FORM 10-Q
__________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 2, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
________________
Commission File Number: 1-10658
Micron Technology, Inc.
State or other jurisdiction of incorporation or organization: Delaware
________________
Internal Revenue Service - Employer Identification No. 75-1618004
8000 S. Federal Way, Boise, Idaho 83716-9632
(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 ___
---
The number of outstanding shares of the registrant's Common Stock as of
January 10, 2000, was 254,422,506 shares of Common Stock and 15,810,277 shares
of Class A Common Stock.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
MICRON TECHNOLOGY, INC.
Consolidated Balance Sheets
(Dollars in millions, except for par value)
December 2, September 2,
As of 1999 1999
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and equivalents $ 441.6 $ 294.6
Liquid investments 1,444.8 1,318.9
Receivables 916.4 692.6
Inventories 504.1 365.7
Prepaid expenses 27.2 38.3
Deferred income taxes 93.4 119.9
-------- --------
Total current assets 3,427.5 2,830.0
Product and process technology, net 206.4 212.6
Property, plant and equipment, net 3,828.7 3,799.6
Other assets 118.8 123.0
-------- --------
Total assets $7,581.4 $6,965.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 883.6 $ 705.4
Deferred income 48.4 23.4
Equipment purchase contracts 64.2 81.5
Current portion of long-term debt 108.8 111.7
-------- --------
Total current liabilities 1,105.0 922.0
Long-term debt 1,501.5 1,527.5
Deferred income taxes 323.9 309.1
Other liabilities 81.4 74.2
-------- --------
Total liabilities 3,011.8 2,832.8
-------- --------
Minority interests 183.5 168.3
Commitments and contingencies
Common Stock, $0.10 par value, authorized 1.0 billion shares, issued
and outstanding 254.1 million and 252.2 million shares, respectively 25.4 25.2
Class A Common Stock, $0.10 par value, authorized 32 million shares,
issued and outstanding 15.8 million shares 1.6 1.6
Additional capital 1,973.6 1,894.0
Retained earnings 2,386.8 2,045.4
Accumulated other comprehensive loss (1.3) (2.1)
-------- --------
Total shareholders' equity 4,386.1 3,964.1
-------- --------
Total liabilities and shareholders' equity $7,581.4 $6,965.2
======== ========
See accompanying notes to consolidated financial statements.
1
MICRON TECHNOLOGY, INC.
Consolidated Statements of Operations
(Dollars in millions, except for per share data)
(Unaudited)
December 2, December 3,
For the quarter ended 1999 1998
- -----------------------------------------------------------------------------------------------------
Net sales $1,584.4 $ 793.6
-------- -------
Costs and expenses:
Cost of goods sold 770.7 677.7
Selling, general and administrative 167.6 103.0
Research and development 91.7 67.7
Other operating expense, net 22.4 7.8
-------- -------
Total costs and expenses 1,052.4 856.2
-------- -------
Operating income (loss) 532.0 (62.6)
Interest income 23.2 --
Interest expense (31.7) (7.9)
Other non-operating income, net 9.6 1.0
-------- -------
Income (loss) before income taxes and minority interests 533.1 (69.5)
Income tax (provision) benefit (186.2) 27.6
Minority interests in net income (5.6) (4.3)
-------- -------
Net income (loss) $ 341.3 $ (46.2)
======== =======
Earnings (loss) per share:
Basic $ 1.27 $ (0.19)
Diluted 1.19 (0.19)
Number of shares used in per share calculations:
Basic 269.2 245.7
Diluted 297.4 245.7
See accompanying notes to consolidated financial statements.
2
MICRON TECHNOLOGY, INC.
Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)
December 2, December 3,
For the three months ended 1999 1998
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 341.3 $ (46.2)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 229.5 189.5
Change in assets and liabilities, net of effects of acquisition
Decrease (increase) in receivables (212.7) 112.3
Increase in inventories (138.5) (36.4)
Increase in accounts payable and accrued
expenses, net of plant and equipment payables 219.7 65.8
Other 109.4 (29.4)
---------- ----------
Net cash provided by operating activities 548.7 255.6
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale and held-to-maturity securities (737.7) (1,273.5)
Proceeds from sales and maturities of securities 623.0 211.5
Expenditures for property, plant and equipment (219.8) (117.5)
Other 1.4 (1.5)
---------- ----------
Net cash used for investing activities (333.1) (1,181.0)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on equipment purchase contracts (86.5) (73.9)
Proceeds from issuance of common stock 51.9 519.1
Repayments of debt (34.3) (28.3)
Cash received in conjunction with acquisition -- 681.1
Proceeds from issuance of debt -- 34.0
Other 0.3 2.3
---------- ----------
Net cash provided by (used for) financing activities (68.6) 1,134.3
---------- ----------
Net increase in cash and equivalents 147.0 208.9
Cash and equivalents at beginning of period 294.6 558.8
---------- ----------
Cash and equivalents at end of period $ 441.6 $ 767.7
========== ==========
SUPPLEMENTAL DISCLOSURES
Interest paid, net of amounts capitalized $ (35.0) $ (6.9)
Income taxes refunded, net 86.4 183.2
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and capital leases 71.1 18.3
Cash received in conjunction with acquisition:
Fair value of assets acquired $ -- $ 949.3
Liabilities assumed -- (138.0)
Debt issued -- (836.0)
Stock issued -- (656.4)
---------- ----------
$ -- $ 681.1
========== ==========
See accompanying notes to consolidated financial statements.
3
MICRON TECHNOLOGY, INC.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in millions)
(Unaudited)
December 2, December 3,
For the quarter ended 1999 1998
- ---------------------------------------------------------------------------------------
Net income (loss) $ 341.3 $ (46.2)
Foreign currency translation adjustment -- (0.2)
Unrealized gain on investments 0.7 --
------- -------
Total comprehensive income (loss) $ 342.0 $ (46.4)
======= =======
See accompanying notes to consolidated financial statements.
4
Notes to Consolidated Financial Statements
(All tabular dollar amounts are stated in millions)
1. Unaudited interim financial statements
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the consolidated financial
position of Micron Technology, Inc., and subsidiaries (the "Company"), and their
consolidated results of operations and cash flows. Micron Technology, Inc. and
its wholly-owned subsidiaries are collectively hereinafter referred to as "MTI."
Micron Electronics, Inc., an approximately 61% owned subsidiary of the Company,
is hereinafter referred to as "MEI."
Recently issued accounting standards include Statement of Position ("SOP")
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued by the AICPA in March 1998 and Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities," issued by the FASB in June 1998.
