalf of a class of purchasers of the Company’s
stock during the period February 24, 2001 to February 13, 2003. The five
lawsuits have been consolidated and a consolidated amended class action
complaint was filed on July 24, 2006. The complaint generally alleges violations
of federal securities laws based on, among other things, claimed misstatements
or omissions regarding alleged illegal price-fixing conduct. The complaint
seeks
unspecified damages, interest, attorneys’ fees, costs, and
expenses.
In
addition, on March 23, 2006, a shareholder derivative action was filed in
the
Fourth District Court for the State of Idaho (Ada County), allegedly on behalf
of and for the benefit of the Company, against certain of the Company’s current
and former officers and directors. The Company also was named as a nominal
defendant. An amended complaint was filed on August 23, 2006. The complaint
is
based on the same allegations of fact as in the securities class actions
filed
in the U.S. District Court for the District of Idaho and alleges breach of
fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets, unjust enrichment, and insider trading. The complaint seeks unspecified
damages, restitution, disgorgement of profits, equitable and injunctive relief,
attorneys’ fees, costs, and expenses. The complaint is derivative in nature and
does not seek monetary damages from the Company. However, the Company may
be
required, throughout the pendency of the action, to advance payment of legal
fees and costs incurred by the defendants.
The
Company is unable to predict the outcome of these cases. A court determination
in any of these actions against the Company could result in significant
liability and could have a material adverse effect on the Company’s business,
results of operations or financial condition.
In
March
2006, following the Company’s announcement of a definitive agreement to acquire
Lexar Media, Inc. (“Lexar”) in a stock-for-stock merger, four purported class
action complaints were filed in the Superior Court for the State of California
(Alameda County) on behalf of shareholders of Lexar against Lexar and its
directors. Two of the complaints also name the Company as a defendant. The
complaints allege that the defendants breached, or aided and abetted the
breach
of, fiduciary duties owed to Lexar shareholders by, among other things, engaging
in self-dealing, failing to engage in efforts to obtain the highest price
reasonably available, and failing to properly value Lexar in connection with
a
merger transaction between Lexar and the Company. The plaintiffs seek, among
other things, injunctive relief preventing, or an order of rescission reversing,
the merger, compensatory damages, interest, attorneys’ fees, and costs. On May
19, 2006, the plaintiffs filed a motion for preliminary injunction seeking
to
block the merger. On May 31, 2006, the Court denied the motion. An amended
consolidated complaint was filed on October 10, 2006. The Company is unable
to
predict the outcome of these suits. A court determination against the Company
could result in significant liability and could have a material adverse effect
on the Company’s business, results of operations or financial condition. (See
“Acquisitions - Lexar Media, Inc.” note.)
The
Company has accrued a liability and charged operations for the estimated
costs
of adjudication or settlement of various asserted and unasserted claims existing
as of the balance sheet date. The Company is currently a party to other legal
actions arising out of the normal course of business, none of which is expected
to have a material adverse effect on the Company’s business, results of
operations or financial condition.
In
the
normal course of business, the Company is a party to a variety of agreements
pursuant to which it may be obligated to indemnify the other party. It is
not
possible to predict the maximum potential amount of future payments under
these
types of agreements due to the conditional nature of the Company’s obligations
and the unique facts and circumstances involved in each particular agreement.
Historically, payments made by the Company under these types of agreements
have
not had a material effect on the Company’s business, results of operations or
financial condition.
Equity
Plans
As
of
March 1, 2007, the Company had an aggregate of 186.0 million shares of its
common stock reserved for issuance under its various equity plans, of which
131.6 million shares were subject to outstanding stock awards and 54.4 million
shares were available for future grants. Awards are subject to terms and
conditions as determined by the Company’s Board of Directors.
Stock
Options: The
Company granted 6.8 million and 7.8 million shares of stock options during
the
second quarter and first six months of 2007, respectively. The weighted-average
grant-date fair value per share was $4.75 and $4.91 for options granted during
the second quarter and first six months of 2007, respectively. The Company
granted 9.8 million and 10.3 million shares of stock options during the second
quarter and first six months of 2006, respectively. The weighted-average
grant-date fair value per share was $5.90 and $5.89 for options granted during
the second quarter and first six months of 2006, respectively.
The
fair
value of each option award is estimated as of the date of grant using the
Black-Scholes model. Expected volatilities are based on implied volatilities
from traded options on the Company’s stock and historical volatility. The
expected life of options granted is based on historical experience and on
the
terms and conditions of the options. The risk-free rates are based on the
U.S.
Treasury yield in effect at the time of the grant. Assumptions used in the
Black-Scholes model are presented below:
|
|
Quarter
ended
|
|
Six
months ended
|
|
|
|
March
1,
2007
|
|
March
2,
2006
|
|
March
1,
2007
|
|
March
2,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Average
expected life in years
|
|
|
4.25
|
|
|
4.25
|
|
|
4.25
|
|
|
4.25
|
|
Expected
volatility
|
|
|
38%-40
|
%
|
|
47
|
%
|
|
38%-42
|
%
|
|
47%-48
|
%
|
Weighted-average
volatility
|
|
|
38
|
%
|
|
47
|
%
|
|
39
|
%
|
|
47
|
%
|
Risk-free
interest rate
|
|
|
4.6
|
%
|
|
4.4
|
%
|
|
4.7
|
%
|
|
4.4
|
%
|
The
Black-Scholes option valuation model was developed for use in estimating
the
fair value of traded options which have no vesting restrictions and are fully
transferable and requires the input of subjective assumptions, including
the
expected stock price volatility and estimated option life. For purposes of
this valuation model, no dividends have been assumed.
Restricted
Stock and Restricted Stock Units:
The
Company awards restricted stock and restricted stock units (collectively,
“Restricted Awards”) under its equity plans. During the second quarter of 2007
and 2006, the Company granted 1.7 million and 0.7 million shares, respectively,
of service-based Restricted Awards. During the first six months of 2007,
the
Company granted 2.7 million shares of service-based Restricted Awards and
0.9
million shares of performance-based Restricted Awards. During the first six
months of 2006, the Company granted 1.5 million shares of service-based
Restricted Awards and 0.6 million shares of performance-based Restricted
Awards.
The weighted-average grant-date fair value per share was $12.38 and $15.13
for
Restricted Awards granted during the second quarter and first six months
of
2007, respectively. The weighted-average grant-date fair value per share
was
$14.26 and $12.91 for Restricted Awards granted during the second quarter
and
first six months of 2006, respectively.
Stock-Based
Compensation Expense: Total
compensation costs for the Company’s stock plans were as follows:
|
|
Quarter
ended
|
|
Six
months ended
|
|
|
|
March
1,
2007
|
|
March
2,
2006
|
|
March
1,
2007
|
|
March
2,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense by caption:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
$
|
3
|
|
$
|
2
|
|
$
|
5
|
|
$
|
3
|
|
Selling,
general and administrative
|
|
|
5
|
|
|
2
|
|
|
10
|
|
|
4
|
|
Research
and development
|
|
|
2
|
|
|
2
|
|
|
5
|
|
|
3
|
|
|
|
$
|
10
|
|
$
|
6
|
|
$
|
20
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense by type of award: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$
|
5
|
|
$
|
4
|
|
$
|
11
|
|
$
|
6
|
|
Restricted
stock
|
|
|
5
|
|
|
2
|
|
|
9
|
|
|
4
|
|
|
|
$
|
10
|
|
$
|
6
|
|
$
|
20
|
|
$
|
10
|
|
Stock-based
compensation expense of $2 million was capitalized and remained in inventory
at
March 1, 2007. As of March 1, 2007, $139 million of total unrecognized
compensation costs related to non-vested awards was expected to be recognized
through the second quarter of 2011, resulting in a weighted-average period
of
1.6 years. Stock-based compensation expense in the above presentation does
not
reflect any significant income taxes, which is consistent with the Company’s
treatment of income or loss from its U.S. operations. (See “Income Taxes”
note.)
Other
Operating (Income) Expense, Net
Other
operating income for the first six months of 2007 includes gains on disposals
of
semiconductor equipment of $10 million. Other operating income for the first
quarter of 2007 includes a gain of $30 million from the sale of certain
intellectual property to Toshiba Corporation. Other
operating income for the second quarter of 2006 includes $230 million of
net
proceeds from Intel for the sale of the Company’s then existing NAND Flash
memory designs and certain related technology and the Company’s acquisition of a
perpetual, paid-up license to use and modify such designs. Other
operating expense for the second quarter and first six month of 2006 include
$9
million from losses net of gains on write-downs and disposals of semiconductor
equipment. Other operating income for the first six months of 2006 includes
net
gains of $8 million from changes in currency exchange rates.
Income
Taxes
Income
taxes for 2007 and 2006 primarily reflect taxes on the Company’s non-U.S.
operations and U.S. alternative minimum tax. The Company has a valuation
allowance for its net deferred tax asset associated with its U.S. operations.
The provision for taxes on U.S. operations in 2007 and 2006 was substantially
offset by a reduction in the valuation allowance. As of March 1, 2007, the
Company had aggregate U.S. tax net operating loss carryforwards of $1.5 billion
and unused U.S. tax credit carryforwards of $191 million. The Company also
had
unused state tax net operating loss carryforwards of $1.4 billion and unused
state tax credits of $169 million. Substantially all of the net operating
loss
carryforwards expire in 2022 to 2025 and substantially all of the tax credit
carryforwards expire in 2013 to 2026.
Earnings
Per Share
Basic
earnings per share is computed based on the weighted-average number of common
shares and stock rights outstanding. Diluted earnings per share is computed
based on the weighted-average number of common shares outstanding plus the
dilutive effects of stock options, warrants and convertible notes. Potential
common shares that would increase earnings per share amounts or decrease
loss
per share amounts are antidilutive and are, therefore, excluded from earnings
per share calculations. Antidilutive potential common shares that could dilute
basic earnings per share in the future were 165.7 million and 111.3 million
for
the second quarter and first six months of 2007, respectively, and 97.0 million
and 110.7 million for the second quarter and first six months of 2006,
respectively.
|
|
Quarter
ended
|
|
Six
months ended
|
|
|
|
March
1,
2007
|
|
March
2,
2006
|
|
March
1,
2007
|
|
March
2,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders - Basic
|
|
$
|
(52
|
)
|
$
|
193
|
|
$
|
63
|
|
$
|
256
|
|
Net
effect of assumed conversion of debt
|
|
|
--
|
|
|
3
|
|
|
--
|
|
|
6
|
|
Net
income (loss) available to common shareholders - Diluted
|
|
$
|
(52
|
)
|
$
|
196
|
|
$
|
63
|
|
$
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding − Basic
|
|
|
768.7
|
|
|
661.5
|
|
|
767.9
|
|
|
655.8
|
|
Net
effect of dilutive stock options and assumed conversion of
debt
|
|
|
--
|
|
|
53.1
|
|
|
8.4
|
|
|
54.8
|
|
Weighted-average
common shares outstanding − Diluted
|
|
|
768.7
|
|
|
714.6
|
|
|
776.3
|
|
|
710.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
$
|
0.29
|
|
$
|
0.08
|
|
$
|
0.39
|
|
Diluted
|
|
|
(0.07
|
)
|
|
0.27
|
|
|
0.08
|
|
|
0.37
|
|
Comprehensive
Income
(Loss)
Comprehensive
income (loss) for 2007 and 2006 includes net income (loss) and de minimis
amounts of unrealized gains and losses on investments. Comprehensive loss
for
the second quarter of 2007 was $55 million and comprehensive income for the
first six months of 2007 was $62 million. Comprehensive income for the second
quarter and first six months of 2006 was $193 million and $256 million,
respectively.
