FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number: 1-10658
MICRON TECHNOLOGY, INC.
State or other jurisdiction of incorporation or organization: Delaware
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Internal Revenue Service -- Employer Identification No. 75-1618004
8000 S. Federal Way, Boise, Idaho 83716-9632
(208) 368-4000
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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
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The number of outstanding shares of the registrant's Common Stock as of
January 5, 1998 was 211,605,654.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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MICRON TECHNOLOGY, INC.
Consolidated Balance Sheets
(Dollars in millions, except for par value data)
November 27, August 28,
As of 1997 1997
- ----- ---- ----
(Unaudited)
ASSETS
Cash and equivalents $ 342.4 $ 619.5
Liquid investments 585.8 368.2
Receivables 436.6 458.9
Inventories 481.4 454.2
Prepaid expenses 11.9 9.4
Deferred income taxes 53.4 62.2
-------- --------
Total current assets 1,911.5 1,972.4
Product and process technology, net 67.8 51.1
Property, plant and equipment, net 2,855.1 2,761.2
Other assets 68.3 66.6
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Total assets $4,902.7 $4,851.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 659.7 $ 546.1
Short-term debt 10.4 10.6
Deferred income 6.7 14.5
Equipment purchase contracts 31.5 62.7
Current portion of long-term debt 95.3 116.0
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Total current liabilities 803.6 749.9
Long-term debt 744.5 762.3
Deferred income taxes 254.7 239.8
Non-current product and process technology 34.0 44.1
Other liabilities 37.1 35.6
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Total liabilities 1,873.9 1,831.7
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Minority interests 132.6 136.5
Commitments and contingencies
Common stock, $0.10 par value, authorized 1.0 billion shares,
issued and outstanding 211.6 million and 211.3 million
shares, respectively 21.1 21.1
Additional capital 488.1 483.8
Retained earnings 2,387.0 2,378.2
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Total shareholders' equity 2,896.2 2,883.1
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Total liabilities and shareholders' equity $4,902.7 $4,851.3
======== ========
See accompanying notes to consolidated financial statements.
1
MICRON TECHNOLOGY, INC.
Consolidated Statements of Operations
(Amounts in millions, except for per share data)
(Unaudited)
November 27, November 28,
For the quarter ended 1997 1996
- --------------------- ----- ----
Net sales $954.6 $728.1
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Costs and expenses:
Cost of goods sold 744.1 572.9
Selling, general and administrative 129.1 75.8
Research and development 63.9 47.2
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Total costs and expenses 937.1 695.9
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Operating income 17.5 32.2
Gain on sale of investments 0.1 9.2
Interest expense, net (1.3) (2.1)
------ ------
Income before income taxes and minority interests 16.3 39.3
Income tax provision (6.5) (15.6)
Minority interests (0.2) (3.1)
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Net income $ 9.6 $ 20.6
====== ======
Earnings per share:
Primary $ 0.04 $ 0.10
Fully diluted 0.04 0.10
Number of shares used in per share calculations:
Primary 215.9 214.0
Fully diluted 215.9 214.5
Cash dividend declared per share -- --
See accompanying notes to consolidated financial statements.
2
MICRON TECHNOLOGY, INC.
Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)
November 27, November 28,
For the quarter ended 1997 1996
- --------------------- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9.6 $ 20.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 136.3 110.3
Decrease in receivables 22.3 32.0
Increase in inventories (27.2) (52.7)
Increase in accounts payable and accrued expenses, net of
plant and equipment purchases 59.1 17.3
Increase in deferred income taxes 17.3 22.1
Decrease in long-term product and process rights liability (10.1) (0.4)
Other (18.1) (1.3)
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Net cash provided by operating activities 189.2 147.9
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CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (187.9) (133.5)
Purchase of available-for-sale and held-to-maturity securities (362.0) (2.1)
Proceeds from sales and maturities of securities 151.5 19.4
Purchase of product and process technology (17.8) --
Other 1.1 (0.3)
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Net cash used for investing activities (415.1) (116.5)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 10.6 37.6
Net repayments on borrowings on lines of credit -- (90.0)
Payments on equipment purchase contracts (12.9) (17.8)
Repayments of long-term debt (48.6) (18.3)
Other (0.3) 3.3
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Net cash used for financing activities (51.2) (85.2)
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Net decrease in cash and equivalents (277.1) (53.8)
Cash and equivalents at beginning of period 619.5 276.1
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Cash and equivalents at end of period $ 342.4 $ 222.3
======= =======
SUPPLEMENTAL DISCLOSURES
Income taxes paid, net $ (3.3) $ 38.4
Interest paid (6.8) (7.9)
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and capital leases 24.6 13.4
See accompanying notes to consolidated financial statements.
3
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" or "MTI"),
and their consolidated results of operations and cash flows.
This report on Form 10-Q for the quarter ended November 27, 1997, should be
read in conjunction with the Company's Annual Report to Shareholders and/or Form
10-K for the year ended August 28, 1997.
2. Recently issued financial statements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." The
requirements of this Statement are first effective for the Company's interim
period ended February 26, 1998. The Statement requires, in all instances, dual
presentation of a basic earnings per share ("EPS"), which excludes dilution, and
a diluted EPS, which reflects the potential dilution that could occur if actions
taken in respect of convertible securities or other obligations to issue common
stock resulted in the issuance of common stock. It also requires a
reconciliation of the income available to common stockholders and weighted-
average shares of the basic EPS computation to the income available to common
stockholders and weighted-average shares plus dilutive potential common shares
of the diluted EPS computation. Basic and diluted EPS pursuant to the
requirements of Statement No. 128 would be as follows:
Quarter Ended
November 27, 1997 November 28, 1996
----------------- -----------------
Basic earnings per share $0.05 $0.10
Diluted earnings per share 0.04 0.10
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. The adoption of SFAS No. 130 is effective
for the Company in 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements is also to be provided. SFAS No. 131 is
effective for the Company in 1999.
3. Supplemental balance sheet information November 27, August 28,
1997 1997
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Receivables
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Trade receivables $412.3 $447.2
Income taxes receivable 30.4 17.9
Allowance for returns and discounts (18.5) (29.3)
Allowance for doubtful accounts (10.3) (9.0)
Other receivables 22.7 32.1
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$436.6 $458.9
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4
Notes to Consolidated Financial Statements, continued
3. Supplemental balance sheet information (continued) November 27, August 28,
1997 1997
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Inventories
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Finished goods $129.5 $128.6
Work in progress 201.8 195.7
Raw materials and supplies 150.1 129.9
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$481.4 $454.2
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Product and process technology
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Product and process technology, at cost $129.5 $108.1
Less accumulated amortization (61.7) (57.0)
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$ 67.8 $ 51.1
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Property, plant and equipment
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Land $ 36.7 $ 35.4
Buildings 875.1 817.9
Equipment 2,489.3 2,416.2
Construction in progress 758.3 681.9
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4,159.4 3,951.4
Less accumulated depreciation and amortization (1,304.3) (1,190.2)
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$ 2,855.1 $ 2,761.2
========= =========
As of November 27, 1997 property, plant and equipment included unamortized
costs of $625.6 million for the Company's semiconductor memory manufacturing
facility in Lehi, Utah, of which $589.2 million has not been placed in service
and is not being depreciated. Test capacity is expected to be provided by the
Lehi facility in the summer of 1998. Completion of the remainder of the Lehi
production facilities is dependent upon market conditions. Market conditions
which the Company expects to evaluate include, but are not limited to, worldwide
market supply and demand of semiconductor products and the Company's operations,
cash flows and alternative uses of capital.