SOP 98-1 requires companies to capitalize certain costs of computer
software developed or obtained for internal use. The Company, which previously
capitalized costs of purchased internal-use computer software and expensed costs
of internally developed internal-use software as incurred, adopted the standard
in the first quarter of 2000 for developmental costs incurred in that quarter
and thereafter. The adoption did not have a material impact on the Company's
results of operations.
SFAS No. 133 requires that all derivatives be recorded as either assets or
liabilities in the balance sheet and marked to market on an ongoing basis. SFAS
No. 133 applies to all derivatives including stand-alone instruments, such as
forward currency exchange contracts and interest rate swaps, or embedded
derivatives, such as call options contained in convertible debt investments.
Along with the derivatives, the underlying hedged items are also to be marked to
market on an ongoing basis. These market value adjustments are to be included
either in the statement of operations or as a component of comprehensive income,
depending on the nature of the transaction. Implementation of SFAS No. 133 is
required for the Company by the first quarter of 2001. The implementation of
SFAS 133 is not expected to have a significant impact on the Company's future
results of operations or financial position.
These unaudited interim financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes included in
the Company's Form 10-K for the year ended September 2, 1999.
2. Supplemental balance sheet information December 2, September 2,
1999 1999
- ----------------------------------------------------------------------------
Receivables
- ----------------------------------------------------------------------------
Trade receivables $ 854.4 $ 542.4
Income taxes receivable 11.6 100.8
Allowance for returns and discounts (31.0) (38.2)
Allowance for doubtful accounts (12.4) (9.8)
Other receivables 93.8 97.4
------- -------
$ 916.4 $ 692.6
======= =======
5
Notes to Consolidated Financial Statements, continued
Inventories
- ----------------------------------------------------------------------------
Finished goods $ 197.3 $ 136.3
Work in progress 246.9 173.6
Raw materials and supplies 76.9 71.5
Allowance for obsolescence (17.0) (15.7)
------- -------
$ 504.1 $ 365.7
======= =======
Product and process technology
- ----------------------------------------------------------------------------
Product and process technology, at cost $ 328.7 $ 325.2
Less accumulated amortization (122.3) (112.6)
-------- --------
$ 206.4 $ 212.6
======== ========
Property, plant and equipment
- ------------------------------------------------------------------------------
Land $ 41.8 $ 42.2
Buildings 1,193.1 1,172.4
Equipment 4,203.8 4,074.4
Construction in progress 767.7 726.0
--------- ----------
6,206.4 6,015.0
Less accumulated depreciation and amortization (2,377.7) (2,215.4)
--------- ----------
$ 3,828.7 $ 3,799.6
========= ==========
As of December 2, 1999, property, plant and equipment included total
unamortized costs of $708.3 million for the Company's semiconductor memory
manufacturing facility in Lehi, Utah, of which $647.6 million has not been
placed in service and is not being depreciated. Timing of the completion of the
remainder of the Lehi facility is dependent upon market conditions. Market
conditions which the Company expects to evaluate include, but are not limited
to, worldwide market supply of and demand for semiconductor products and the
Company's operations, cash flows and alternative uses of capital. The Company
continues to evaluate the carrying value of the facility and as of December 2,
1999, it was determined to have no impairment.
Depreciation expense was $213.6 million and $181.1 million for the first
quarter of 2000 and 1999, respectively.
December 2, September 2,
1999 1999
- ----------------------------------------------------------------------------
Accounts payable and accrued expenses
- ----------------------------------------------------------------------------
Accounts payable $465.6 $453.1
Salaries, wages and benefits 150.9 95.4
Interest payable 26.6 33.9
Taxes payable other than income 52.9 33.4
Product and process technology payable 17.8 24.0
Income taxes payable 126.2 13.7
Other 43.6 51.9
------ ------
$883.6 $705.4
====== ======
6
Notes to Consolidated Financial Statements, continued
Debt
- ----------------------------------------------------------------------------------------------------
Convertible subordinated notes payable, due October 2005, with
an effective yield to maturity of 8.4%, net of unamortized
discount of $62.7 million $ 677.3 $ 675.2
Convertible subordinated notes payable, due July 2004,
interest rate of 7.0% 500.0 500.0
Subordinated notes payable, due October 2005, with an effective
yield to maturity of 10.7%, net of unamortized discount of
$36.9 million 173.1 171.9
Notes payable in periodic installments through July 2015,
weighted average interest rate of 7.35% and 7.37%,
respectively 228.9 259.0
Capitalized lease obligations payable in monthly installments
through August 2004, weighted average interest rate of
7.69% and 7.52%, respectively 31.0 33.1
-------- --------
1,610.3 1,639.2
Less current portion (108.8) (111.7)
-------- --------
$1,501.5 $1,527.5
======== ========
The convertible subordinated notes due October 2005 (the "Convertible
Notes") with an effective yield to maturity of 8.4% have a face value of $740
million and a stated interest rate of 6.5%. The Convertible Notes are
convertible into shares of the Company's common stock at $60 per share. The
Company may call for the early redemption of the Convertible Notes between
October 2000 and October 2002 if the price of the Company's common stock is at
least $78 per share for a specified trading period. Subsequent to October 2002,
the Convertible Notes are redeemable by the Company at an initial price of 103%
which declines to 100% of the principal amount depending on the date of
redemption. The Convertible Notes have not been registered with the Securities
and Exchange Commission, however the holder has certain registration rights.
The 7.0% convertible subordinated notes due July 2004 are convertible into
shares of the Company's common stock at $67.44 per share. The Company may call
for the early redemption of the notes through July 2001 if the price of the
Company's common stock is at least $87.67 per share for a specified trading
period. Subsequent to July 2001, the notes are redeemable by the Company at an
initial price of 103% which declines to 100% of the principal amount depending
on the date of redemption. The subordinated notes due October 2005 with a yield
to maturity of 10.7% have a face value of $210 million and stated interest rate
of 6.5%.
MEI has a $100 million unsecured credit agreement expiring in June 2001.
Under the credit agreement, MEI is subject to certain financial and other
covenants including certain financial ratios and limitations on the amount of
dividends paid by MEI. As of December 2, 1999, MEI had no borrowings outstanding
under the agreement.
MTI terminated its secured revolving credit agreement effective December 2,
1999.
3. Other operating expense, net
Other operating expense for the first quarter of 2000 includes a net pre-
tax charge of $18.2 million from the write down and disposal of semiconductor
operations equipment.
7
Notes to Consolidated Financial Statements, continued
4. Other non-operating income, net
Other non-operating income for the first quarter of 2000 includes a $9.7
million gain on the contribution by MTI of 1.9 million shares of MEI Common
Stock (the "Contribution") to the Micron Technology Foundation. The Contribution
decreased MTI's ownership interest in MEI from approximately 63% to 61%.