Acquisitions
Lexar
Media, Inc. (“Lexar”):
On June
21, 2006, the Company acquired Lexar, a designer, developer, manufacturer
and
marketer of flash memory products, in a stock for stock merger to broaden
the
Company’s NAND Flash product offering, enhance its retail presence and
strengthen its portfolio of intellectual property. In connection therewith,
the
Company issued 50.7 million shares of common stock, issued 6.6 million stock
options and incurred other acquisition costs resulting in an aggregate purchase
price of $886 million, which was allocated to the assets and liabilities
of
Lexar based on preliminary estimates of fair values. The Company recorded
total
assets of $1,348 million, including cash and short-term investments of $101
million, receivables of $311 million, intangible assets of $183 million and
goodwill of $467 million; and total liabilities of $462 million. The recorded
amounts include adjustments in 2007 to the initial allocation of purchase
price
to reflect additional information about the fair value of assets and liabilities
acquired. The adjustments in 2007 include an $11 million increase in receivables
and other assets, an $8 million decrease in liabilities and a $19 million
decrease in goodwill. The Company’s results of operations subsequent to the
acquisition date include Lexar, as part of the Company’s Memory
segment.
The
following unaudited pro forma information presents the consolidated results
of
operations of the Company as if the acquisition of Lexar had taken place
at the
beginning of 2006. The pro forma information does not necessarily reflect
the
actual results that would have occurred nor is it necessarily indicative
of
future results of operations.
|
|
Quarter
ended
March
2,
2006
|
|
Six
months ended
March
2,
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,347
|
|
$
|
2,946
|
|
Net
income
|
|
|
151
|
|
|
185
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted
|
|
$
|
0.20
|
|
$
|
0.25
|
|
Avago
Technologies Limited Image Sensor Business:
On
December 11, 2006, the Company acquired the CMOS image sensor business of
Avago
Technologies Limited (“Avago”) for approximately $53 million in cash, plus
additional contingent payments of up to $17 million if certain milestones
are
met. The purchase price was allocated to the acquired net assets based on
preliminary estimates of fair values. As of March 1, 2007, the Company recorded
total assets of $56 million, including intangible assets of $17 million and
goodwill of $38 million; and total liabilities of $1 million. The Company’s
results of operations subsequent to the acquisition date include the CMOS
image
sensor business acquired from Avago, as part of the Company’s Imaging segment.
Mercedes Johnson, a member of the Company’s Board of Directors, is the Senior
Vice President, Finance and Chief Financial Officer, of Avago. Ms. Johnson
recused herself from all deliberations of the Company’s Board of Directors
concerning this transaction.
Joint
Ventures
NAND
Flash Joint Ventures with Intel Corporation (“IM
Flash”):
The
Company has formed two joint ventures with Intel to manufacture NAND Flash
memory products for the exclusive benefit of the partners: IM Flash
Technologies, LLC and IM Flash Singapore LLP. As of March 1, 2007, the Company
owned 51% and Intel owned 49% of IM Flash. The parties share output of IM
Flash
generally in proportion to their ownership in IM Flash.
The
Company has determined that both of the IM Flash joint ventures are variable
interest entities as defined in FIN 46(R), “Consolidation of Variable Interest
Entities,” and that the Company is the primary beneficiary of both. Accordingly,
IM Flash financial results are included in the accompanying consolidated
financial statements of the Company. The creditors of IM Flash have recourse
only to the assets of IM Flash and do not have recourse to any other assets
of
the Company.
TECH
Semiconductor Singapore Pte. Ltd. (“TECH”):
Since
1998, the Company has participated in TECH, a semiconductor memory manufacturing
joint venture in Singapore among the Company, the Singapore Economic Development
Board (“EDB”), Canon Inc. and Hewlett-Packard Company. As of March 1, 2007, the
Company owned an approximate 43% interest in TECH. The shareholders’ agreement
for the TECH joint venture expires in 2011.
On
March
30, 2007, the Company exercised its option and acquired all of the shares
of
TECH common stock held by EDB for approximately $290 million payable over
nine
months. As a result of the acquisition, the Company’s ownership interest in TECH
increased from 43% to 73%. The accompanying consolidated financial statements
do
not reflect the impact of acquiring these shares as the transaction closed
subsequent to the end of the second quarter.
The
Company has determined that TECH is a variable interest entity, and has
concluded it is the primary beneficiary of TECH as defined by FIN 46(R) and
therefore began consolidating TECH’s financial results as of the beginning of
the Company’s third quarter of 2006. The creditors of TECH have recourse only to
the assets of TECH and do not have recourse to any other assets of the
Company.
TECH’s
semiconductor manufacturing uses the Company’s product and process technology.
Subject
to specific terms and conditions, the Company has agreed to purchase all
of the
products manufactured by TECH. The Company generally purchases semiconductor
memory products from TECH at prices determined quarterly, based on a discount
from average selling prices realized by the Company for the preceding quarter.
The Company performs assembly and test services on product manufactured by
TECH.
The Company also provides certain technology, engineering and training to
support TECH. Through the second quarter of 2006, prior to the consolidation
of
TECH, all of these transactions with TECH were recognized as part of the
net
cost of products purchased from TECH. The net cost of products purchased
from
TECH amounted to $147 million and $287 million for the second quarter and
first
six months of 2006, respectively.
Segment
Information
The
Company’s reportable segments are Memory and Imaging. The Memory segment’s
primary products are DRAM and NAND Flash memory and the Imaging segment’s
primary product is CMOS image sensors. Segment information reported below
is
consistent with how it is reviewed and evaluated by the Company’s chief
operating decision maker and is based on the nature of the Company’s operations
and products offered to customers. The Company does not identify or report
depreciation and amortization, capital expenditures or assets by segment.
The
information below represents the Company’s reportable segments:
|
|
Quarter
ended
|
|
Six
months ended
|
|
|
|
March
1,
2007
|
|
March
2,
2006
|
|
March
1,
2007
|
|
March
2,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
$
|
1,271
|
|
$
|
1,066
|
|
$
|
2,557
|
|
$
|
2,274
|
|
Imaging
|
|
|
156
|
|
|
159
|
|
|
400
|
|
|
313
|
|
Total
consolidated net sales
|
|
$
|
1,427
|
|
$
|
1,225
|
|
$
|
2,957
|
|
$
|
2,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
$
|
(24
|
)
|
$
|
161
|
|
$
|
36
|
|
$
|
182
|
|
Imaging
|
|
|
(10
|
)
|
|
27
|
|
|
40
|
|
|
68
|
|
Total
consolidated operating income (loss)
|
|
$
|
(34
|
)
|
$
|
188
|
|
$
|
76
|
|
$
|
250
|
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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 “Overview” regarding NAND Flash
production in future periods and expected contributions to IM Flash; in “Net
Sales” regarding NAND Flash production in future periods and expected revenue
from sales of NAND Flash; in “Selling, General and Administrative” regarding
SG&A expenses for the third quarter of 2007; in “Research and Development”
regarding R&D costs in future periods; in “Stock-Based Compensation”
regarding increases in future stock-based compensation costs; and in “Liquidity
and Capital Resources” regarding capital spending in 2007 and 2008 and future
capital contributions to IM Flash. The Company’s actual results could differ
materially from the Company’s 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. OTHER
INFORMATION - Item 1A. Risk Factors.” This discussion should be read in
conjunction with the Consolidated Financial Statements and accompanying notes
and with the Company’s Annual Report on Form 10-K for the year ended August 31,
2006. All period references are to the Company’s fiscal periods unless otherwise
indicated. All tabular dollar amounts are in millions. All production data
reflects production of the Company and its consolidated joint ventures.
Overview
The
Company is a global manufacturer of semiconductor devices, principally
semiconductor memory products (including DRAM and NAND Flash) and CMOS image
sensors. The Company operates in two segments: Memory and Imaging. Its products
are used in a broad range of electronic applications including personal
computers, workstations, network servers, mobile phones and other consumer
applications including flash memory cards, USB storage devices, digital still
cameras, MP3 players and in automotive applications. The Company markets
its
products through its internal sales force, independent sales representatives
and
distributors primarily to original equipment manufacturers and retailers
located
around the world. The Company’s success is largely dependent on the market
acceptance of a diversified semiconductor product portfolio, efficient
utilization of the Company’s manufacturing infrastructure, successful ongoing
development of advanced process technologies and generation of sufficient
return
on research and development investments.
The
Company has strategically diversified its business by expanding into
semiconductor products such as specialty memory products (including SDRAM,
PSRAM, mobile SDRAM and reduced latency DRAM), NAND Flash memory products
and
CMOS image sensors. These products are used in a wider range of applications
than the computing applications that use the Company’s highest volume products,
DDR and DDR2 DRAM. The Company leverages its expertise in semiconductor memory
manufacturing and product and process technology to provide products that
are
differentiated from competitors’ products based on performance characteristics.
In 2006 and the first six months of 2007, approximately half of the Company’s
revenue came from sales of specialty memory products, NAND Flash memory products
and CMOS image sensors. The Company believes the strategic diversification
of
its product portfolio will strengthen its ability to allocate manufacturing
resources to achieve the highest rate of return.
The
Company has partnered with Intel to form two NAND Flash manufacturing joint
ventures: IM Flash Technologies, LLC and IM Flash Singapore LLP (collectively
“IM Flash”). IM Flash operations include two 300mm wafer fabrication facilities
that are expected to greatly increase the Company’s production of NAND Flash in
2007. IM Flash Singapore LLP plans to begin construction of a new 300mm wafer
fabrication facility in Singapore in 2007. The Company expects to contribute
approximately $2 billion in cash to IM Flash over the next three years, with
similar contributions to be made by Intel. As of March 1, 2007, the Company
owned 51% and Intel owned 49% of IM Flash. The parties share output of IM
Flash
generally in proportion to their ownership in IM Flash.
The
Company makes significant ongoing investments to implement its proprietary
product and process technology in its facilities in the United States, Europe
and Asia to manufacture semiconductor products with increasing functionality
and
performance at lower costs. The Company continues to introduce new generations
of products that offer improved performance characteristics, such as higher
data
transfer rates, reduced package size, lower power consumption and increased
megapixel count. The Company generally reduces the manufacturing cost of
each
generation of product through advancements in product and process technology
such as its leading-edge line width process technology and innovative array
architecture.
In
order
to maximize returns from investments in research and development (“R&D”),
the Company develops process technology that effectively reduces production
costs and leverages the Company’s capital expenditures. To leverage its R&D
investments, the Company has formed strategic joint ventures under which
the
costs of developing NAND Flash memory product and process technologies are
shared with its joint venture partner. In addition, from time to time, the
Company has also sold and/or licensed technology to third parties. To be
successfully incorporated in customers’ end products, the Company must offer
qualified semiconductor solutions at a time when customers are developing
their
design specifications for their end products. This is especially true for
specialty memory products and CMOS image sensors, which are required to
demonstrate advanced functionality and performance well ahead of a planned
ramp
of production to commercial volumes. In addition, DRAM and NAND Flash products
necessarily incorporate highly advanced design and process technologies.
The
Company must make significant investments in R&D to expand its product
offering and develop its leading-edge product and process
technologies.