Accounts payable and accrued expenses
- --------------------------------------------------------------------------------
Accounts payable $416.1 $277.0
Salaries, wages and benefits 71.7 93.7
Product and process technology payable 74.5 99.9
Taxes payable other than income 42.5 37.3
Interest payable 15.6 6.9
Other 39.3 31.3
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$659.7 $546.1
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5
Notes to Consolidated Financial Statements, continued
3. Supplemental balance sheet information (continued) November 27, August 28,
1997 1997
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Debt
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Convertible Subordinated Notes payable, due July 2004,
interest rate of 7% $500.0 $ 500.0
Notes payable in periodic installments through July 2015,
weighted average interest rate of 7.43% and 7.33%,
respectively 297.0 331.3
Capitalized lease obligations payable in monthly installments
through August 2002, weighted average interest rate of
7.67% and 7.68%, respectively 37.7 40.7
Other 5.1 6.3
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839.8 878.3
Less current portion (95.3) (116.0)
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$744.5 $ 762.3
====== =======
During the fourth quarter of 1997 the Company issued $500 million in 7%
convertible subordinated notes due July 1, 2004 which are convertible into
shares of the company's common stock at $67.44 per share. The notes were
offered under a $1 billion shelf registration statement pursuant to which the
Company may issue from time to time up to $500 million of additional debt or
equity securities.
MTI has a $500 million unsecured revolving credit agreement expiring in May
2000. The agreement contains certain restrictive covenants pertaining to the
Company's semiconductor operations, including a minimum fixed charge coverage
ratio and a maximum operating loss covenant. As of November 27, 1997, MTI was
in compliance with all covenants under the facility and had no borrowings
outstanding under the agreement. There can be no assurance that MTI will
continue to be able to meet the terms of the covenants and conditions and be
able to borrow under the credit agreement. MEI has an aggregate of $157
million in revolving credit agreements which contain certain restrictive
covenants pertaining to MEI's operations, including a minimum EBITDA
covenant, certain minimum financial ratios and limitations on the amount of
dividends declared or paid by MEI. As of November 27, 1997 MEI had aggregate
borrowings of approximately $9 million outstanding under the agreements.
The Company leases certain facilities and equipment under operating leases.
Total rental expense on all operating leases was $2.9 million and $1.4 million
for the first quarter of 1997 and 1996, respectively. Minimum future rental
commitments under operating leases aggregate $11.5 million as of November 27,
1997 and are payable as follows (in millions): 1998, $2.7; 1999, $3.7; 2000,
$3.3; 2001, $1.4 and 2002, $0.4.
4. Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
expensed in the first quarters of 1998 and 1997 were $20.3 million and $9.6
million, respectively.
5. Income taxes
The estimated effective income tax rate for fiscal 1998 is 40.0%. The
effective income tax rate primarily reflects the statutory corporate income tax
rate, the net effect of state taxation, and provision of tax by the parent on
the earnings of domestic subsidiaries not consolidated with the Company for
federal income tax purposes.
6
6. Earnings per share
Earnings per share is computed using the weighted average number of common
and common equivalent shares outstanding. Common equivalent shares result from
the assumed exercise of outstanding stock options and affect earnings per share
when they have a dilutive effect.
7. Purchase of minority interest
In the first quarter of 1998 the Company purchased the 12% minority interest
in one of its subsidiaries, Micron Display Technology, Inc. ("MDT"), for $21
million in cash. The cost of the acquired interest was allocated primarily to
intangible assets related to field emission flat panel display technology, which
is being amortized over a three-year period.
8. Commitments
As of November 27, 1997, the Company had commitments of approximately $573.2
million for equipment purchases and $69.5 million for the construction of
buildings.
9. Contingencies
Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products 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 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 party to
various other legal actions arising out of the normal course of business, none
of which are expected to have a material effect on the Company's financial
position or results of operations.
7
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 (including statements regarding future operating results,
future capital expenditures and facility expansion, new product introductions,
technological developments 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." All
period references are to the Company's fiscal periods ended November 27, 1997,
August 28, 1997, or November 28, 1996, unless otherwise indicated.