Selling, general and administrative expense in the first quarter of 2000
reflects an $18.7 million charge for the market value of the stock contributed.
5. Income tax provision (benefit)
The effective tax rate for the first quarter of 2000 and 1999 approximated
35% and 40%, respectively. The reduction in the effective tax rate is
principally a result of favorable tax treatment on permanently reinvested
earnings from certain of the Company's foreign operations.
6. Earnings (loss) per share
Basic earnings per share is calculated using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of the
average number of common shares outstanding plus the effect of outstanding stock
options using the "treasury stock method" and convertible debentures using the
"if-converted" method. Diluted earnings per share further assumes the
conversion of MTI's convertible subordinated notes for the periods in which they
were outstanding, unless such assumed conversion would not be dilutive.
December 2, December 3,
For the quarter ended 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) available for common shareholders, Basic $341.3 $ (46.2)
====== =======
Net income (loss) available for common shareholders, Diluted $355.0 $ (46.2)
====== =======
Weighted average common stock outstanding - Basic 269.2 245.7
Net effect of dilutive stock options 8.4 --
Net effect of dilutive convertible subordinated notes 19.8 --
------ -------
Adjusted weighted average common stock - Diluted 297.4 245.7
====== =======
Basic income (loss) per share $ 1.27 $ (0.19)
====== =======
Diluted income (loss) per share $ 1.19 $ (0.19)
====== =======
The average shares listed below were not included in the computation of
diluted earnings per share because to do so would have been antidilutive for the
periods presented:
December 2, December 3,
For the quarter ended 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Employee stock plans 0.9 27.4
8.4% convertible subordinated notes payable due 2005 -- 8.8
7.0% convertible subordinated notes payable due 2004 -- 7.4
8
Notes to Consolidated Financial Statements, continued
7. Acquisition
On September 30, 1998, MTI completed the acquisition (the "Acquisition") of
substantially all of the memory operations of Texas Instruments Incorporated
("TI") for a net purchase price of approximately $832.8 million. The
Acquisition was consummated through the issuance of debt and equity securities.
In connection with the transaction, MTI issued 28.9 million shares of MTI common
stock, $740 million principal amount of Convertible Notes and $210 million
principal amount of subordinated notes. In addition to TI's net memory assets,
MTI received $681.1 million in cash. The Acquisition was accounted for as a
business combination using the purchase method of accounting. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values. MTI and TI also entered into a ten-year, royalty-
free, life-of-patents, patent cross license that commenced on January 1, 1999.
MTI made royalty payments to TI under a prior cross license agreement for
operations through December 31, 1998.
The following unaudited pro forma information presents the consolidated
results of operations of the Company for the first quarter of 1999 as if the
Acquisition had taken place at the beginning of fiscal 1999:
December 3,
For the quarter ended 1998
- -------------------------------------------------------------------
Net sales $ 848.9
Net loss (63.4)
Basic loss per share (0.23)
Diluted loss per share (0.23)
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the Acquisition occurred on the dates
indicated, or which may result in the future.
8. Equity investment
On October 19, 1998, Intel Corporation ("Intel") invested $500 million in
the Company and as a result holds approximately 15.8 million shares of MTI's
non-voting Class A Common Stock. The Class A Common Stock represented
approximately 6% of MTI's outstanding common stock as of December 2, 1999. The
Class A Common Stock will automatically be converted into MTI's common stock,
subject to certain adjustments, upon a transfer to a holder other than Intel or
a 90% owned subsidiary of Intel. As of December 2, 1999, the Class A Common
Stock was convertible into common stock on a one-to-one basis. The Class A
Common Stock issued to Intel has not been registered under the Securities Act of
1933, as amended, and is therefore subject to certain restrictions on resale.
MTI and Intel entered into a securities rights and restrictions agreement which
provides Intel with certain registration rights and places certain restrictions
on Intel's voting rights and other activities with respect to the shares of MTI
Class A Common Stock or common stock. Intel also has the right to designate a
director nominee, acceptable to MTI's Board of Directors. Pursuant to its
agreement with Intel, MTI committed to the development of direct Rambus(R) DRAM
("RDRAM") and to make available to Intel a certain percentage of its
semiconductor memory output over a five-year period, subject to certain
limitations.
9. Joint Ventures
MTI has interests in two joint venture wafer fabrication facilities: TECH
Semiconductor Singapore Pte. Ltd. ("TECH") and KMT Semiconductor Limited
("KMT"). TECH, which operates in Singapore, is a joint venture among MTI, the
Singapore Economic Development Board, Canon Inc. and Hewlett-Packard Company.
KMT,
9
Notes to Consolidated Financial Statements, continued
which operates in Japan, is a joint venture between MTI and Kobe Steel, Ltd.
TECH and KMT are collectively referred to herein as the "JVs".
Subject to certain terms and conditions, MTI has agreed to purchase the
entire output of the JVs. MTI is a party to various agreements with the JVs
whereby MTI provides technology, engineering support, training and information
system support to the JVs. MTI also performs assembly and test services on
product manufactured by the JVs. All transactions with the JVs are recognized as
part of the net cost of products obtained from the JVs. The net cost of products
purchased from the JVs, including the amortization on the value of the JV supply
agreements, amounted to $113.6 million and $62.1 million for KMT and TECH,
respectively, for the first quarter of 2000, and $24.3 million and $8.5 million
for the first quarter of 1999.
Receivables from KMT and TECH were $15.1 million and $54.6 million and
payables were $76.8 million and $36.1 million, respectively, as of December 2,
1999. As of September 2, 1999, receivables from KMT and TECH were $19.1 million
and $47.2 million and payables were $24.4 million and $32.0 million,
respectively.
10. Operating Segment Information
The Company has two reportable segments based on the nature of its
operations and products offered to customers: semiconductor operations and PC
operations. The semiconductor operations segment's primary product is DRAM. The
PC operations segment's primary products include desktop and notebook PC
systems, multiprocessor network servers and hardware services.
Segment operating results are measured based on operating income (loss).
Intersegment sales primarily reflect sales of memory products from the
semiconductor operations segment to the PC operations segment and, to a lesser
extent, sales of computers from the PC operations segment to the semiconductor
operations segment. Intersegment sales are measured based on contract prices as
internally reported.
Sales to two of the Company's major PC OEM customers each approximated 15%
of the Company's net sales of semiconductor memory products in the first quarter
of 2000.