Results
of Operations
|
|
Second
Quarter
|
|
|
|
First
Quarter
|
|
|
|
Six
Months
|
|
|
|
|
2007
|
|
%
of net sales
|
|
|
|
2006
|
|
%
of net sales
|
|
|
|
2007
|
|
%
of net sales
|
|
|
|
2007
|
|
%
of net sales
|
|
|
|
2006
|
|
%
of net sales
|
|
|
(amounts
in millions and as a percent of net sales)
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
$
|
1,271
|
|
|
89
|
|
%
|
|
$
|
1,066
|
|
|
87
|
|
%
|
|
$
|
1,286
|
|
|
84
|
|
%
|
|
$
|
2,557
|
|
|
86
|
|
%
|
|
$
|
2,274
|
|
|
88
|
|
%
|
Imaging
|
|
|
156
|
|
|
11
|
|
%
|
|
|
159
|
|
|
13
|
|
%
|
|
|
244
|
|
|
16
|
|
%
|
|
|
400
|
|
|
14
|
|
%
|
|
|
313
|
|
|
12
|
|
%
|
|
|
$
|
1,427
|
|
|
100
|
|
%
|
|
$
|
1,225
|
|
|
100
|
|
%
|
|
$
|
1,530
|
|
|
100
|
|
%
|
|
$
|
2,957
|
|
|
100
|
|
%
|
|
$
|
2,587
|
|
|
100
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
$
|
302
|
|
|
24
|
|
%
|
|
$
|
166
|
|
|
16
|
|
%
|
|
$
|
340
|
|
|
26
|
|
%
|
|
$
|
642
|
|
|
25
|
|
%
|
|
$
|
404
|
|
|
18
|
|
%
|
Imaging
|
|
|
55
|
|
|
35
|
|
%
|
|
|
70
|
|
|
44
|
|
%
|
|
|
102
|
|
|
42
|
|
%
|
|
|
157
|
|
|
39
|
|
%
|
|
|
143
|
|
|
46
|
|
%
|
|
|
$
|
357
|
|
|
25
|
|
%
|
|
$
|
236
|
|
|
19
|
|
%
|
|
$
|
442
|
|
|
29
|
|
%
|
|
$
|
799
|
|
|
27
|
|
%
|
|
$
|
547
|
|
|
21
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
$
|
153
|
|
|
11
|
|
%
|
|
$
|
108
|
|
|
9
|
|
%
|
|
$
|
180
|
|
|
12
|
|
%
|
|
$
|
333
|
|
|
11
|
|
%
|
|
$
|
203
|
|
|
8
|
|
%
|
R&D
|
|
|
243
|
|
|
17
|
|
%
|
|
|
159
|
|
|
13
|
|
%
|
|
|
183
|
|
|
12
|
|
%
|
|
|
426
|
|
|
14
|
|
%
|
|
|
325
|
|
|
13
|
|
%
|
Other
operating
(income)
expense,
net
|
|
|
(5
|
)
|
|
(0
|
|
%
|
|
|
(219
|
)
|
|
(18
|
)
|
%
|
|
|
(31
|
)
|
|
(2
|
)
|
%
|
|
|
(36
|
)
|
|
(1
|
)
|
%
|
|
|
(231
|
)
|
|
(9
|
)
|
%
|
Net
income (loss)
|
|
|
(52
|
)
|
|
(4
|
)
|
%
|
|
|
193
|
|
|
16
|
|
%
|
|
|
115
|
|
|
8
|
|
%
|
|
|
63
|
|
|
2
|
|
%
|
|
|
256
|
|
|
10
|
|
%
|
Net
Sales
Total
net
sales for the second quarter of 2007 decreased 7% as compared to the first
quarter of 2007 primarily reflecting a 36% decrease in Imaging sales due
to
weakness in the mobile handset market, increased competition and shifts in
market mix towards lower value VGA-based camera phones. Memory sales for
the
second quarter of 2007 were relatively unchanged from the first quarter of
2007,
as increases in megabit sales volumes for DRAM and NAND Flash memory products
were offset by declines in per megabit average selling prices. Total net
sales
for the second quarter of 2007 increased 16% as compared to the second quarter
of 2006 primarily due to a 19% increase in Memory sales. Total net sales
for the
first six months of 2007 increased 14% as compared to the first six months
of
2006 due to a 12% increase in Memory sales and a 28% increase in Imaging
sales.
Memory:
Memory
sales for the second quarter of 2007 were relatively unchanged from the first
quarter of 2007 as an increase in NAND sales offset a slight decrease in
DRAM
sales.
Sales
of
NAND Flash memory products in the second quarter of 2007 increased 8% compared
to the first quarter of 2007 primarily due to a 62% increase in megabits
manufactured, partially offset by a 31% decline in average selling prices.
Megabit production of NAND Flash products increased for the second quarter
of
2007 as compared to the first quarter of 2007 primarily due to the ramp of
the
Company’s wafer fabrication facility in Virginia. Sales of NAND Flash products
include sales from IM Flash to Intel at long-term negotiated prices
approximating cost. Sales of NAND Flash products represented 19% of the
Company’s total net sales for the second quarter of 2007 as compared to 16% for
the first quarter of 2007 and 5% for the second quarter of 2006. The Company
expects that sales of NAND Flash products will continue to increase in future
periods as it ramps additional NAND Flash production capacity in
Utah.
Sales
of
DRAM products for the second quarter of 2007 were relatively unchanged from
the
first quarter of 2007 as a 14% increase in megabits sold was offset by 13%
decrease in average selling prices (which includes the effects of a $50 million
charge to revenue in the first quarter of 2007 as a result of a settlement
agreement with a class of direct purchasers of certain DRAM products (the
“Direct Purchaser Settlement”)). Megabit production of DRAM products increased
14% for the second quarter of 2007 as compared to the first quarter of 2007,
primarily due to improvements in product and process technologies. Sales
of DDR
and DDR2 DRAM products were 50% of the Company’s total net sales in the second
quarter of 2007 as compared to 44% for first quarter of 2007 and 53% for
the
second quarter of 2006.
Memory
sales for the second quarter of 2007 increased 19% as compared to the second
quarter of 2006 primarily due to a 343% increase in sales of NAND Flash
products. Memory sales for the first six months of 2007 increased 12% as
compared to the first six months of 2006 primarily due to a 277% increase
in
sales of NAND Flash products. The increases in sales of NAND Flash products
for
the second quarter and first six months of 2007 as compared to the corresponding
periods of 2006 was primarily due to the Company’s acquisition of Lexar Media,
Inc. (which occurred in the fourth quarter of 2006) and a significant increases
in megabits manufactured, partially offset by decreases in average selling
prices per megabit of approximately 55%. Megabit production of NAND Flash
increased significantly for the second quarter and first six months of 2007
as
compared to the corresponding periods of 2006, primarily due to the continued
ramp of the wafer fabrication facility in Virginia. Sales of DRAM products
for
the second quarter of 2007 were relatively unchanged as compared to the second
quarter of 2006 as an 11% increase in average selling prices per megabit
was
offset by a decrease in megabit sales volume. Sales of DRAM products for
the
first six months of 2007 decreased 6% as compared to the first six months
of
2006 primarily due to reductions in megabit sales volume. Megabit sales volume
of DRAM products for the second quarter and first six months of 2007 decreased
from the corresponding periods of 2006 as the Company allocated a larger
portion
of its manufacturing resources to Imaging and NAND Flash products.
Imaging: Imaging
sales for the second quarter of 2007 decreased by 36% from the first quarter
of
2007 primarily due to lower sales volume and decreases in selling prices
as a
result of weakness in the mobile handset market, increased competition and
shifts in market mix towards lower value VGA-based camera phones. Imaging
sales
for the second quarter of 2007 decreased by 2% as compared to the second
quarter
of 2006 primarily due to lower average selling prices. Imaging sales for
the
first six months of 2007 increased by 28% as compared to the first six months
of
2006 primarily due to increases in unit sales, partially offset by lower
average
selling prices. Imaging sales were 11% of the Company’s total net sales in the
second quarter of 2007 as compared to 16% for the first quarter of 2007 and
13%
for the second quarter of 2006.
Gross
Margin
The
Company’s overall gross margin for the second quarter of 2007 declined as
compared to the first quarter of 2007 primarily due to decreases in the gross
margins for Memory and Imaging. The Company’s overall gross margin for the
second quarter and first six months of 2007 improved as compared to the
corresponding periods of 2006 primarily due to increases in the gross margin
for
Memory partially offset by declines in the gross margin of Imaging.
Memory:
The
Company’s gross margin for Memory for the second quarter of 2007 decreased
slightly to 24% from 26% for the first quarter of 2007 primarily due to
declining margins for NAND Flash products. The gross margin for NAND Flash
products declined primarily as a result of the 31% decrease in average selling
prices which was mitigated by a 23% reduction in per megabit costs. The Company
achieved cost reductions for NAND Flash products through improved product
yields
and an increase in production utilizing the Company’s 72nm line-width process.
The gross margin for DRAM products in the second quarter of 2007 was relatively
stable from the first quarter of 2007 as a 13% decrease in average selling
prices was mitigated by a 13% reduction in costs. The Company achieved cost
reductions for DRAM products through improved product yields and an increase
in
production utilizing the Company’s 95nm and 78nm process
technologies.
The
Company’s gross margin for Memory for the second quarter of 2007 improved to 24%
as compared to 16% for the second quarter of 2006 primarily due to improvements
in margins on DRAM products partially offset by declines in margins on NAND
Flash products. The Company’s gross margin for Memory for the first six months
of 2007 improved to 25% as compared to 18% for the first six months of 2006
primarily due to improvements in margins on DRAM products partially offset
by
declines in margins on NAND Flash products. The gross margin for DRAM products
in the second quarter and first six months of 2007 improved from the
corresponding periods of 2006, primarily due to reductions in production
costs
and increases in average selling prices per megabit of approximately 10%.
The
Company’s gross margin on NAND Flash products for the second quarter and first
six months of 2007 declined from the corresponding periods of 2006 primarily
due
to decreases in average selling prices of approximately 55%, which were
mitigated by significant reductions in costs.
The
Company’s TECH Semiconductor Singapore Pte. Ltd. (“TECH”) joint venture supplied
approximately 20% of the total megabits of memory produced by the Company
in
recent periods. TECH primarily produced DDR and DDR2 products in 2007 and
2006.
As of the beginning of the third quarter of 2006, TECH’s results are included in
the Company’s consolidated results. Through the second quarter of 2006, the
Company’s results reflected memory products purchased from TECH at prices
generally based on a discount from average selling prices realized by the
Company for the preceding quarter. In the first six months of 2006, the Company
realized higher gross margin percentages on sales of TECH products than on
sales
of similar products manufactured by the Company’s wholly-owned operations.
Subsequent to the second quarter of 2006, the Company’s purchases from TECH are
eliminated in consolidation and, as a result, TECH’s actual manufacturing costs
are included in the Company’s consolidated results of operations. Since TECH
utilizes the Company’s product designs and process technology and has a similar
manufacturing cost structure, the gross margin on sales of TECH products
since
the third quarter of 2006 approximated those on sales of similar products
manufactured by the Company’s wholly-owned operations. (See “Item 1. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements
-
Joint Ventures - TECH Semiconductor Singapore Pte. Ltd.”)
Imaging:
The
Company’s gross margin for Imaging declined to 35% for the second quarter of
2007 from 42% for the first quarter of 2007 primarily due to declines in
average
selling prices which was mitigated by cost reductions. The Company’s gross
margin for Imaging declined to 35% for the second quarter of 2007 from 44%
for
the second quarter of 2006 primarily due to reductions in average selling
prices
that were mitigated by cost reductions and shifts in product mix to higher
resolution products. The Company’s gross margin for Imaging declined to 39% for
the first six months of 2007 from 46% for the first six months of 2006 primarily
due to reductions in average selling prices that were mitigated by cost
reductions and shifts in product mix to higher resolution products.
Selling,
General and Administrative
Selling,
general and administrative (“SG&A”) expenses for the second quarter of 2007
decreased 15% from the first quarter of 2007 primarily due to a $31 million
net
charge to SG&A in the first quarter of 2007 as a result of the Direct
Purchaser Settlement. SG&A expenses for the second quarter of 2007 increased
42% from the second quarter of 2006 primarily due to higher personnel costs.