Micron Technology, Inc. and its subsidiaries are hereinafter referred to
collectively as the "Company" or "MTI". The Company designs, develops,
manufactures and markets semiconductor memory products, primarily DRAM, and
through its approximately 64% owned subsidiary, Micron Electronics, Inc.
("MEI"), the Company develops, markets, manufactures and supports PC systems.
RESULTS OF OPERATIONS
Net income for the first quarter of 1998 was $10 million, or $0.04 per
fully diluted share, on net sales of $955 million. For the first quarter of 1997
net income was $21 million, or $0.10 per fully diluted share, on net sales of
$728 million. For the fourth quarter of 1997, net income was $72 million, or
$0.33 per fully diluted share, on net sales of $946 million.
NET SALES
First Quarter
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1998 % Change 1997
--------------------------------------------
Net sales % Net sales %
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Semiconductor memory products $440.1 46.1 $342.2 47.0
PC systems 445.1 46.6 333.8 45.8
Other 69.4 7.3 52.1 7.2
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Total net sales $954.6 100.0 31.1% $728.1 100.0
============= ==============
Net sales reported under "semiconductor memory products" include sales of
MTI semiconductor memory products incorporated in MEI products, which amounted
to $12.4 million and $11.3 million in the first quarters of 1998 and 1997,
respectively. The caption "Other" primarily includes revenue from contract
manufacturing services, government research and development contracts, licensing
fees and remote intelligent communication ("RIC") products. In December 1997,
MEI entered into an agreement to sell, subject to certain conditions, a 90%
interest in its contract manufacturing business. Contract manufacturing services
accounted for approximately $60.6 million of the Company's "Other" revenue in
the first quarter of 1998.
Net sales in the first quarter of 1998 increased by 31% as compared to the
first quarter of 1997, principally due to increased volumes of semiconductor
memory products sold and increased unit sales of PC systems, offset by a sharp
decline in average selling prices of semiconductor memory products and a decline
in average selling prices for PC systems. The relatively flat sales for the
first quarter of 1998 compared to the $946 million of net sales for the fourth
quarter of 1997 reflect an increase in revenue from the Company's PC operations
which was offset by a decrease in net sales of semiconductor memory products.
Net sales of semiconductor memory products for the first quarter of 1998
increased by 29% as compared to the first quarter of 1997, primarily due to
increased production, which was partially offset by a sharp decline in average
selling prices for such products. The Company's principal memory product in the
first quarter of 1998 was the 16 Meg DRAM, which comprised approximately 88% of
the net sales of semiconductor memory. Total megabits shipped in the first
quarter of 1998 more than doubled the megabits shipped in the first quarter of
1997. This increase in production was principally the result of the transition
to the 16 Meg DRAM as the Company's principal memory product, ongoing
transitions to successive reduced die size ("shrink") versions of existing
memory products, enhanced yields on existing memory products and an increase in
total wafer outs primarily due to completion of the conversion to 8-inch wafers.
Average selling prices per megabit of memory declined approximately 44% from the
8
first quarter of 1997 to the first quarter of 1998 and 25% from the fourth
quarter of 1997 to the first quarter of 1998. Average selling prices for the
Company's semiconductor memory products continue to decline and in December 1997
were approximately 38% lower than in the first quarter of 1998. As a result of
the decline in average selling prices, net sales of semiconductor memory
products for the first quarter of 1998 decreased by 9% as compared to the fourth
quarter of 1997 despite a 24% increase in megabits shipped for the same period.
The increase in megabit shipments for the first quarter of 1998 as compared to
the fourth quarter of 1997 was primarily due to ongoing transitions to
successive shrink versions of existing memory products, enhanced yields on
existing memory products and shifts in the Company's mix of semiconductor memory
products to a higher average density. Total wafer outs for the first quarter of
1998 were 10% lower than for the fourth quarter of 1997, primarily as a result
of a shift in product mix to SDRAM.