10
Notes to Consolidated Financial Statements, continued
December 2, December 3,
For the quarter ended 1999 1998
- -------------------------------------------------------------------------------
Net Sales
- -------------------------------------------------------------------------------
Semiconductor operations
External $1,321.9 $426.8
Intersegment 17.6 10.7
-------- ------
$1,339.5 $437.5
PC operations
External $ 262.4 $363.6
Intersegment 1.2 .6
-------- ------
$ 263.6 $364.2
All other - external $ 0.1 $ 3.2
Total segments $1,603.2 $804.9
Elimination of intersegment (18.8) (11.3)
-------- ------
Total consolidated net sales $1,584.4 $793.6
======== ======
Operating income (loss)
- -------------------------------------------------------------------------------
Semiconductor operations $ 564.9 $ (57.0)
PC operations (31.2) 2.0
All other (1.8) (7.4)
------- -------
Total segments $ 531.9 $ 62.4)
Elimination of intersegment 0.1 (0.2)
------- -------
Total consolidated operating income (loss) $ 532.0 $ (62.6)
======= =======
Segment assets consist of assets that are identified to reportable segments
and reviewed by the chief operating decision-makers. Included in segment assets
are cash, investments, accounts receivable, inventory and property, plant and
equipment.
December 2, September 2,
Segment assets as of 1999 1999
- -----------------------------------------------------------------------------
Semiconductor operations $6,704.2 $6,001.9
PC operations 510.0 533.9
All other 15.3 15.5
-------- --------
7,229.5 6,551.3
Elimination of intersegment (87.0) (74.8)
-------- --------
$7,142.5 $6,476.5
======== ========
Reconciliation to total assets
- ------------------------------------------------------------------------------
Total segment assets $7,142.5 $6,476.5
Prepaid expenses 27.2 38.3
Deferred taxes 93.4 119.9
Product and process technology 206.4 212.6
Other assets (net of segment assets) 111.9 117.9
-------- --------
Total consolidated assets $7,581.4 $6,965.2
======== ========
11
Notes to Consolidated Financial Statements, continued
11. Commitments and contingencies
As of December 2, 1999, the Company had commitments of approximately $911.1
million for equipment purchases and $65.1 million for the construction of
buildings.
The Company has from time to time received, and may in the future receive,
communications alleging that its products or its processes may infringe on
product or process technology rights held by others. The Company has accrued a
liability and charged operations for the estimated costs of settlement or
adjudication of asserted and unasserted claims for alleged infringement prior to
the balance sheet date. Determination that the Company's manufacture of
products has infringed on valid rights held by others could have a material
adverse effect on the Company's financial position, results of operations or
cash flows and could require changes in production processes and products. The
Company is currently a party to various other legal actions arising out of the
normal course of business, none of which are expected to have a material adverse
effect on the Company's financial position or results of operations.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Micron Technology, Inc. and its subsidiaries (hereinafter referred to
collectively as the "Company") principally design, develop, manufacture and
market semiconductor memory products and personal computer ("PC") systems.
Micron Technology, Inc. and its wholly-owned subsidiaries are hereinafter
referred to collectively as "MTI."The Company's PC operations are operated
through Micron Electronics, Inc. ("MEI"), a 61% owned, publicly-traded
subsidiary of MTI.
The following discussion contains trend information and other forward-
looking statements (including, for example, statements regarding future
operating results, future capital expenditures and facility expansion, new
product introductions, technological developments, acquisitions and the effect
thereof and industry trends) that involve a number of risks and uncertainties.
The Company's actual results could differ materially from the Company's
historical results of operations 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 "Certain Factors." This
discussion should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended September 2, 1999. All period references are to the
Company's fiscal periods ended December 2, 1999, September 2, 1999, or December
3, 1998, unless otherwise indicated. All per share amounts are presented on a
diluted basis unless otherwise stated.
Results of Operations
First Quarter
----------------------------------------------------
2000 1999
----------------------------------------------------
(dollars in millions, except per share data)
Net sales:
Semiconductor operations $1,339.5 84.5% $ 437.5 55.1%
PC operations 263.6 16.6% 364.2 45.9%
All other 0.1 0.0% 3.2 0.4%
Intersegment (18.8) (1.1)% (11.3) (1.4)%
-------- ----- ------- -----
Consolidated net sales $1,584.4 100.0% $ 793.6 100.0%
======== ===== ======= =====
Operating income (loss):
Semiconductor operations $ 564.9 $ (57.0)
PC operations (31.2) 2.0
All other (1.8) (7.4)
Intersegment 0.1 (0.2)
-------- -------
Consolidated operating income (loss) $ 532.0 $ (62.6)
======== =======
Net income (loss) $ 341.3 $ (46.2)
======== =======
Earnings (loss) per share $ 1.19 $ (0.19)
======== =======
The net loss for the fourth quarter of 1999 was $17 million, or $0.07 per
share, on net sales of $1,081 million.
Intersegment sales represent sales between different segments of the
Company and are eliminated to arrive at consolidated net sales. Intersegment
sales for the first quarter of 2000 and 1999 are primarily comprised of sales
from the Company's semiconductor operations segment to the Company's PC
operations segment. (See "Notes to Consolidated Financial Statements - Operating
Segment Information.")
13
Net Sales
Consolidated net sales for the first quarter of 2000 were higher by 100%
compared to the first quarter of 1999, principally due to an increase in the
volume of megabits of memory sold. The increase in net sales for the first
quarter of 2000 as compared to the first quarter of 1999 was partially offset by
a decline in both the volume and average price per unit of PC systems sold.
Average selling prices per megabit of semiconductor memory generally declined
during the second half of 1999 but recovered during the first quarter of 2000 to
reach average selling prices similar to those in the first quarter of 1999.
Consolidated net sales for the first quarter of 2000 increased by 47% compared
to the fourth quarter of 1999, principally due to a 70% increase in average
selling prices per megabit of memory.
Net sales from semiconductor operations for the first quarter of 2000
increased by 206% as compared to the first quarter of 1999 due primarily to a
227% increase in total megabits of semiconductor memory sold. This increase in
shipments was made possible by an increase in product available from continued
improvements in manufacturing efficiencies through ongoing transitions to
successive reduced die size ("shrink") versions of existing memory products,
shifts in the Company's mix of semiconductor memory products to higher average
density products and additional output from the ramp of the Company's
international operations and joint ventures.
Net sales from semiconductor operations increased by 63% in the first
quarter of 2000 as compared to the fourth quarter of 1999, primarily due to an
approximate 70% increase in the average selling prices of semiconductor memory
products. The Company expects average selling prices for semiconductor memory
products to decrease in the second quarter of 2000 as compared to the first
quarter. The level of megabit sales remained relatively constant comparing the
first quarter of 2000 with the fourth quarter of 1999. The level of megabit
sales achieved in the first quarter was made possible primarily by production
gains while the level of megabit sales in the fourth quarter was attributable in
part to a reduction in finished goods inventory. Finished goods inventory levels
at the end of the first quarter of 2000 were higher than at the end of the
fourth quarter of 1999, but remained constant in terms of weeks of production.