Personnel costs in the second quarter of 2007 increased from the second quarter
of 2006 primarily due to increased headcount resulting in part from the
acquisition of Lexar, the formation of IM Flash in the second quarter of
2006
and the consolidation of TECH in the third quarter of 2006, as well as higher
levels of stock-based compensation. SG&A expenses for the first six months
of 2007 increased 64% from the first six months of 2006 primarily due to
higher
personnel costs and the Direct Purchaser Settlement. The Company expects
SG&A expenses to approximate $140 million to $150 million for the third
quarter of 2007. For the Company’s Memory segment, SG&A expenses as a
percentage of Memory sales were 10% in the second quarter of 2007, 12% in
the
first quarter of 2007 and 8% in the second quarter of 2006. For the Imaging
segment, SG&A expenses as a percentage of Imaging sales were 15% in the
second quarter of 2007, 11% in the first quarter of 2007 and 13% in the second
quarter of 2006.
Research
and Development
Research
and development (“R&D”) expenses vary primarily with the number of
development wafers processed, the cost of advanced equipment dedicated to
new
product and process development, and personnel costs. Because of the lead
times
necessary to manufacture its products, the Company typically begins to process
wafers before completion of performance and reliability testing. The Company
deems development of a product complete once the product has been thoroughly
reviewed and tested for performance and reliability. R&D expenses can vary
significantly depending on the timing of product qualification as costs incurred
in production prior to qualification are charged to R&D.
R&D
expenses for the second quarter of 2007 increased 33% from the first quarter
of
2007, principally due to costs associated with NAND preproduction wafer
processing mitigated by increased reimbursements from Intel under a NAND
Flash
R&D cost sharing agreement. The Company and Intel share R&D process and
design costs for NAND Flash. Under this NAND Flash R&D cost-sharing
arrangement, the Company charged Intel $82 million in the second quarter
of
2007, $48 million in the first quarter of 2007 and $20 million in the second
quarter of 2006. R&D expenses for the second quarter and first six months of
2007 increased 53% and 31%, respectively, from the corresponding periods
of 2006
principally due to NAND preproduction wafer processing mitigated by
reimbursements received from Intel under the NAND Flash R&D cost-sharing
arrangement. The Company expects that its net R&D costs will approximate
$200 million to $220 million for the third quarter of 2007. For the Memory
segment, R&D expenses as a percentage of Memory sales were 16% in the second
quarter of 2007, 12% in the first quarter of 2007 and 13% in the second quarter
of 2006. For the Imaging segment, R&D expenses as a percentage of Imaging
sales were 27% in the second quarter of 2007, 13% in the first quarter of
2007
and second quarter of 2006.
The
Company’s process technology R&D efforts are focused primarily on
development of successively smaller line-width process technologies which
are
designed to facilitate the Company’s transition to next-generation memory
products and CMOS image sensors. Additional process technology R&D efforts
focus on specialty memory products (including PSRAM, mobile SDRAM and reduced
latency DRAM) and new manufacturing materials. Product design and development
efforts are concentrated on the Company’s 1 Gb and 2 Gb DDR, DDR2 and DDR3
products as well as high density and mobile NAND Flash memory (including
multi-level cell technology), CMOS image sensors and specialty memory
products.
Other
Operating (Income) Expense, Net
Other
operating income for the first six months of 2007 includes gains on disposals
of
semiconductor equipment of $10 million. Other operating income for the first
quarter of 2007 includes a gain of $30 million from the sale of certain
intellectual property to Toshiba Corporation. Other
operating income for the second quarter of 2006 includes $230 million of
net
proceeds from Intel for the sale of the Company’s then existing NAND Flash
memory designs and certain related technology and the Company’s acquisition of a
perpetual, paid-up license to use and modify such designs. Other
operating expense for the second quarter and first six month of 2006 include
$9
million from losses net of gains on write-downs and disposals of semiconductor
equipment. Other operating income for the first six months of 2006 includes
net
gains of $8 million from changes in currency exchange rates.
Income
Taxes
Income
taxes for 2007 and 2006 primarily reflect taxes on the Company’s non-U.S.
operations and U.S. alternative minimum tax. The Company has a valuation
allowance for its net deferred tax asset associated with its U.S. operations.
The provision for taxes on U.S. operations in 2007 and 2006 was substantially
offset by a reduction in the valuation allowance. As of March 1, 2007, the
Company had aggregate U.S. tax net operating loss carryforwards of $1.5 billion
and unused U.S. tax credit carryforwards of $191 million. The Company also
had
unused state tax net operating loss carryforwards of $1.4 billion and unused
state tax credits of $169 million. Substantially all of the net operating
loss
carryforwards expire from 2022 to 2025 and substantially all of the tax credit
carryforwards expire in 2013 to 2026.
Noncontrolling
Interests in Net Income
Noncontrolling
interests in net income for 2007 and 2006 primarily reflects the share of
net
income realized by the Company’s TECH joint venture attributable to the
noncontrolling interests in TECH. On March 30, 2007, the Company acquired
all of
the shares of TECH common stock held by the Singapore Economic Development
Board
for approximately $290 million, reducing the noncontrolling interests in
TECH as
of that date from 57% to 27%.
Stock-Based
Compensation
Total
compensation cost for the Company’s equity plans was $10 million for the second
quarter of 2007, $10 million for the first quarter of 2007 and $6 million
for
the second quarter of 2006. As of March 1, 2007, $2 million of stock
compensation costs were capitalized and remained in inventory. As of March
1,
2007, there was $139 million of total unrecognized compensation cost related
to
equity plans, which is expected to be recognized through the second quarter
of
2011. In 2005, the Company accelerated the vesting of substantially all of
its
unvested stock options then outstanding under the Company’s stock plans to
reduce compensation costs recognized subsequent to the adoption in 2006 of
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based
Payment.” Because the Company’s stock-based compensation costs were reduced by
the effect of the acceleration of vesting in 2005, stock-based compensation
costs will continue to grow in future periods if the Company continues to
grant
amounts of new stock-based compensation awards.
Liquidity
and Capital Resources
The
Company’s liquidity is highly dependent on average selling prices for its
products and the timing of capital expenditures, both of which can vary
significantly from period to period. As of March 1, 2007, the Company had
cash
and equivalents and short-term investments totaling $2.2 billion compared
to
$3.1 billion as of August 31, 2006. The balance as of March 1, 2007, included
an
aggregate of $277 million held at, and anticipated to be used in the near
term
by, IM Flash and TECH.
Operating
Activities:
For the
first six months of 2007, the Company generated $716 million of cash from
operating activities, which principally reflects the Company’s $63 million of
net income adjusted by $800 million for non-cash depreciation and amortization
expense. Net cash provided by operating activities was net of the effects
of an
increase of $331 million in inventories primarily due to increases in production
and higher levels of Memory inventories required to support a more diversified
product portfolio and, with respect to Imaging, weakness in the mobile handset
market.
Investing
Activities:
For the
first six months of 2007, net cash used by investing activities was $1.2
billion, which included cash expenditures for property, plant and equipment
of
$2.2 billion partially offset by the net effect of purchases, sales and
maturities of investment securities of $1.0 billion. A significant portion
of
the capital expenditures relate to the ramp of IM Flash facilities and 300mm
conversion at TECH. The Company believes that to develop new product and
process
technologies, support future growth, achieve operating efficiencies and maintain
product quality, it must continue to invest in manufacturing technologies,
facilities and capital equipment, research and development, and product and
process technologies. The Company expects capital spending for the remainder
of
2007 to approximate $1.8 billion, of which approximately $0.5 billion is
expected to be funded by capital contributions from joint venture partners.
The
Company currently anticipates 2008 capital spending to be between $2.0 billion
and $3.0 billion. As of March 1, 2007, the Company had commitments of
approximately $720 million for the acquisition of property, plant and equipment,
nearly all of which are expected to be paid within one year.
On
December 11, 2006, the Company acquired the CMOS image sensor business of
Avago
Technologies Limited for approximately $53 million in cash, plus additional
contingent payments up to $17 million if certain milestones are met. The
Company
made payments of $55 million in the second quarter of 2007 in connection
with
this acquisition.
On
March
30, 2007, the Company acquired all of the shares of TECH common stock held
by
the Singapore Economic Development Board for approximately $290 million payable
over nine months, increasing its ownership interest in TECH from 43% to
73%.
Financing
Activities:
For the
first six months of 2007, net cash provided by financing activities was $614
million, which includes $647 million in capital contributions received from
a
joint venture partner and $309 million in proceeds from equipment financing
arrangements that are payable in periodic installments over 5 years. The
Company
also made an aggregate of $391 million in scheduled debt payments and payments
on equipment purchase contracts in the first six months of 2007.
The
Company’s TECH joint venture has a credit facility that enables it to borrow up
to $400 million in future periods to fund its capital expenditures.
Access
to
capital markets has historically been important to the Company. Depending
on
market conditions, the Company may issue registered or unregistered securities
to raise capital to fund a portion of its operations.
Joint
Ventures:
As of
March 1, 2007, IM Flash had $162 million of cash and marketable investment
securities. IM Flash’s cash and marketable investment securities are not
anticipated to be made available to finance the Company’s other operations.
Subject to certain conditions, the Company expects to make additional
contributions to IM Flash of approximately $2 billion over the next three
years,
with similar contributions to be made by Intel. The Company anticipates
additional investments as appropriate to support the growth of IM Flash’s
operations.
As
of
March 1, 2007, TECH had $115 million of cash and marketable investment
securities. TECH’s cash and marketable investment securities are not anticipated
to be made available to finance the Company’s other operations.
See
“Item
1. Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Joint Ventures.”
Contractual
Obligations:
As of
March 1, 2007, contractual obligations for notes payable, capital lease
obligations and operating leases were as follows:
|
|
Total
|
|
Remainder
of 2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
and
thereafter
|
|
|
|
Notes
payable (including interest)
|
|
$
|
275
|
|
$
|
34
|
|
$
|
67
|
|
$
|
50
|
|
$
|
119
|
|
$
|
4
|
|
$
|
1
|
|
Capital
lease obligations
|
|
|
672
|
|
|
80
|
|
|
146
|
|
|
140
|
|
|
79
|
|
|
145
|
|
|
82
|
|
Operating
leases
|
|
|
112
|
|
|
18
|
|
|
38
|
|
|
19
|
|
|
8
|
|
|
6
|
|
|
23
|
|
Recently
Issued Accounting Standards
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115.” Under SFAS No. 159, the Company may elect to measure
many financial instruments and certain other items at fair value on an
instrument by instrument basis subject to certain restrictions. The Company
may
adopt SFAS No. 159 at the beginning of 2008. The impact of the adoption of
SFAS
No. 159 will be dependent on the extent to which the Company elects to measure
eligible items at fair value.
In
September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” The Company is required to
adopt SAB No. 108 by the end of 2007 and does not expect the adoption to
have a
significant impact on the Company’s financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB
Statements No. 87, 88, 106, and 132(R).” Under SFAS No. 158, the Company is
required to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end
of
2007. The Company does not expect the adoption of SFAS No. 158 to have a
significant impact on its financial position or results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements. The Company is required to
adopt
SFAS No. 157 effective at the beginning of 2009.
In
June 2006, the FASB issued Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109.” FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS
No. 109. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates it is more likely
than
not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step is to measure
the tax benefit as the largest amount which is more than 50% likely of being
realized upon ultimate settlement. The Company is required to adopt FIN 48
effective at the beginning of 2008. The Company is evaluating the impact
this
statement will have on its consolidated financial statements.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments.” SFAS No. 155 permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation. As of March 1, 2007, the Company did not have
any
hybrid financial instruments subject to the fair value election under SFAS
No.