Net sales of PC systems increased in the first quarter of 1998 compared to
the first quarter of 1997 primarily due to a 36% increase in unit sales of PC
systems partially offset by a decline in average selling prices for the
Company's PC systems, and an increase in non-system revenue. Non-system revenue
is revenue received from the sale of PC related products and services separate
from the sale of a PC system. The growth in unit sales of PC systems was
partially attributable to a higher level of sales to governmental entities and
corporate customers. Net sales of PC systems for the first quarter of 1998 were
18% higher than for the fourth quarter of 1997 primarily due to a higher level
of non-system revenue, an increase in unit sales of PC systems and a higher
average selling price for the Company's PC systems.
GROSS MARGIN
First Quarter
----------------------
1998 Change 1997
-----------------------
Gross margin 210.5 35.6% $155.2
As a % of net sales 22.1% 21.3%
The Company's gross margin percentage was relatively flat for the first
quarter of 1998 compared to the first quarter of 1997. The gross margin
percentage on sales of the Company's semiconductor memory products improved for
the first quarter of 1998 as compared to the fourth quarter of 1997 as a result
of increased production efficiencies. The increase in semiconductor gross
margin was offset by lower gross margins on sales of the Company's PC systems.
The Company's gross margin percentage for the fourth quarter of 1997 was 30%
which exceeded the first quarter of 1998 primarily due to a decline in average
selling prices for semiconductor memory products, increased pricing pressure on
PC systems, and the disposition of PC component inventories.
The Company's gross margin percentage on sales of semiconductor memory
products for the first quarter of 1998 was 32%, compared to 24% and 44% in the
first and fourth quarters of 1997, respectively. The increase in gross margin
percentage on sales of semiconductor memory products for the first quarter of
1998 compared to the first quarter of 1997 was primarily the result of a decline
in per unit manufacturing costs, partially offset by a decline in average
selling prices. Decreases in per unit manufacturing costs for the first quarter
of 1998 compared to the same period in 1997 were achieved through transitions to
shrink versions of existing products, shifts in the Company's mix of
semiconductor memory products to a higher average density, and improved
manufacturing yields. The decrease in gross margin percentage on semiconductor
memory products in the first quarter of 1998 from the fourth quarter of 1997 was
primarily the result of the approximate 25% decline in average selling prices
per megabit of memory, partially offset by lower per megabit manufacturing
costs. The gross margin in the first quarter of 1998 was adversely affected by
a $15 million charge related to the valuation of Flash products and benefited by
$11 million resulting from a change in estimate of a long-term product and
process rights liability.
The semiconductor memory industry is characterized by frequent product
introductions and enhancements. The Company's ramp of its SDRAM products
reached approximately 55% of DRAM wafer starts at the end of the first quarter
of 1998. The Company's transition from the 16 Meg to the 64 Meg SDRAM as its
primary memory product is expected to occur in late calendar 1998. Future gross
margins may be adversely impacted if the Company is unable to transition to
shrink versions of the 16 Meg SDRAM or to the 64 Meg at gross margin rates
comparable to those of the Company's current primary products.
The gross margin percentage for the Company's PC operations for the first
quarter of 1998 was 13%, compared to 20% and 16% in the first and fourth
quarters of 1997, respectively. In the first quarter of 1998 net sales of PC
9
systems increased but the gross margin decreased due to intense price pressure,
particularly on notebook systems, and the disposition of PC component
inventories.
SELLING, GENERAL AND ADMINISTRATIVE
First Quarter
----------------------
1998 Change 1997
----------------------
Selling, general and administrative 129.1 70.3% $75.8
as a % of net sales 13.5% 10.4%
The higher level of selling, general and administrative expenses during the
first quarter of 1998 as compared to the first quarter of 1997 primarily
reflects an increase in the number of administrative employees associated with
the Company's expanded PC and semiconductor operations. In addition, selling,
general and administrative expenses for the Company's PC operations increased
during the first quarter of 1998 as a result of increased advertising costs, bad
debt expense and increased technical and professional fees primarily associated
with information technology consulting services. Selling, general and
administrative expenses for the first quarter of 1998 also reflect a $6 million
contribution to a university in support of engineering education. This
contribution, along with an increase in advertising costs for the Company's PC
operations, contributed to a 28% increase in selling, general and administrative
expenses for the first quarter of 1998 as compared to the fourth quarter of
1997.
