Crucial 2011 Annual Report Download - page 32

Our overall gross margin percentage improved to 32% for 2010 from negative 9% for 2009 primarily due to improvements in the gross
margin for all reportable segments as a result of cost reductions and improved DRAM pricing. Our gross margin percentage was also impacted by
our acquisition of Numonyx in May of 2010 as gross margins for Numonyx activities were 19% for the 2010 period after the acquisition.
Our gross margins in prior years were impacted by charges to write down inventories to their estimated market values as a result of the
significant decreases in average selling prices for both DRAM and NAND Flash products. As charges to write down inventories are recorded in
advance of when inventories are sold, gross margins in subsequent reporting periods are higher than they otherwise would be. Our gross margins
for 2010 and 2009 were $40 million and $164 million higher as a result of the net impact of sales of products that had been written down to their
estimated marked values in prior periods. In future periods, we will be required to record additional inventory write-downs if estimated average
selling prices of products held in finished goods and work in process inventories at a quarter-end date are below the manufacturing cost of those
products.
Operating Results by Business Segments
DRAM Solutions Group ("DSG")
DSG sales and operating results track closely with our average selling prices, gigabit sales volumes and cost per gigabit for our consolidated
sales of DRAM products. (See "Operating Results by Product Groups - DRAM" for further detail.) DSG sales for 2011 decreased 31% from 2010
primarily due to significant declines in average selling prices partially offset by an increase in sales volume. DSG operating income decreased
from 2010 to 2011 primarily as a result of the significant declines in average selling prices, mitigated by reductions in manufacturing costs per
gigabit as a result of improved production efficiencies.
The significant declines in DSG sales and margins for 2011 compared to 2010 was primarily attributable to a severe decrease in demand for
PC DRAM, particularly for DDR3 DRAM, due to overall weakness in the PC market. Decreases in PC DRAM margins for 2011 were mitigated
by the relatively higher margins in our server and other premium markets.
DSG operating income for 2011 benefited from the following items as compared to the corresponding periods of 2010:
We have formed partnering arrangements and have sold or licensed technology to other parties. DSG recognized royalty and license revenue
of $25 million in 2011, $83 million in 2010 and $120 million in 2009. We have a partnering arrangement with Nanya pursuant to which we and
Nanya jointly develop process technology and designs to manufacture stack DRAM products. In addition, we have deployed and licensed certain
intellectual property related to the manufacture of stack DRAM products to Nanya and licensed certain intellectual property from Nanya. We
recognized $65 million and $105 million of license revenue in net sales from this arrangement during 2010 and 2009, respectively. In April 2010
the license agreement was completed and we began to share DRAM development costs with Nanya on an approximately equal basis. This cost-
sharing arrangement reduced our overall research and development costs by $141 million and $51 million for 2011 and 2010, respectively, of
which $109 million and $51 million was attributed to DSG. DSG received royalties of $25 million and $6 million in 2011 and 2010, respectively,
from Nanya for sales of stack DRAM products manufactured by or for Nanya on process nodes of 50nm or larger and we expect to continue to
receive royalties from Nanya associated with technology developed prior to the cost-sharing arrangement.
31
2011 2010 2009
Net sales
$
3,203
$
4,638
$
2,100
Operating income (loss)
290
1,269
(902
)
• Lower SG&A costs primarily due to costs recognized in the third quarter of 2010 from the settlement of litigation in DRAM antitrust
matters;
• Lower R&D costs primarily due to the DRAM R&D cost-sharing agreement with Nanya that commenced in the third quarter of 2010;
and
• A $75 million gain in 2011 from a license arrangement with Samsung.