155. The Company is required to adopt SFAS No. 155 effective at the beginning
of
2008.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
SFAS No. 154 changes the requirements for the accounting for and reporting
of a
change in accounting principle. The Company adopted SFAS No. 154 at the
beginning of 2007. The adoption of SFAS No. 154 did not impact the Company’s
results of operations and financial condition.
Critical
Accounting Estimates
The
preparation of financial statements and related disclosures in conformity
with
U.S. GAAP requires management to make estimates and judgments that affect
the
reported amounts of assets, liabilities, revenues, expenses and related
disclosures. Estimates and judgments are based on historical experience,
forecasted future events and various other assumptions that the Company believes
to be reasonable under the circumstances. Estimates and judgments may vary
under
different assumptions or conditions. The Company evaluates its estimates
and
judgments on an ongoing basis. Management believes the accounting policies
below
are critical in the portrayal of the Company’s financial condition and results
of operations and require management’s most difficult, subjective or complex
judgments.
Acquisitions
and consolidations:
Determination and the allocation thereof of the purchase price of acquired
operations significantly influences the period in which costs are recognized.
Accounting for acquisitions and consolidations requires the Company to estimate
the fair value of the individual assets and liabilities acquired as well
as
various forms of consideration given. The Company typically obtains independent
third party valuation studies to assist in determining fair values, which
may
include assistance in determining future cash flows, appropriate discount
rates
and comparable market values. The estimation of the fair values of consideration
given and assets and liabilities acquired involves a number of judgments,
assumptions and estimates that could materially affect the amount and timing
of
costs recognized.
Contingencies:
The
Company is subject to the possibility of losses from various contingencies.
Considerable judgment is necessary to estimate the probability and amount
of any
loss from such contingencies. An accrual is made when it is probable that
a
liability has been incurred or an asset has been impaired and the amount
of loss
can be reasonably estimated. The Company accrues a liability and charges
operations for the estimated costs of adjudication or settlement of asserted
and
unasserted claims existing as of the balance sheet date.
Goodwill
and intangible assets: The
Company tests goodwill for impairment annually and whenever events or
circumstances make it more likely than not that an impairment may have occurred,
such as a significant adverse change in the business climate or a decision
to
sell or dispose of a reporting unit. Determining whether impairment has occurred
requires valuation of the respective reporting unit. If the analysis indicates
goodwill is impaired, measuring the impairment requires a fair value estimate
of
each identified tangible and intangible asset. The Company tests other
identified intangible assets with definite useful lives and subject to
amortization when events and circumstances indicate the carrying value may
not
be recoverable by comparing the carrying amount to the sum of undiscounted
cash
flows expected to be generated by the asset. The Company tests intangible
assets
with indefinite lives annually for impairment using a fair value method such
as
discounted cash flows. Estimating fair values involves significant assumptions,
especially regarding future sales prices, sales volumes, costs and discount
rates.
Income
taxes: The
Company is required to estimate its provision for income taxes and amounts
ultimately payable or recoverable in numerous tax jurisdictions around the
world. Estimates involve interpretations of regulations and are inherently
complex. Resolution of income tax treatments in individual jurisdictions
may not
be known for many years after completion of any fiscal year. The Company
is also
required to evaluate the realizability of its deferred tax assets on an ongoing
basis in accordance with U.S. GAAP, which requires the assessment of the
Company’s performance and other relevant factors when determining the need for a
valuation allowance with respect to these deferred tax assets. Realization
of
deferred tax assets is dependent on the Company’s ability to generate future
taxable income.
Inventories:
Inventories are stated at the lower of average cost or market value. Cost
includes labor, material and overhead costs, including product and process
technology costs. Determining market value of inventories involves numerous
judgments, including projecting average selling prices and sales volumes
for
future periods and costs to complete products in work in process inventories.
To
project average selling prices and sales volumes, the Company reviews recent
sales volumes, existing customer orders, current contract prices, industry
analysis of supply and demand, seasonal factors, general economic trends
and
other information. When these analyses reflect estimated market values below
the
Company’s manufacturing costs, the Company records a charge to cost of goods
sold in advance of when the inventory is actually sold. Differences in
forecasted average selling prices used in calculating lower of cost or market
adjustments can result in significant changes in the estimated net realizable
value of product inventories and accordingly the amount of write-down recorded.
Due to the volatile nature of the semiconductor memory industry, actual selling
prices and volumes often vary significantly from projected prices and volumes
and, as a result, the timing of when product costs are charged to operations
can
vary significantly.
U.S.
GAAP
provides for products to be grouped into categories in order to compare costs
to
market values. The amount of any inventory write-down can vary significantly
depending on the determination of inventory categories. The Company’s
inventories have been categorized as Memory products or Imaging products.
The
major characteristics the Company considers in determining inventory categories
are product type and markets.
Product
and process technology:
Costs
incurred to acquire product and process technology or to patent technology
developed by the Company are capitalized and amortized on a straight-line
basis
over periods currently ranging up to 10 years. The Company capitalizes a
portion
of costs incurred based on its analysis of historical and projected patents
issued as a percent of patents filed. Capitalized product and process technology
costs are amortized over the shorter of (i) the estimated useful life of
the
technology, (ii) the patent term or (iii) the term of the technology
agreement.
Property,
plant and equipment: The
Company reviews the carrying value of property, plant and equipment for
impairment when events and circumstances indicate that the carrying value
of an
asset or group of assets may not be recoverable from the estimated future
cash
flows expected to result from its use and/or disposition. In cases where
undiscounted expected future cash flows are less than the carrying value,
an
impairment loss is recognized equal to the amount by which the carrying value
exceeds the estimated fair value of the assets. The estimation of future
cash
flows involves numerous assumptions which require judgment by the Company,
including, but not limited to, future use of the assets for Company operations
versus sale or disposal of the assets, future selling prices for the Company’s
products and future production and sales volumes. In addition, judgment is
required by the Company in determining the groups of assets for which impairment
tests are separately performed.
Research
and development:
Costs
related to the conceptual formulation and design of products and processes
are
expensed as research and development when incurred. Determining when product
development is complete requires judgment by the Company. The Company deems
development of a product complete once the product has been thoroughly reviewed
and tested for performance and reliability.
Stock-based
compensation:
Under
the provisions of SFAS No. 123(R), stock-based compensation cost is estimated
at
the grant date based on the fair-value of the award and is recognized as
expense
ratably over the requisite service period of the award. Determining the
appropriate fair-value model and calculating the fair value of stock-based
awards at the grant date requires considerable judgment, including estimating
stock price volatility, expected option life and forfeiture rates. The Company
develops its estimates based on historical data and market information which
can
change significantly over time. A small change in the estimates used can
result
in a relatively large change in the estimated valuation.
The
Company uses the Black-Scholes option valuation model to value employee stock
awards. The Company estimates stock price volatility based on an average
of its
historical volatility and the implied volatility derived from traded options
on
the Company’s stock. Estimated option life and forfeiture rate assumptions are
derived from historical data. For stock based compensation awards with graded
vesting that were granted after 2005, the Company recognizes compensation
expense using the straight-line amortization method.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
Interest
Rate Risk
As
of
March 1, 2007, $734 million of
the
Company’s $822 million in total debt was at fixed interest rates. As a result,
the fair value of the debt fluctuates based on changes in market interest
rates.
The estimated fair market value of the Company’s debt was $844 million as of
March 1, 2007. The difference between the estimated fair value of the Company’s
debt and its recorded value is primarily attributable to the Company’s
convertible debt.
Foreign
Currency Exchange Rate Risk
The
information in this section should be read in conjunction with the information
related to changes in the exchange rates of foreign currency in “Item 1A. Risk
Factors.” Changes in foreign currency exchange rates could materially adversely
affect the Company’s results of operations or financial condition.
The
functional currency for substantially all of the Company’s operations is the
U.S. dollar. The Company held aggregate cash and other assets in foreign
currencies valued at U.S. $388 million as of March 1, 2007, and U.S. $425
million as of August 31, 2006 (including cash and equivalents denominated
in yen
valued at U.S. $197 million as of March 1, 2007, and U.S. $222 million as
of
August 31, 2006; cash and equivalents denominated in Singapore dollars valued
at
U.S. $15 million as of March 1, 2007 and $42 million as of August 31, 2006;
and
deferred income tax assets denominated in yen valued at U.S. $70 million
as of
March 1, 2007, and U.S. $64 million as of August 31, 2006). The Company also
held aggregate foreign currency liabilities valued at U.S. $617 million as
of
March 1, 2007, and U.S. $615 million as of August 31, 2006 (including debt
denominated in yen valued at U.S. $194 million as of March 1, 2007, and U.S.
$228 million as of August 31, 2006). Foreign currency receivables and payables
as of March 1, 2007, were comprised primarily of yen, euros and Singapore
dollars. The
Company estimates that, based on its assets and liabilities denominated in
currencies other than U.S. dollar as of March 1, 2007, a 1% change in the
exchange rate versus the U.S. dollar would result in foreign currency gains
or
losses of approximately $1 million for the euro, the yen and the Singapore
dollar.
Item
4. Controls
and Procedures
An
evaluation was carried out under the supervision and with the participation
of
the Company’s management, including its principal executive officer and
principal financial officer, of the effectiveness of the design and operation
of
the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of
the
period covered by this report. Based upon that evaluation, the principal
executive officer and principal financial officer concluded that those
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms and that such
information is accumulated and communicated to the Company’s management,
including the principal executive officer and principal financial officer,
as
appropriate, to allow timely decision regarding disclosure.
During
the quarterly period covered by this report, there were no changes in the
Company’s internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal
Proceedings
On
August
28, 2000, the Company filed a complaint against Rambus, Inc. (“Rambus”) in the
U.S. District Court for the District of Delaware seeking monetary damages
and
declaratory and injunctive relief. Among other things, the Company’s complaint
(as amended) alleges violation of federal antitrust laws, breach of contract,
fraud, deceptive trade practices, and negligent misrepresentation. The complaint
also seeks a declaratory judgment (a) that certain Rambus patents are not
infringed by the Company, are invalid, and/or are unenforceable, (b) that
the
Company has an implied license to those patents, and (c) that Rambus is estopped
from enforcing those patents against the Company. On February 15, 2001, Rambus
filed an answer and counterclaim in Delaware denying that the Company is
entitled to relief, alleging infringement of the eight Rambus patents named
in
the Company’s declaratory judgment claim, and seeking monetary damages and
injunctive relief. A number of other suits are currently pending in Europe
alleging that certain of the Company’s SDRAM and DDR SDRAM products infringe
various of Rambus’ country counterparts to its European patent 525 068,
including: on September 1, 2000, Rambus filed suit against Micron Semiconductor
(Deutschland) GmbH in the District Court of Mannheim, Germany; on September
22,
2000, Rambus filed a complaint against the Company and Reptronic (a distributor
of the Company’s products) in the Court of First Instance of Paris, France; on
September 29, 2000, the Company filed suit against Rambus in the Civil Court
of
Milan, Italy, alleging invalidity and non-infringement. In addition, on December
29, 2000, the Company filed suit against Rambus in the Civil Court of Avezzano,
Italy, alleging invalidity and non-infringement of the Italian counterpart
to
European patent 1 004 956. Additionally, other suits are pending alleging
that
certain of our DDR SDRAM products infringe Rambus’ country counterparts to its
European patent 1 022 642, including: on August 10, 2001, Rambus filed suit
against the Company and Assitec (an electronics retailer) in the Civil Court
of
Pavia, Italy; and on August 14, 2001, Rambus filed suit against Micron
Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany.