RESEARCH AND DEVELOPMENT
First Quarter
---------------------
1998 Change 1997
---------------------
Research and development 63.9 35.4% $47.2
as a % of net sales 6.7% 6.5%
Research and development expenses vary primarily with the number of wafers
processed, personnel costs, and the cost of advanced equipment dedicated to new
product and process development. Research and development efforts are focused
on advanced process technology, which is the primary determinant in
transitioning to next generation products. Application of advanced process
technology currently is concentrated on development of the Company's 16 Meg, 64
Meg and 256 Meg SDRAMs. The PC industry is in the process of transitioning from
EDO to SDRAM. The Company's transition to SDRAM as the primary DRAM technology
is expected to occur in early calendar 1998. Other research and development
efforts are devoted to the design and development of Flash, SRAM, RIC, flat
panel display products and PC systems.
The Company transitioned a substantial portion of its product lines to .30
micron (u) line width processing from .35(u) line width processing in 1997.
The Company anticipates completion of the .30(u) transition in 1998 and
anticipates that process technology will move to line widths of .25(u), .21(u)
and .18(u) in the next several years as needed for the development of future
generation semiconductor products.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards include Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share," issued by the
Financial Accounting Standards Board ("FASB") in February 1997, SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," issued by the FASB in June 1997. Basic
and diluted earnings per share pursuant to the requirements of SFAS No. 128, as
well as a description of SFAS No. 130 and SFAS No. 131 are disclosed in the
notes to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of November 27, 1997, the Company had cash and liquid investments
totaling $928 million, representing a decrease of $59 million during the first
quarter of 1998.
The Company's principal source of liquidity during the first quarter of 1998
was cash flows from operations of $189 million. Cash flow from operations
depends significantly on average selling prices and variable cost per unit
10
for the Company's semiconductor memory products. The principal uses of funds in
the first quarter of 1998 were $188 million for property, plant and equipment
and $63 million for repayments of equipment contracts and debt. During the first
three months of 1998, the Company's inventories increased by $27 million, of
which $20 million was attributable to an increase in raw materials inventories.
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 billion in fiscal 1998 for purchases of equipment and construction and
improvement of buildings. Subsequent to its first quarter of 1998, the Company
experienced further price decreases for its semiconductor memory products and,
in consideration of these decreases, is reevaluating its capital expenditures
and will adjust such expenditures as appropriate in response to market
conditions and expected cash flow needs. As of November 27, 1997, the Company
had entered into contracts extending into fiscal 2000 for approximately $573
million for equipment purchases and approximately $69 million for the
construction of facilities. Should the Company elect to cancel its outstanding
equipment purchase commitments, the Company could be subject to cancellation
fees in excess of $135 million. Future capital expenditures will be used
primarily to enhance manufacturing efficiencies and product and process
technology at the Company's existing facilities. As the Company considers its
product and process technology enhancement programs and technology
diversification objectives, the Company has evaluated, and continues to
evaluate, possible acquisitions, strategic alliances and the purchase of the
minority interest of its subsidiaries. In the first quarter of 1998 the Company
purchased the 12% minority interest in Micron Display Technology, Inc. for $21
million in cash. The Company has a $1 billion shelf registration statement. In
July 1997, the Company issued $500 million in convertible subordinated notes
pursuant to the shelf registration statement and may issue from time to time up
to an additional $500 million in debt or equity securities.