The Company's primary memory product in the first quarter of 2000 was the
64 Meg Synchronous DRAM ("SDRAM"), which comprised approximately 70% of the net
sales of semiconductor memory for the period. The 64 Meg SDRAM comprised
approximately 56% and 70% of the net sales of semiconductor memory for the first
and fourth quarters of 1999, respectively.
Net sales from the Company's PC operations for the first quarter of 2000
decreased by approximately 28% as compared to the first quarter of 1999
primarily due to a 26% decrease in unit sales and to a lesser extent due to a 9%
decrease in overall average selling prices for the Company's PC systems. The
decrease in unit sales for the first quarter of 2000 as compared to the first
quarter of 1999 is primarily due to lower consumer and government PC unit
sales, together with a 44% reduction in notebook shipments. The significant
decline in the consumer business was due in part to the Company's ongoing effort
to focus its PC business resources on increasing the levels of sales in the
small business, commercial and government sectors, which efforts have not yet
resulted in the expected increase in sales. The decline in government sector
sales reflects increased pricing competition and lower than usual purchases by
federal government agencies. The decline in overall average selling prices is
primarily attributed to price competition in the market served by the Company's
desktop product line.
Net sales from PC operations for the first quarter of 2000 decreased by
approximately 2% as compared to the fourth quarter of 1999 primarily due to a 4%
decrease in unit sales. The decrease in unit sales is primarily due to a 16%
decrease in notebook shipments.
Gross Margin
First Quarter
------------------------------
2000 % Change 1999
------------------------------
Gross margin $813.7 602.1% $115.9
as a % of net sales 51.4% 14.6%
14
The increase in the Company's consolidated gross margin for the first
quarter of 2000 as compared to the first quarter of 1999 is attributable to
reductions in the Company's per megabit costs in its semiconductor operations.
The Company's consolidated gross margin percentage for the fourth quarter of
1999 was 21%. The increase in gross margin for the first quarter of 2000 as
compared to the fourth quarter of 1999 resulted primarily from an approximate
70% increase in average selling prices for the Company's semiconductor memory
products.
The gross margin percentage for the Company's semiconductor operations for
the first quarter of 2000 was 58%, compared to 14% for the first quarter of
1999. The gross margin increase was due to comparative decreases in per megabit
costs which were achieved primarily through continued improvements in
manufacturing efficiencies and improved cost on products purchased from MTI's
joint ventures. Decreases in per megabit manufacturing costs were achieved
principally through transitions to shrink versions of existing products and
shifts in the Company's mix of semiconductor memory products to a higher average
density.
The gross margin percentage on sales of semiconductor memory products for
the fourth quarter of 1999 was 23%. The increase in gross margin percentage for
semiconductor memory products sold in the first quarter of 2000 as compared to
the fourth quarter of 1999 was primarily the result of the 70% increase in
average selling prices per megabit of memory.
Subject to certain terms and conditions, MTI has agreed to purchase the
entire output from two joint venture wafer fabrication facilities, TECH
Semiconductor Singapore Pte. Ltd. ("TECH") and KMT Semiconductor Limited
("KMT"). TECH and KMT are collectively referred to herein as the "JVs." The cost
of products purchased from the JVs is subject to significant fluctuations, based
in part on MTI's average selling prices. The Company expects the cost of
products purchased from the JVs to be higher in the second quarter of 2000 than
in the first quarter. MTI is a party to various agreements with the JVs whereby
MTI provides technology, engineering support, training and information systems
support to the JVs. MTI also performs assembly and test services on product
manufactured by the JVs. All transactions with the JVs are recognized as part of
the net cost of products purchased from the JVs and as such can impact the
Company's gross margin percentage. The Company expects the gross margin on
products purchased from the JVs to be lower in the second quarter of 2000 than
in the first quarter.
The gross margin percentage for the Company's PC operations for the first
quarter of 2000 was 14%, compared with 15% and 18%, respectively, in the first
and fourth quarters of 1999. The decrease for the PC operations gross margin
percentage comparing the first quarter of 2000 to the first quarter of 1999 is
due to the 9% decrease in average selling prices for the Company's PC systems.
The decrease in PC operations gross margin percentage for the first quarter of
2000 as compared to the fourth quarter of 1999 is primarily due to increased
costs for materials and increased pricing pressure in the government sector.
Selling, General and Administrative
First Quarter
------------------------------
2000 % Change 1999
------------------------------
Selling, general and administrative $167.6 62.7% $103.0
as a % of net sales 10.6% 13.0%
Selling, general and administrative expenses increased in the first quarter
of 2000 as compared to the first and fourth quarters of 1999 primarily as a
result of a $19 million charge for the market value of MEI common stock
contributed by MTI to the Micron Technology Foundation, a higher level of
performance based compensation costs for the Company's semiconductor operations
and increased advertising expense for the Company's PC operations. Additionally,
the increase in selling, general and administrative expense for the first
quarter of 2000 as compared to the first quarter of 1999 reflects a higher level
of personnel expense for an increased number of administrative
15
employees associated with semiconductor and PC operations. Selling, general and
administrative expenses for the first quarter of 2000 increased by 26% as
compared to the fourth quarter of 1999. The Company expects selling, general and
administrative expenses to remain at approximately the same level as the first
quarter of 2000 for the remainder of the year.
Research and Development
First Quarter
-----------------------------
2000 % Change 1999
-----------------------------
Research and development $91.7 35.5% $67.7
as a % of net sales 5.8% 8.5%
Substantially all the Company's research and development efforts relate to
its semiconductor operations. Research and development expenses vary primarily
with personnel costs, the cost of advanced equipment dedicated to new product
and process development and the number of development wafers processed. Research
and development efforts are focused on .15 micron line widths process
technology, which is the primary determinant in transitioning to next generation
and future products. Simultaneous research and development efforts across
multiple products prepare the Company for future product introductions and allow
current products to utilize the advanced process technology to achieve higher
performance at lower production costs. Application of advanced process
technology currently is concentrated on design of shrink versions of the
Company's 64 Meg and 128 Meg SDRAMs and on design and development of the
Company's 256 Meg and 512 Meg SDRAMs, Rambus(R) DRAM ("RDRAM"), Double Data Rate
("DDR") SDRAM, Flash and SRAM memory products. Other research and development
efforts are currently devoted to the design and development of embedded memory
products, system-on-a-chip ("SOC") solutions, and memory technology enablement.