In
the European suits against the Company, Rambus is seeking monetary damages
and
injunctive relief. Subsequent to the filing of the various European suits,
the
European Patent Office declared Rambus’ 525 068 and 1 004 956 European patents
invalid and revoked the patents. On January 13, 2006, Rambus filed a lawsuit
against the Company in the U.S. District Court for the Northern District
of
California alleging infringement of eighteen Rambus patents.
On
June
2, 2005, Tadahiro Ohmi (“Ohmi”) filed suit against the Company in the U.S.
District Court for the Eastern District of Texas (amended on August 31, 2005)
alleging infringement of a single Ohmi patent. On August 31, 2005, an amended
complaint was filed substituting the Foundation for Advancement of International
Science as the plaintiff.
On
October 3, 2006, the Massachusetts Institute of Technology (“MIT”) filed suit
against the Company in the U.S. District Court for the District of Massachusetts
alleging infringement of a single MIT patent.
On
July
24, 2006, the Company filed a declaratory judgment action against Mosaid
Technologies, Inc. (“Mosaid”) in the U.S. District Court for the Northern
District of California seeking, among other things, a court determination
that
fourteen Mosaid patents are invalid, not enforceable, and/or not infringed.
On
July 25, 2006, Mosaid filed a lawsuit against the Company and others in the
U.S.
District Court for the Eastern District of Texas alleging infringement of
nine
Mosaid patents. On August 31, 2006, Mosaid filed an amended complaint adding
two
additional Mosaid patents. On October 23, 2006, the California Court dismissed
the Company’s declaratory judgment suit based on lack of
jurisdiction.
Among
other things, the above lawsuits pertain to certain of the Company’s SDRAM, DDR
SDRAM, DDR2 SDRAM, RLDRAM, and image sensor products, which account for a
significant portion of the Company’s net sales.
The
Company is unable to predict the outcome of these suits. A court determination
that the Company’s products or manufacturing processes infringe the product or
process intellectual property rights of others could result in significant
liability and/or require the Company to make material changes to its products
and/or manufacturing processes. Any of the foregoing results could have a
material adverse effect on the Company’s business, results of operations or
financial condition.
On
June
17, 2002, the Company received a grand jury subpoena from the U.S. District
Court for the Northern District of California seeking information regarding
an
investigation by the Antitrust Division of the Department of Justice (the
“DOJ”)
into possible antitrust violations in the “Dynamic Random Access Memory” or
“DRAM” industry. The Company is cooperating fully and actively with the DOJ in
its investigation. The Company’s cooperation is pursuant to the terms of the
DOJ’s Corporate Leniency Policy, which provides that in exchange for our full,
continuing and complete cooperation in the pending investigation, the Company
will not be subject to prosecution, fines or other penalties from the
DOJ.
Subsequent
to the commencement of the DOJ investigation, a number of purported class
action
lawsuits have been filed against the Company and other DRAM suppliers. Eighteen
cases have been filed in various federal district courts (two of which have
been
dismissed) asserting claims on behalf of a purported class of individuals
and
entities that purchased DRAM directly from the various DRAM suppliers during
the
period from April 1, 1999 through at least June 30, 2002. All of the cases
have
been transferred to the U.S. District Court for the Northern District of
California for consolidated proceedings. The complaints allege price-fixing
in
violation of federal antitrust laws and seek treble damages sustained by
purported class members, in addition to restitution, costs and attorneys’ fees,
as well as an injunction against the allegedly unlawful conduct. On June
5,
2006, the Court granted plaintiffs’ motion to certify the proposed class of
direct purchasers. On January 9, 2007, Micron entered into a settlement
agreement with the class of direct purchasers (“Direct Purchaser Settlement”).
Under terms of the Direct Purchaser Settlement, Micron agreed to pay $91
million
and will be dismissed with prejudice from the direct purchaser consolidated
class-action suit. The Direct Purchaser Settlement is subject to approval
by the
U.S. District Court for the Northern District of California.
Four
cases have been filed in the U.S. District Court for the Northern District
of
California asserting claims on behalf of a purported class of individuals
and
entities that indirectly purchased DRAM and/or products containing DRAM from
various DRAM suppliers during the time period from April 1, 1999 through
at
least June 30, 2002. The complaints allege price fixing in violation of federal
antitrust laws and various state antitrust and unfair competition laws and
seek
treble monetary damages, restitution, costs, interest and attorneys’ fees. In
addition, at least sixty-two cases have been filed in various state courts
(five
of which have been dismissed) asserting claims on behalf of a purported class
of
indirect purchasers of DRAM. Cases have been filed in the following states:
Arkansas, Arizona, California, Florida, Hawaii, Iowa, Kansas, Massachusetts,
Maine, Michigan, Minnesota, Mississippi, Montana, North Carolina, North Dakota,
Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, New York, Ohio,
Pennsylvania, South Dakota, Tennessee, Utah, Vermont, Virginia, Wisconsin,
and
West Virginia, and also in the District of Columbia and Puerto Rico. The
complaints purport to be on behalf of a class of individuals and entities
that
indirectly purchased DRAM and/or products containing DRAM in the respective
jurisdictions during various time periods ranging from 1999 through the filing
date of the various complaints. The complaints allege violations of the various
jurisdictions’ antitrust, consumer protection and/or unfair competition laws
relating to the sale and pricing of DRAM products and seek treble monetary
damages, restitution, costs, interest and attorneys’ fees. A number of these
cases have been removed to federal court and transferred to the U.S. District
Court for the Northern District of California (San Francisco) for consolidated
proceedings. The Direct Purchaser Settlement does not resolve these
suits.
Additionally,
three cases have been filed in the following Canadian courts: Superior Court,
District of Montreal, Province of Quebec; Ontario Superior Court of Justice,
Ontario; and Supreme Court of British Columbia, Vancouver Registry, British
Columbia. The substantive allegations in these cases are similar to those
asserted in the cases filed in the United States. The Direct Purchaser
Settlement does not resolve these suits.
In
addition, various states, through their Attorneys General, have filed suit
against the Company and other DRAM manufacturers. On July 14, 2006, and on
September 8, 2006 in an amended complaint, the following states filed suit
in
the U.S. District Court for the Northern District of California: Alaska,
Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Idaho,
Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,
South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West
Virginia, Wisconsin and the Commonwealth of the Northern Mariana Islands.
The
amended complaint alleges, among other things, violations of the Sherman
Act,
Cartwright Act, and certain other states’ consumer protection and antitrust laws
and seeks damages, and injunctive and other relief. Additionally, on July
13,
2006, the State of New York filed a similar suit in the U.S. District Court
for
the Southern District of New York. That case was subsequently transferred
to the
U.S. District Court for the Northern District of California for pre-trial
purposes. The Direct Purchaser Settlement does not resolve these
suits.
On
February 28, 2007, February 28, 2007 and March 8, 2007, cases were filed
against
the Company and other manufacturers of DRAM in the U.S. District Court for
the
Northern District of California by All American Semiconductor, Inc., Jaco
Electronics, Inc. and DRAM Claims Liquidation Trust, respectively, that
opted-out of the Direct Purchaser class action. The complaints allege, among
other things, violations of federal and state antitrust and competition laws
in
the DRAM industry, and seek damages, injunctive relief, and other remedies.
The
Direct Purchaser Settlement does not resolve these three suits.
On
October 11, 2006, the Company received a grand jury subpoena from the U.S.
District Court for the Northern District of California seeking information
regarding an investigation by the DOJ into possible antitrust violations
in the
“Static Random Access Memory” or “SRAM” industry. The Company believes that it
is not a target of the investigation and is cooperating with the DOJ in its
investigation of the SRAM industry.
Subsequent
to the issuance of subpoenas to the SRAM industry, a number of purported
class
action lawsuits have been filed against the Company and other SRAM suppliers.
Six cases have been filed in the U.S. District Court for the Northern District
of California asserting claims on behalf of a purported class of individuals
and
entities that purchased SRAM directly from various SRAM suppliers during
the
period from January 1, 1998 through December 31, 2005. Additionally, at least
seventy-two cases have been filed in various U.S. District Courts asserting
claims on behalf of a purported class of individuals and entities that
indirectly purchased SRAM and/or products containing SRAM from various SRAM
suppliers during the time period from January 1, 1998 through December 31,
2005.
The complaints allege price fixing in violation of federal antitrust laws
and
state antitrust and unfair competition laws and seek treble monetary damages,
restitution, costs, interest and attorneys’ fees.
In
the
first calendar quarter of 2007, at least fifteen purported class action lawsuits
were filed against the Company and other suppliers of flash memory products.
Thirteen of these were filed in the U.S. District Court for the Northern
District of California. These cases assert claims on behalf of a purported
class
of individuals and entities that purchased Flash memory directly or indirectly
from various Flash memory suppliers during the period from January 1, 1999
through the date the various cases were filed. The complaints generally allege
price fixing in violation of federal antitrust laws and various state antitrust
and unfair competition laws and seek monetary damages, restitution, costs,
interest, and attorneys’ fees.
On
May 5,
2004, Rambus filed a complaint in the Superior Court of the State of California
(San Francisco County) against the Company and other DRAM suppliers. The
complaint alleges various causes of action under California state law including
a conspiracy to restrict output and fix prices on Rambus DRAM (“RDRAM”) and
unfair competition. The complaint seeks treble damages, punitive damages,
attorneys’ fees, costs, and a permanent injunction enjoining the defendants from
the conduct alleged in the complaints.
The
Company is unable to predict the outcome of these lawsuits and investigations.
The final resolution of these alleged violations of antitrust laws could
result
in significant liability and could have a material adverse effect on the
Company’s business, results of operations or financial condition.
On
February 24, 2006, a putative class action complaint was filed against the
Company and certain of its officers in the U.S. District Court for the District
of Idaho alleging claims under Section 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.
Four
substantially similar complaints subsequently were filed in the same Court.
The
cases purport to be brought on behalf of a class of purchasers of the Company’s
stock during the period February 24, 2001 to February 13, 2003. The five
lawsuits have been consolidated and a consolidated amended class action
complaint was filed on July 24, 2006. The complaint generally alleges violations
of federal securities laws based on, among other things, claimed misstatements
or omissions regarding alleged illegal price-fixing conduct or the Company’s
operations and financial results. The complaint seeks unspecified damages,
interest, attorneys’ fees, costs, and expenses.
In
addition, on March 23, 2006 a shareholder derivative action was filed in
the
Fourth District Court for the State of Idaho (Ada County), allegedly on behalf
of and for the benefit of the Company, against certain of the Company’s current
and former officers and directors. The Company also was named as a nominal
defendant. An amended complaint was filed on August 23, 2006. The complaint
is
based on the same allegations of fact as in the securities class actions
filed
in the U.S. District Court for the District of Idaho and alleges breach of
fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets, unjust enrichment, and insider trading. The complaint seeks unspecified
damages, restitution, disgorgement of profits, equitable and injunctive relief,
attorneys’ fees, costs, and expenses. The complaint is derivative in nature and
does not seek monetary damages from the Company. However, the Company may
be
required, throughout the pendency of the action, to advance payment of legal
fees and costs incurred by the defendants.
The
Company is unable to predict the outcome of these cases. A court determination
in any of these actions against the Company could result in significant
liability and could have a material adverse effect on the Company’s business,
results of operations or financial condition.