MTI has a $500 million unsecured revolving credit agreement expiring in May
2000. The agreement contains certain restrictive covenants pertaining to the
Company's semiconductor operations, including a minimum fixed charge coverage
ratio and a maximum operating loss covenant. As of November 27, 1997, MTI was
in compliance with all covenants under the facility and had no borrowings
outstanding under the agreement. There can be no assurance that MTI will
continue to be able to meet the terms of the covenants and conditions and be
able to borrow under the credit agreement. MEI has an aggregate of $157 million
in revolving credit agreements which contain certain restrictive covenants
pertaining to MEI's operations, including a minimum EBITDA covenant, certain
minimum financial ratios and limitations on the amount of dividends declared or
paid by MEI. As of November 27, 1997 MEI had aggregate borrowings of
approximately $9 million outstanding under the agreements. Cash generated by
and credit lines available to MEI are not anticipated to be available to finance
other MTI operations.
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 August 28, 1997, 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 semiconductor memory 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 approximate
30% on an annualized basis; however, significant fluctuations from this rate
have occurred from time to time, as evidenced by the 75% decline in average
selling prices for the Company's semiconductor memory products for 1997 and the
25% decline in average selling prices for the first quarter of 1998 compared to
the fourth quarter of 1997. In addition, average selling prices for the
Company's semiconductor memory products in December 1998 were approximately 38%
lower than the average selling prices for the first quarter of 1998.
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
11
has outpaced growth in worldwide demand in recent periods, resulting in a
significant decrease in average selling prices for the Company's semiconductor
memory products. For most of fiscal 1997 the rate at which the Company was able
to decrease per unit manufacturing costs exceeded the rate of decline in average
selling prices, due mainly to a transition to a higher density product. However,
in the fourth quarter of 1997 and the first quarter of 1998 the Company was
unable to decrease per unit manufacturing costs at a rate commensurate with the
decline in average selling prices. In the event that average selling prices
continue to decline at a faster rate than that at which the Company is able to
decrease per unit manufacturing costs, the Company could be materially adversely
affected in its operations, cash flows and financial condition. Although
worldwide excess capacity exists, certain Asian competitors continue to add
capacity for the production of semiconductor memory products. The amount of
capacity to be placed into production and future yield improvements by the
Company's competitors could dramatically increase worldwide supply of
semiconductor memory and increase downward pressure on pricing. Further, the
Company has no firm information with which to determine inventory levels of its
competitors, or to determine the likelihood that substantial inventory
liquidation may occur and cause further downward pressure on pricing.
Worldwide semiconductor pricing is influenced by currency fluctuations. In
calendar 1997 the Korean Won, the New Taiwan Dollar and the Japanese Yen were
devalued significantly, dropping approximately 100%, 20% and 10%, respectively,
compared to the U.S. dollar. The devaluation of these currencies was
particularly severe in the fourth quarter of calendar 1997 and contributed to
the current South Korean credit crisis. South Korean semiconductor competitors
are likely to be particularly affected by the currency devaluations as a result
of substantial debt structures denominated in U.S. dollars. The currency
devaluations and the credit crisis could have a particularly significant impact
on DRAM pricing if the Company's Asian, and particularly Korean, competitors
offer products at significantly lower prices in an effort to maximize cash flows
to service near-term dollar denominated obligations. While the Company cannot
predict the overall impact of the Asian currency devaluations and the Korean
credit crisis, its products may be subject to further downward pricing pressure.
If average selling prices for semiconductor memory products continue to decline,
the Company may not be able to remain profitable.
If pricing for the Company's semiconductor products remains at current
levels for an extended period of time or declines further, the Company may be
required to make changes in its operations, including but not limited to,
reduction of the amount or changes in timing of its capital expenditures,
renegotiation of existing debt agreements, reduction of production and workforce
levels, reduction of research and development, or changes in the products
produced.