Other Operating Expense, net
Other operating expense for the first quarter of 2000 includes a net pre-
tax charge of $18 million from the write down and disposal of semiconductor
operations equipment.
Other Non-Operating Income, net
Other non-operating income for the first quarter of 2000 includes a $10
million gain on the contribution by MTI of 1.9 million shares of MEI Common
Stock (the "Contribution") to the Micron Technology Foundation. The Contribution
decreased MTI's ownership interest in MEI from approximately 63% to 61%.
Selling, general and administrative expense in the first quarter of 2000
reflects a $19 million charge for the market value of the stock contributed.
Income Tax Provision (Benefit)
The effective tax rates for the first quarter of 2000 and 1999 approximated
35% and 40%, respectively. The reduction in the effective tax rate is
principally a result of favorable tax treatment on permanently reinvested
earnings from certain of the Company's foreign operations. Taxes on earnings of
certain foreign operations and domestic subsidiaries not consolidated for tax
purposes may cause the effective tax rate to vary significantly from period to
period.
Recently Issued Accounting Standards
Recently issued accounting standards include Statement of Position ("SOP")
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued by the AICPA in March 1998 and Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities," issued by the FASB in June 1998.
16
SOP 98-1 requires companies to capitalize certain costs of computer
software developed or obtained for internal use. The Company, which previously
capitalized costs of purchased internal-use computer software and expensed costs
of internally developed internal-use software as incurred, adopted the standard
in the first quarter of 2000 for developmental costs incurred in that quarter
and thereafter. The adoption did not have a material impact on the Company's
results of operations.
SFAS No. 133 requires that all derivatives be recorded as either assets or
liabilities in the balance sheet and marked to market on an ongoing basis. SFAS
No. 133 applies to all derivatives including stand-alone instruments, such as
forward currency exchange contracts and interest rate swaps, or embedded
derivatives, such as call options contained in convertible debt investments.
Along with the derivatives, the underlying hedged items are also to be marked to
market on an ongoing basis. These market value adjustments are to be included
either in the statement of operations or as a component of comprehensive income,
depending on the nature of the transaction. Implementation of SFAS No. 133 is
required for the Company by the first quarter of 2001. The implementation of
SFAS 133 is not expected to have a significant impact on the Company's future
results of operations or financial position.
Liquidity and Capital Resources
As of December 2, 1999, the Company had cash and liquid investments
totaling $1.9 billion, representing an increase of $273 million during the first
three months of 2000. The Company's principal source of liquidity during the
first three months of 2000 was net cash flow from operations of $549 million.
The principal use of funds during the first three months of 2000 was $220
million for property, plant and equipment expenditures.
The Company believes that in order to develop new product and process
technologies, support future growth, achieve operating efficiencies and maintain
product quality, it must continue to invest in manufacturing technology,
facilities and capital equipment, research and development, and product and
process technology. The Company currently estimates it will spend approximately
$1.5 billion in fiscal 2000 for purchases of equipment and for construction and
improvement of buildings, of which it has spent approximately $291 million to
date. As of December 2, 1999, the Company had entered into contracts extending
into fiscal 2001 for approximately $911 million for equipment purchases and
approximately $65 million for the construction of facilities.
As of December 2, 1999, approximately $363 million of the Company's
consolidated cash and liquid investments were held by MEI. Cash generated by MEI
is not readily available to finance operations or other expenditures of MTI's
semiconductor memory operations. MEI has a $100 million unsecured credit
agreement, expiring June 2001 which contains certain restrictive covenants
pertaining to MEI, including certain financial ratios and limitations on the
amount of dividends declared or paid by the Company. As of December 2, 1999, MEI
had no borrowings outstanding under the agreement. MTI terminated its secured
revolving credit agreement effective December 2, 1999.
Year 2000
The Company did not experience an interruption of its operations as a
consequence of the transition from the year 1999 to the year 2000. The Company
incurred aggregate incremental costs of approximately $6.4 million to complete
its Year 2000 compliance programs.
17
Certain Factors
In addition to the factors discussed elsewhere in this Form 10-Q and in the
Company's Form 10-K for the fiscal year ended September 2, 1999, 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.
The semiconductor memory industry is characterized by rapid technological
change, frequent product introductions and enhancements, difficult product
transitions, relatively short product life cycles and volatile market
conditions. These characteristics historically have made the semiconductor
industry highly cyclical, particularly in the market for DRAMs, which are the
Company's primary products. The semiconductor industry has a history of
declining average sales prices as products mature. Long-term average decreases
in sales prices for semiconductor memory products have approximated 30% on an
annualized basis; however, significant fluctuations from this rate have occurred
from time to time, including in recent periods.
The selling prices for the Company's semiconductor memory products
fluctuate significantly with real and perceived changes in the balance of supply
and demand for these commodity products. Growth in worldwide supply outpaced
growth in worldwide demand in recent years, resulting in a significant decrease
in average selling prices for the Company's semiconductor memory products. The
semiconductor industry in general and the DRAM market in particular, experienced
a severe downturn from mid 1996 through 1999. Average per megabit prices
declined approximately 37% comparing 1999 to 1998, following a 60% decline
comparing 1998 to 1997 and a 75% decline comparing 1997 to 1996. Although the
Company experienced improvements in average per megabit prices in the first
quarter of 2000 as compared to the fourth quarter of 1999, the Company is unable
to predict future prices for its products. In the event that average selling
prices decline at a faster rate than the rate at which the Company is able to
decrease per unit manufacturing costs, the Company's operations, cash flows and
financial condition could be adversely affected.
The Company and its competitors are seeking improved yields, smaller die
size and fewer mask levels in their product designs. These improvements could
result in a significant increase in worldwide supply of semiconductor memory
devices which could lead to further downward pressures on prices. The increase
in worldwide semiconductor memory production resulting from the Company's full
utilization of its international wafer fabrication operations and the transfer
of its product and process technology to these operations may result in further
downward pricing pressure on semiconductor memory products. In addition,
consolidation by competitors in the semiconductor memory industry could provide
competitors with greater capital resources and create the potential for greater
worldwide investment in semiconductor memory capacity, which could exert further
downward pressure on prices. Recent evidence of improved economic conditions in
Asia could increase capital flows to that region and result in increased
investment by Asian DRAM manufacturers to finance technology advancements and
expansion projects, potentially increasing worldwide supply and leading to
further downward pricing pressure.