In
March
2006, following the Company’s announcement of a definitive agreement to acquire
Lexar Media, Inc. (“Lexar”) in a stock-for-stock merger, four purported class
action complaints were filed in the Superior Court for the State of California
(Alameda County) on behalf of shareholders of Lexar against Lexar and its
directors. Two of the complaints also name the Company as a defendant. The
complaints allege that the defendants breached, or aided and abetted the
breach
of, fiduciary duties owed to Lexar shareholders by, among other things, engaging
in self-dealing, failing to engage in efforts to obtain the highest price
reasonably available, and failing to properly value Lexar in connection with
a
merger transaction between Lexar and the Company. The plaintiffs seek, among
other things, injunctive relief preventing, or an order of rescission reversing,
the merger, compensatory damages, interest, attorneys’ fees, and costs. On May
19, 2006, the plaintiffs filed a motion for preliminary injunction seeking
to
block the merger. On May 31, 2006, the Court denied the motion. An amended
consolidated complaint was filed on October 10, 2006. The Company is unable
to
predict the outcome of these suits. A court determination against the Company
could result in significant liability and could have a material adverse effect
on the Company’s business, results of operations or financial condition. (See
“PART I. FINANCIAL INFORMATION - Item 1. Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Lexar Media,
Inc.”)
(See
“Item 1A. Risk Factors”)
Item
1A. Risk
Factors
In
addition to the factors
discussed elsewhere in this Form 10-Q, the following are important
factors which could cause actual results or events to differ materially from
those contained in any forward-looking statements made by or on behalf of
the
Company.
We
have experienced dramatic declines in average selling prices for our
semiconductor memory products which have adversely affected our
business.
In
the
second quarter of 2007 average selling prices for DRAM products and NAND
Flash
products decreased 13% and 31%, respectively, as compared to the first quarter
of 2007. In recent years, we have also experienced annual decreases in per
megabit average selling prices for our memory products including: 34% in
2006,
24% in 2005, 17% in 2003, 53% in 2002 and 60% in 2001. At times, average
selling
prices for our memory products have been below our costs. If average selling
prices for our memory products decrease faster than we can decrease per megabit
costs, our business, results of operations or financial condition could be
materially adversely affected.
Increased
worldwide semiconductor memory production or lack of demand for semiconductor
memory could lead to further declines in average selling
prices.
The
transitions to smaller line-width process technologies and 300mm wafers in
the
industry have resulted in significant increases in the worldwide supply of
semiconductor memory and will likely lead to future increases. Increases
in
worldwide supply of semiconductor memory also result from semiconductor memory
fab capacity expansions, either by way of new facilities, increased capacity
utilization or reallocation of other semiconductor production to semiconductor
memory production. We and several of our competitors have announced plans
to
increase production through construction of new facilities or expansion of
existing facilities. Increases in worldwide supply of semiconductor memory,
if
not accompanied with commensurate increases in demand, would lead to further
declines in average selling prices for our products and would materially
adversely affect our business, results of operations or financial
condition.
We
may be unable to reduce our per megabit manufacturing costs at the same rate
as
we have in the past.
Historically,
our gross margin has benefited from decreases in per unit manufacturing costs
achieved through improvements in our manufacturing processes, including reducing
the die size of our existing products. In future periods, we may be unable
to
reduce our per unit manufacturing costs or reduce these costs at historical
rates due to strategic product diversification decisions affecting product
mix,
the ever increasing complexity of manufacturing processes, changes in process
technologies or products which inherently may require relatively larger die
sizes. Per unit manufacturing costs may also be affected by the relatively
smaller production quantities and shorter product lifecycles of Imaging and
certain specialty memory products.
Our
plans to significantly increase our NAND Flash memory
production and sales have numerous risks.
We
plan
to significantly increase our NAND Flash production and sales in future periods.
As part of this plan we have formed a manufacturing joint venture with Intel
and
made substantial investments in capital expenditures for equipment and new
facilities as well as research and development. Our plans also require
significant future investments in capital expenditures and research and
development. We currently expect our capital spending for 2008 to be between
$2.0 and $3.0 billion, with a majority of the expenditures being made to
support
our NAND operations. These investments involve numerous risks. In addition
we
are required to devote a significant portion of our existing semiconductor
manufacturing capacity to the production of NAND Flash instead of the Company’s
other products. We are party to a contract with Apple Inc. to provide NAND
Flash
products for an extended period of time at contractually determined prices.
We
currently have a relatively small share of the world-wide market for NAND
Flash.
Our
NAND
Flash strategy involves numerous risks, and may include the
following:
· |
increasing
our exposure to changes in average selling prices for NAND
Flash;
|
· |
difficulties
in establishing new production operations at multiple
locations;
|
· |
increasing
capital expenditures to increase production capacity and modify existing
processes to produce NAND Flash;
|
· |
increasing
debt to finance future investments;
|
· |
diverting
management’s attention from DRAM and CMOS Image sensor
operations;
|
· |
managing
larger operations and facilities and employees in separate geographic
areas; and
|
· |
hiring
and retaining key employees.
|
Our
NAND
Flash strategy may not be successful and could materially adversely affect
our
business, results of operations or financial condition.
The
future success of our Imaging business will be dependent on continued market
acceptance of our products and the development, introduction and marketing
of
new Imaging products.
Our
Imaging business represented 11% of our net sales in the second quarter of
2007.
Despite growth in 2006, Imaging net sales and gross margins were down
significantly in the second quarter of 2007 compared to the first quarter
of
2007. There can be no assurance that we will be able to grow or maintain
our
market share or gross margins for Imaging products in the future. The success
of
our Imaging business will depend on a number of factors, including:
· |
development
of products that maintain a technological advantage over the products
of
our competitors;
|
· |
accurate
prediction of market requirements and evolving standards, including
pixel
resolution, output interface standards, power requirements, optical
lens
size, input standards and other
requirements;
|
· |
timely
completion and introduction of new Imaging products that satisfy
customer
requirements;
|
· |
timely
achievement of design wins with prospective customers, as manufacturers
may be reluctant to change their source of components due to the
significant costs, time, effort and risk associated with qualifying
a new
supplier; and
|
· |
efficient,
cost-effective manufacturing as we transition to new products and
higher
volumes.
|
We
may not be able to generate sufficient cash flows to fund our operations
and
make adequate capital investments.
Our
cash
flows from operations depend primarily on the volume of semiconductor memory
and
CMOS image sensors sold, average selling prices and per unit manufacturing
costs. To develop new product and process technologies, support future growth,
achieve operating efficiencies and maintain product quality, we must make
significant capital investments in manufacturing technology, facilities and
capital equipment, research and development, and product and process technology.
We expect capital spending for the remainder of 2007 to approximate $1.8
billion, of which approximately $0.5 billion is expected to be funded by
capital
contributions from our joint venture partners. We currently anticipate 2008
capital spending to be between $2 billion and $3 billion. Cash and investments
of IM Flash and TECH are generally not available to finance our other
operations. In addition to cash provided by operations, we have from time
to
time utilized external sources of financing. Access to capital markets has
historically been very important to us. Depending on market conditions, we
may
issue registered or unregistered securities to raise capital to fund a portion
of our operations. There can be no assurance that we will be able to generate
sufficient cash flows to fund our operations, make adequate capital investments
or access capital markets on acceptable terms, and an inability to do so
could
have a material adverse effect on our business and results of
operations.
The
semiconductor industry is highly competitive.
We
face
intense competition in the semiconductor memory market from a number of
companies, including Elpida Memory, Inc.; Hynix Semiconductor Inc.; Qimonda
AG
ADS; Samsung Electronics Co., Ltd.; SanDisk Corporation; Toshiba Corporation
and
from emerging companies in Taiwan and China, who have announced plans to
significantly expand the scale of their operations. Some of our competitors
are
large corporations or conglomerates that may have greater resources to withstand
downturns in the semiconductor markets in which we compete, invest in technology
and capitalize on growth opportunities. Our competitors seek to increase
silicon
capacity, improve yields, reduce die size and minimize mask levels in their
product designs. These factors have significantly increased worldwide supply
and
put downward pressure on prices.
We
face
competition in the image sensor market from a number of suppliers of CMOS
image
sensors including
MagnaChip Semiconductor Ltd.; OmniVision Technologies, Inc.; Samsung
Electronics Co., Ltd;
Sony
Corporation; STMicroelectronics NV; Toshiba Corporation
and from a number of suppliers of CCD image sensors including Matsushita
Electric Industrial Co., Ltd.; Sharp Corporation and Sony
Corporation.
In
recent periods, a number of new companies have entered the CMOS image sensor
market. Competitors
include many large domestic and international companies that have greater
presence in key markets, better access to certain customer bases, greater
name
recognition and more established strategic and financial relationships than
the
Company.
We
may have difficulty integrating the operations of Lexar.
If
we are
unable to successfully combine and integrate the Lexar operations, we may
not be
able to realize many of the anticipated benefits of the merger, which could
harm
our results of operations. In order to realize the benefits of the merger,
we
will need to timely integrate the technology, operations, and personnel of
Lexar. Integrating the two companies will be a complex, time-consuming and
expensive process that, even with proper planning and implementation, could
significantly disrupt the businesses of Micron and Lexar. The challenges
involved in this integration include: combining product and service offerings,
optimizing inventory management over a broader distribution chain, and
preserving customer, supplier and other important relationships of both Micron
and Lexar. If we are not able to successfully integrate our operations with
those of Lexar, our results of operations could be materially adversely
affected.
Our
internal control over financial reporting could be adversely affected by
material weaknesses in Lexar’s internal controls.
In
Lexar’s Annual Report on Form 10-K for the period ended December 31, 2005, and
its Quarterly Report on Form 10-Q for the period ended March 31, 2006, Lexar
reported material weaknesses with respect to its revenue recognition controls
and inventory accounting controls. These control deficiencies resulted in
audit
adjustments to revenues, accounts receivable, cost of product revenues, deferred
revenue, sales related accruals and inventory in Lexar’s 2005 consolidated
financial statements. As a result of these material weaknesses, Lexar concluded
in its Annual Report and Quarterly Report that its internal control over
financial reporting was not effective as of the end of the periods covered
by
the reports. While prior to the close of the merger Lexar continued to take
steps to remediate these material weaknesses, there can be no assurance that
we
will be able to completely remediate these material weaknesses such that
we will
be able to conclude that our internal control over financial reporting is
effective. We began consolidating the financial results of Lexar on June
22,
2006. However, due to the timing of the acquisition, the internal control
over
financial reporting relating to Lexar was exempt from testing and evaluation
for
2006. To the extent we do not remediate the material weaknesses, the
effectiveness of our internal control over financial reporting may be adversely
affected.
Our
net operating loss carryforwards may be limited as a result of the Lexar
merger.
Micron
and Lexar had net operating loss carryforwards for federal income tax purposes
prior to the merger and both entities had provided significant valuation
allowances against the tax benefit of such losses as well as certain tax
credit
carryforwards. Utilization of these net operating losses and credit
carryforwards are dependent upon us achieving profitable results following
the
Lexar merger. As a consequence of the merger, as well as earlier issuances
of
common stock consummated by both companies and business combinations by the
Company, utilization of the tax benefits of these carryforwards are subject
to
limitations imposed by Section 382 of the Internal Revenue Code. The
determination of the limitations is complex and requires significant judgment
and analysis of past transactions. Accordingly, some portion or all of these
carryforwards may not be available to offset any future taxable
income.
Our
resellers receive price protections which may have an adverse affect on our
gross margins.
NAND
Flash sales are made through resellers which traditionally have been provided
price protection. In an environment of slower demand and abundant supply
of
products, price declines and channel promotions expenses are more likely
to
occur. Further, in this environment, high channel inventory may result in
substantial price protection charges. These price protection charges have
the
effect of reducing gross sales and gross margin. We expect to continue to
incur
price protection charges for the foreseeable future due to competitive pricing
pressures and, as a result, our revenues and gross margins could be adversely
affected.
Changes
in foreign currency exchange rates could materially adversely affect our
business, results of operations or financial condition.