The PC market continues to consume the majority of the Company's
semiconductor production. In the first quarter of 2000, approximately 87% of the
Company's sales of semiconductor memory products were sold into the PC or
peripheral markets. DRAMs are the most widely used semiconductor memory
component in most PC systems. Should the rate of growth for PC industry units
decrease or the rate of growth in the amount of memory per PC system decrease,
the growth rate for sales of semiconductor memory could also decrease, placing
further downward pressure on selling prices for the Company's semiconductor
memory products. The Company is unable to predict changes in industry supply,
major customer marketing or inventory management strategies or end user demand,
which are significant factors that influence prices for the Company's
semiconductor memory products.
Over the past several years, the Company's productivity gains have
continued to increase its semiconductor memory output. In recent periods, the
Company has sold this additional semiconductor memory output by increasing its
market share with several of its larger OEM customers and through sales to a
broader customer base including accounts of lesser size and potentially lesser
financial stability. In the event the Company is unable to further increase its
market share with OEM customers, broaden its customer base, or if the Company
experiences
18
reductions in the level of OEM orders, the Company's results of operations and
cash flows could be adversely affected.
The Company's semiconductor operations experience intense competition from
a number of companies, including Hyundai Electronics Industries Co., Ltd.,
Infineon Technologies AG, NEC Corporation and Samsung Semiconductor, Inc. Some
of the Company's competitors are very large corporations or conglomerates which
may have greater resources and a better ability to withstand downturns in the
semiconductor memory market. Additional mergers or consolidation in the industry
could put the Company at a further disadvantage with respect to such
competitors.
The semiconductor memory industry is characterized by frequent product
introductions and enhancements. The Company's ability to reduce per unit
manufacturing costs of its semiconductor memory products is largely dependent on
its ability to design and develop new generation products and shrink versions of
existing products and its ability to ramp such products at acceptable rates to
acceptable yields, of which there can be no assurance. As the semiconductor
industry transitions to higher bandwidth products including DDR SDRAM and RDRAM,
the Company may encounter difficulties in achieving the semiconductor
manufacturing efficiencies that it has historically achieved. The Company's
productivity levels, die per wafer yields and in particular, backend assembly
and test equipment requirements are expected to be affected by a transition to
higher bandwidth products, likely resulting in higher per megabit production
costs. There can be no assurance that the Company will successfully transition
to these products or that it will be able to achieve its historical rate of cost
per megabit reductions.
The Company is engaged in ongoing efforts to enhance its production
processes to reduce per unit costs by reducing the die size of existing
products. The result of such efforts has generally led to significant increases
in megabit production. There can be no assurance that the Company will be able
to maintain or approximate the rate of increase in megabit production at a level
approaching that experienced in recent years or that the Company will not
experience decreases in manufacturing yield or production as it attempts to
implement future technologies. Further, from time to time, the Company
experiences volatility in its manufacturing yields, as it is not unusual to
encounter difficulties in ramping latest shrink versions of existing devices or
new generation devices to commercial volumes.
The raw materials utilized by the Company's semiconductor operations
generally must meet exacting product specifications. The Company generally uses
multiple sources of supply, but the number of suppliers capable of delivering
certain raw materials is very limited. The availability of raw materials, such
as silicon wafers, photolithography reticles, certain chemicals, lead frames and
molding compound, may decline due to the increase in worldwide semiconductor
manufacturing. Although shortages have occurred from time to time and lead times
in the industry have been extended on occasion, to date the Company has not
experienced any significant interruption in operations as a result of a
difficulty in obtaining raw materials for its semiconductor operations.
Interruption of any one raw material source could adversely affect the Company's
operations. Moreover, interruption of manufacturing due to any cause could
materially adversely affect the Company's results of operations.
Subject to certain terms and conditions, MTI has agreed to purchase the
entire output of the JVs. Historically, the JVs have required external financing
to fund operations and to transition to the latest generation technologies in a
timely or efficient manner. The JVs are also dependent on certain key personnel
and on a limited number of sources for certain raw materials. In the event
either of the JVs are unable to secure required external financing, experience a
loss of key personnel, or incur significant interruption in the delivery of raw
materials, the Company would experience a reduction in supply of product from
the JVs. Any reduction of supply, regardless of cause, could adversely affect
the Company's results of operations and cash flows. The JVs also rely on Texas
Instruments Incorporated ("TI") computer networks and information technology
services purchased from TI. If unforeseen difficulties are encountered in
transitioning the JVs away from TI's software, hardware or services or if TI
fails to perform its service agreement with the JVs before the JVs are ready to
transition to new systems, JV production could be impacted and the Company's
results of operations could be adversely affected.
The semiconductor and PC industries have experienced a substantial amount
of litigation regarding patent and other intellectual property rights. From time
to time, third parties have asserted, and may in the future assert,
19
that the Company's products or its processes infringe product or process
technology rights held by such parties. The Company has entered into a number of
patent and intellectual property license agreements with third parties, some of
which require one-time or periodic royalty payments. It may be necessary or
advantageous in the future for the Company to obtain additional patent licenses
or to renew existing license agreements. The Company is unable to predict
whether these license agreements can be obtained or renewed on terms acceptable
to the Company. The Company is currently involved in litigation to enforce
patents held by the Company and to defend the Company against claimed
infringement of the rights of others. Adverse determinations that the Company's
manufacturing processes or products have infringed the product or process rights
held by others could subject the Company to significant liabilities to third
parties or require material changes in production processes or products, any of
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's PC operations, through MEI, participate in a highly
competitive industry characterized by intense pricing pressure, generally low
gross margin percentages, rapid technological advances in hardware and software,
frequent introduction of new products and rapidly declining component costs.
Many of the Company's PC competitors have experienced greater growth rate, have
greater brand name recognition and market share, offer broader product lines and
have substantially greater financial, technical, marketing and other resources
than the Company. The Company's PC competitors may also benefit from component
volume purchasing and product and process technology license arrangements that
are more favorable in terms of pricing and availability than the Company's
arrangements. In addition, the Company may be at a relative cost disadvantage to
certain of its competitors as a result of the Company's U.S. dollar denominated
purchases of PC components during a period of relative weakening of the U.S.
dollar. The failure of the Company to compete effectively in the PC market could
have a material adverse effect on the Company's results of operations and
financial position.