Our
financial statements are prepared in accordance with U.S. GAAP and are reported
in U.S. dollars. Across our multi-national operations, there are transactions
and balances denominated in other currencies, primarily the euro, yen and
Singapore dollar. We estimate that, based on our assets and liabilities
denominated in currencies other than U.S. dollar as of March 1, 2007, a 1%
change in the exchange rate versus the U.S. dollar would result in foreign
currency gains or losses of approximately $1 million for the euro, the yen
and
the Singapore dollar. In the event that the U.S. dollar weakens significantly
compared to the euro, yen or Singapore dollars, our results of operations
or
financial condition will be adversely affected.
New
product development may be unsuccessful.
We
are
developing new products that complement our traditional memory products or
leverage their underlying design or process technology. We have made significant
investments in product and process technologies and anticipate expending
significant resources for new semiconductor product development over the
next
several years. The process to develop NAND Flash, Imaging and certain specialty
memory products requires us to demonstrate advanced functionality and
performance, many times well in advance of a planned ramp of production,
in
order to secure design wins with our customers. There can be no assurance
that
our product development efforts will be successful, that we will be able
to
cost-effectively manufacture these new products, that we will be able to
successfully market these products or that margins generated from sales of
these
products will recover costs of development efforts.
An
adverse determination that our products or manufacturing processes infringe
the
intellectual property rights of others could materially adversely affect
our
business, results of operations or financial condition.
As
is
typical in the semiconductor and other high technology industries, from time
to
time, others have asserted, and may in the future assert, that our products
or
manufacturing processes infringe their intellectual property rights. In this
regard, we are engaged in litigation with Rambus, Inc. (“Rambus”) relating to
certain of Rambus’ patents and certain of our claims and defenses. On August 28,
2000, we filed a complaint (subsequently amended) against Rambus in the U.S.
District Court for the District of Delaware seeking monetary damages and
declaratory and injunctive relief. Among other things, our amended complaint
alleges violation of federal antitrust laws, breach of contract, fraud,
deceptive trade practices, and negligent misrepresentation. The complaint
also
seeks a declaratory judgment (a) that certain Rambus patents are not infringed
by us, are invalid, and/or are unenforceable, (b) that we have an implied
license to those patents, and (c) that Rambus is estopped from enforcing
those
patents against us. On February 15, 2001, Rambus filed an answer and
counterclaim in Delaware denying that we are entitled to relief,
alleging
infringement of the eight Rambus patents named in our declaratory judgment
claim, and seeking monetary damages and injunctive relief. A number of other
suits are pending in Europe alleging that certain of our SDRAM and DDR SDRAM
products infringe various of Rambus’ country counterparts to its European patent
525 068, including: on September 1, 2000, Rambus filed suit against Micron
Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany;
on
September 22, 2000, Rambus filed a complaint against us and Reptronic (a
distributor of our products) in the Court of First Instance of Paris, France;
and on September 29, 2000, we filed suit against Rambus in the Civil Court
of
Milan, Italy, alleging invalidity and non-infringement. In addition, on December
29, 2000, we filed suit against Rambus in the Civil Court of Avezzano, Italy,
alleging invalidity and non-infringement of the Italian counterpart to European
patent 1 004 956. Additionally, other suits are pending alleging that certain
of
our DDR SDRAM products infringe Rambus’ country counterparts to its European
patent 1 022 642, including: on August 10, 2001, Rambus filed suit against
us
and Assitec (an electronics retailer) in the Civil Court of Pavia, Italy;
and on
August 14, 2001, Rambus filed suit against Micron Semiconductor (Deutschland)
GmbH in the District Court of Mannheim, Germany. In the European suits against
us, Rambus is seeking monetary damages and injunctive relief. Subsequent
to the
filing of the various European suits, the European Patent Office declared
Rambus’ 525 068 and 1 004 956 European patents invalid and revoked the patents.
On January 13, 2006, Rambus filed a lawsuit against us in the U.S. District
Court for the Northern District of California alleging infringement of eighteen
Rambus patents. We also are engaged in litigation with Tadahiro Ohmi (“Ohmi”).
On June 2, 2005, Ohmi filed suit against us in the U.S. District Court for
the
Eastern District of Texas (amended on August 31, 2005 substituting the
Foundation for Advancement of International Science as the plaintiff) alleging
infringement of a single Ohmi patent. We are also engaged in litigation with
Mosaid Technologies, Inc. (“Mosaid”). On July 24, 2006, we filed a declaratory
judgment action against Mosaid in the U.S. District Court for the Northern
District of California seeking, among other things, a court determination
that
fourteen Mosaid patents are invalid, not enforceable, and/or not infringed.
On
July 25, 2006, Mosaid filed a lawsuit against us and others in the U.S. District
Court for the Eastern District of Texas alleging infringement of nine Mosaid
patents. On August 31, 2006, Mosaid filed an amended complaint adding two
additional Mosaid patents. On October 23, 2006, the California Court dismissed
our declaratory judgment suit based on lack of jurisdiction.
Among
other things, the above lawsuits pertain to certain of our SDRAM, DDR SDRAM,
DDR2 SDRAM, RLDRAM, and image sensor products, which account for a significant
portion of our net sales.
A
court
determination that our products or manufacturing processes infringe the
intellectual property rights of others could result in significant liability
and/or require us to make material changes to our products and/or manufacturing
processes. We are unable to predict the outcome of assertions of infringement
made against us. Any of the foregoing could have a material adverse effect
on
our business, results of operations or financial condition.
We
have a
number of patent and intellectual property license agreements. Some of these
license agreements require us to make one time or periodic payments. We may
need
to obtain additional patent licenses or renew existing license agreements
in the
future. We are unable to predict whether these license agreements can be
obtained or renewed on acceptable terms.
Allegations
of anticompetitive conduct.
On
June
17, 2002, we received a grand jury subpoena from the U.S. District Court
for the
Northern District of California seeking information regarding an investigation
by the Antitrust Division of the Department of Justice (the “DOJ”) into possible
antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry.
We are cooperating fully and actively with the DOJ in its investigation of
the
DRAM industry. Our cooperation is pursuant to the terms of the DOJ’s Corporate
Leniency Policy, which provides that in exchange for our full, continuing
and
complete cooperation in the pending investigation, we will not be subject
to
prosecution, fines or other penalties from the DOJ.
Subsequent
to the commencement of the DOJ investigation, a number of purported class
action
lawsuits have been filed against us and other DRAM suppliers. Eighteen cases
have been filed in various federal district courts (two of which have been
dismissed) asserting claims on behalf of a purported class of individuals
and
entities that purchased DRAM directly from various DRAM suppliers during
the
period from April 1, 1999 through at least June 30, 2002. All of the cases
have
been transferred to the U.S. District Court for the Northern District of
California for consolidated proceedings. The complaints allege price-fixing
in
violation of federal antitrust laws and seek treble damages sustained by
purported class members, in addition to restitution, costs and attorneys’ fees,
as well as an injunction against the allegedly unlawful conduct. On June
5,
2006, the Court granted plaintiffs’ motion to certify the proposed class of
direct purchasers. On January 9, 2007, we entered into a settlement agreement
with the class of direct purchasers (“Direct Purchaser Settlement”). Under terms
of the Direct Purchaser Settlement, we agreed to pay $91 million and will
be
dismissed with prejudice from the direct purchaser consolidated class-action
suit. The Direct Purchaser Settlement is subject to approval by the U.S.
District Court for the Northern District of California.
Four
cases have been filed in the U.S. District Court for the Northern District
of
California asserting claims on behalf of a purported class of individuals
and
entities that indirectly purchased DRAM and/or products containing DRAM from
various DRAM suppliers during the time period from April 1, 1999 through
at
least June 30, 2002. The complaints allege price fixing in violation of federal
antitrust laws and various state antitrust and unfair competition laws and
seek
treble monetary damages, restitution, costs, interest and attorneys’ fees. In
addition, at least sixty-two cases have been filed in various state and federal
courts (five of which have been dismissed) asserting claims on behalf of
a
purported class of indirect purchasers of DRAM. Cases have been filed in
the
following states: Arkansas, Arizona, California, Florida, Hawaii, Iowa, Kansas,
Massachusetts, Maine, Michigan, Minnesota, Mississippi, Montana, North Carolina,
North Dakota, Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, New
York,
Ohio, Pennsylvania, South Dakota, Tennessee, Utah, Vermont, Virginia, Wisconsin,
and West Virginia, and also in the District of Columbia and Puerto Rico.
The
complaints purport to be on behalf of individuals and entities that indirectly
purchased DRAM and/or products containing DRAM in the respective jurisdictions
during various time periods ranging from 1999 through the filing date of
the
various complaints. The complaints allege violations of various jurisdictions’
antitrust, consumer protection and/or unfair competition laws relating to
the
sale and pricing of DRAM products and seek treble monetary damages, restitution,
costs, interest and attorneys’ fees. A number of these cases have been removed
to federal court and transferred to the U.S. District Court for the Northern
District of California (San Francisco) for consolidated proceedings. The
Direct
Purchaser Settlement does not resolve these suits.
Additionally,
three cases have been filed in the following Canadian courts: Superior Court,
District of Montreal, Province of Quebec; Ontario Superior Court of Justice,
Ontario; and Supreme Court of British Columbia, Vancouver Registry, British
Columbia. The substantive allegations in these cases are similar to those
asserted in the cases filed in the United States. The Direct Purchaser
Settlement does not resolve these suits.
In
addition, various states, through their Attorneys General, have filed suit
against us and other DRAM manufacturers. On July 14, 2006, and on September
8,
2006 in an amended complaint, the following states filed suit in the U.S.
District Court for the Northern District of California: Alaska, Arizona,
Arkansas, California, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois,
Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina,
North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina,
Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin
and the Commonwealth of the Northern Mariana Islands. The amended complaint
alleges, among other things, violations of the Sherman Act, Cartwright Act,
and
certain other states’ consumer protection and antitrust laws and seeks damages,
and injunctive and other relief. Additionally, on July 13, 2006, the State
of
New York filed a similar suit in the U.S. District Court for the Southern
District of New York. That case was subsequently transferred to the U.S.
District Court for the Northern District of California for pre-trial purposes.
The Direct Purchaser Settlement does not resolve these suits.
In
February and March 2007, three cases were filed against the Company and other
manufacturers of DRAM in the U.S. District Court for the Northern District
of
California by parties that opted-out of the Direct Purchaser class action.
The
complaints allege, among other things, violations of federal and state antitrust
and competition laws in the DRAM industry, and seek damages, injunctive relief,
and other remedies. The Direct Purchaser Settlement does not resolve these
suits.
On
October 11, 2006, we received a grand jury subpoena from the U.S. District
Court
for the Northern District of California seeking information regarding an
investigation by the DOJ into possible antitrust violations in the “Static
Random Access Memory” or “SRAM” industry. We believe that we are not a target of
the investigation and we are cooperating with the DOJ in its investigation
of
the SRAM industry.
Subsequent
to the issuance of subpoenas to the SRAM industry, a number of purported
class
action lawsuits have been filed against us and other SRAM suppliers. Six
cases
have been filed in the U.S. District Court for the Northern District of
California asserting claims on behalf of a purported class of individuals
and
entities that purchased SRAM directly from various SRAM suppliers during
the
period from January 1, 1998 through December 31, 2005. Additionally, at least
seventy-two cases have been filed in various U.S. District Courts asserting
claims on behalf of a purported class of individuals and entities that
indirectly purchased SRAM and/or products containing SRAM from various SRAM
suppliers during the time period from January 1, 1998 through December 31,
2005.
The complaints allege price fixing in violation of federal antitrust laws
and
state antitrust and unfair competition laws and seek treble monetary damages,
restitution, costs, interest and attorneys’ fees.
In
the
first calendar quarter of 2007, at least fifteen purported class action lawsuits
were filed against the Company and other suppliers of flash memory products.
Thirteen of these were filed in the U.S. District Court for the Northern
District of California. These cases assert claims on behalf of a