The Company's PC operations compete with a number of PC manufacturers,
which sell their products primarily through direct channels, including Dell
Computer Corporation and Gateway 2000, Inc. The Company also competes with PC
manufacturers, such as Apple Computer, Inc., Compaq Computer Corporation,
Hewlett-Packard Company, International Business Machines Corporation ("IBM"),
NEC Corporation and Toshiba Corporation among others. Several of these
manufacturers, which have traditionally sold their products through national and
regional distributors, dealers and value added resellers and retail stores now
sell their products through the direct channel. In addition, the Company expects
to face increased competition in the U.S. direct sales market from foreign PC
suppliers and from foreign and domestic suppliers of PC products that decide to
implement, or devote additional resources to, a direct sales strategy. In order
to gain an increased share of the United States PC direct sales market, these
competitors may effect a pricing strategy that is more aggressive than the
current pricing in the direct sales market or may have pricing strategies
influenced by relative fluctuations in the U.S. dollar compared to other
currencies. The Company continues to experience significant pressure on its PC
operating results as a result of intense competition in the PC industry and
consumer expectations of more powerful PC systems at lower prices.
MEI's e-services initiatives are designed around four key areas: web
hosting, e-commerce, connectivity and computer hardware and desktop management.
The offering of e-services increases the complexity of the Company's PC
operations and may place a significant strain on MEI's operating, financial and
managerial resources. There can be no assurance that MEI's resources will be
adequate to support these initiatives. Furthermore, web hosting and connectivity
are areas that are extremely competitive and subject to rapid changes in
technology. A large number of companies, including Verio Inc. and Concentric
Network Corporation, offer e-services similar to those provided by the Company.
Large diversified companies such as Intel Corporation ("Intel"), IBM and AT&T
Corp. have indicated their intent to enter into the e-services market, which
will intensify the competition. Many of these competitors have greater financial
resources, strategic relationships, brand recognition and a larger customer base
than MEI, any or all of which may prove critical for success in the e-service
market. There can be no assurance that the Company will successfully compete in
this market or that its efforts to succeed in this market will not diminish its
ability to compete effectively in the PC market.
20
MEI's past operating results have been, and its future operating results
may be, subject to seasonality and other fluctuations, on a quarterly and an
annual basis, as a result of a wide variety of factors, including, but not
limited to, industry competition, MEI's ability to accurately forecast demand
and selling prices for its PC products, fluctuating market pricing for PCs,
seasonal government purchasing cycles, inventory obsolescence, MEI's ability to
effectively manage inventory levels, changes in product mix, manufacturing and
production constraints, fluctuating component costs, the effects of product
reviews and industry awards, critical component availability, seasonal cycles
common in the PC industry, the timing of new product introductions by MEI and
its competitors and global market and economic conditions. MEI's operating
results could have a material impact on the Company's consolidated operating
results.
The Company is dependent upon a limited number of key management and
technical personnel. In addition, the Company's future success will depend in
part upon its ability to attract and retain highly qualified personnel in its
worldwide operations particularly as it adds different product types to its
product line, which require parallel design efforts and significantly increase
the need for highly skilled technical personnel. The Company competes for such
personnel with other companies, academic institutions and government entities.
The Company has experienced, and expects to continue to experience, recruitment
of its existing personnel by other employers. There can be no assurance that the
Company will be successful in hiring or retaining qualified personnel. Any loss
of key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect on the Company's business and results of
operations.
International sales comprised approximately 39% and 27% of the Company's
consolidated net sales in the first quarter of 2000 and 1999, respectively. The
Company expects international sales to continue to increase as a result of
increased production by its international operations. International sales and
operations are subject to a variety of risks, including those arising from
fluctuations in currency exchange rates, import tariffs and export duties,
changes to import and export regulations, possible restrictions on the
repatriation and other transfer of funds, longer customer payment terms, greater
difficulty in collecting accounts receivable, the burdens and costs of
compliance with a variety of international laws and regulations, and, in certain
instances, political and economic instability. While to date these factors have
not had a significant adverse impact on the Company's results of operations,
there can be no assurance that there will not be such an impact in the future.
The only portion of the Company's workforce subject to collective bargaining
agreements is based in Italy. The Company has experienced minimal interruptions
in work flow as a result of union activity. While to date such interruptions
have not had a material impact on the Company's business or results of
operations, there can be no assurance that a future interruption, if any, would
not have an adverse effect on the Company's business or results of operations.
Historically, the Company has reinvested substantially all cash flow from
its semiconductor operations in capacity expansion and enhancement programs. The
Company's cash flow from operations depends primarily on average selling prices
and per unit manufacturing costs of the Company's semiconductor memory products.
If for any extended period of time average selling prices decline faster than
the rate at which the Company is able to decrease per unit manufacturing costs,
the Company may not be able to generate sufficient cash flows from operations to
sustain operations. There can be no assurance that, if needed, external sources
of liquidity will be available to fund the Company's operations or its capacity
and product and process technology enhancement programs. Failure to obtain
financing could hinder the Company's ability to make continued investments in
such programs, which could materially adversely affect the Company's business,
results of operations and financial condition. Cash generated by MEI is not
readily available to finance operations or other expenditures of MTI's
semiconductor operations.
As of December 2, 1999, TI and Intel held an aggregate of 44,743,369
shares of common stock, representing 17% of the Company's total outstanding
common stock. These shares have not been registered with the Securities and
Exchange Commission ("SEC"), however TI and Intel each have registration rights.
Until such time as TI and Intel substantially reduce their holdings of Company
common stock, the Company may be hindered in obtaining new equity capital. As of
December 2, 1999, the Company also had outstanding $500 million of convertible
subordinated notes that were issued in an SEC registered offering in June 1997
that are convertible into 7,413,997 shares of common stock. TI holds notes with
a face value of $740 million which are convertible into 12,333,333
21
shares of common stock. TI's resale of these notes could limit the Company's
ability to raise capital through the issuance of additional convertible debt
instruments.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
Substantially all of the Company's liquid investments and long-term debt
are at fixed interest rates; therefore, the fair value of these instruments is
affected by changes in market interest rates. However, substantially all of the
Company's liquid investments mature within one year. As a result, the Company
believes that the market risk arising from its holdings of financial instruments
is minimal. As of December 2, 1999, the Company held aggregate cash and
receivables in foreign currency valued at approximately US $164 million and
aggregate foreign currency payables valued at approximately US $255 million
(including long-term liabilities denominated in Euros valued at approximately US
$129 million). Foreign currency receivables and payables are comprised primarily
of Euros, Singapore Dollars and British Pounds.
23
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following are filed as a part of this report:
Exhibit
Number Description of Exhibit
------ ------------------------------------------------------------
3.7 By-laws of the Registrant, as amended
27 Financial Data Schedule
(b) The registrant did not file any reports on Form 8-K during the fiscal
quarter ended December 2, 1999.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Micron Technology, Inc.
-----------------------------------------------------
Registrant)
Dated: January 13, 2000 /s/ Wilbur G. Stover, Jr.
-----------------------------------------------------
Wilbur G. Stover, Jr., Vice President of Finance and
Chief Financial Officer (Principal Financial and
Accounting Officer)
25