Approximately 63% of the Company's sales of semiconductor memory products
during the first quarter of 1998 were directly into the PC or peripheral
markets. DRAMs are the most widely used semiconductor memory component in most
PC systems. Should the rate of growth of sales of PC systems 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 inventory
management strategies, or end user demand, which are significant factors
influencing pricing for the Company's semiconductor memory products. In recent
periods the PC industry has seen a shift in demand towards sub-$1000 PCs. While
the Company cannot predict with any degree of accuracy the future impact on the
PC and semiconductor industry of this shift, possible effects include, but are
not limited to, further downward pricing pressure on PC systems and further
downward pricing pressure on semiconductor memory products.
The Company's operating results are significantly impacted by the operating
results of its consolidated subsidiaries, particularly MEI. 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, the Company's ability to accurately forecast demand for its PC
products, the Company's ability to effectively manage PC inventory levels,
fluctuating market pricing for PCs and semiconductor memory products,
fluctuating component costs, changes in product mix, inventory obsolescence, the
timing of new product introductions by the Company and its competitors, the
timing of orders from and shipments to OEM customers, seasonal government
purchasing cycles, manufacturing and production constraints, the effects of
product reviews and industry awards, seasonal cycles common in the PC industry,
critical component availability, and the failure by MEI to successfully
integrate the operations of NetFRAME Systems Incorporated. Changing
circumstances, including but not limited to, changes in the Company's core
operations, uses of capital, strategic objectives and market conditions, could
result in the Company changing its ownership interest in its subsidiaries.
12
The Company is engaged in ongoing efforts to enhance its semiconductor
production processes to reduce per unit costs by reducing the die size of
existing products. The result of such efforts has led to a significant increase
in megabit production. There can be no assurance that the Company will be able
to maintain or approximate increases in megabit production at a level
approaching that experienced in recent periods or that the Company will not
experience decreases in production volume 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 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.
The semiconductor memory industry is characterized by frequent product
introductions and enhancements. The Company's transition to SDRAM products
reached approximately 55% of DRAM wafer starts at the end of the first quarter
of 1998. The Company's transition from the 16 Meg to the 64 Meg SDRAM as
its primary memory product is expected to occur in late calendar 1998. It is
not unusual to encounter difficulties in manufacturing while transitioning to
shrink versions of existing products or new generation products. Future gross
margins will be adversely impacted if the Company is unable to transition to
shrink versions of the 16 Meg SDRAM or to the 64 Meg SDRAM at gross margin rates
at least comparable to those of the Company's current primary products.
Historically, the Company has reinvested substantially all cash flow from
semiconductor memory 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. The Company has a $500 million
unsecured revolving credit agreement which is available to finance its
semiconductor operations. However, the agreement contains certain restrictive
covenants, including a minimum fixed charge coverage ratio and a maximum
operating losses covenant, which the Company may not be able to meet if
semiconductor market conditions continue to deteriorate. In the event that the
Company does not comply with the covenants, there can be no assurance that the
Company would be able to successfully renegotiate the agreement or obtain a
waiver to the covenants of the existing agreement. In either event, the Company
may not be able to draw on the credit facility. Cash generated by, and credit
lines available to, MEI are not anticipated to be available to finance other MTI
operations.
Completion of the Company's semiconductor manufacturing facility in Lehi,
Utah was suspended in February 1996, as a result of the decline in average
selling prices for semiconductor memory products. As of November 27, 1997, the
Company had invested approximately $626 million in the Lehi facility. The cost
to complete the Lehi facility is estimated to approximate $1.7 billion. Although
additional test capacity for Boise production is anticipated to be provided in
Lehi in 1998, completion of the remainder of the Lehi production facilities is
dependent upon market conditions. Market conditions which the Company expects to
evaluate include, but are not limited to, worldwide market supply and demand of
semiconductor products and the Company's operations, cash flows and alternative
uses of capital. There can be no assurance that the Company will be able to fund
the completion of the Lehi manufacturing facility. The failure by the Company to
complete the facility would likely result in the Company being required to write
off all or a portion of the facility's cost, which could have a material adverse
effect on the Company's business and results of operations. In addition, in the
event that market conditions improve, there can be no assurance that the Company
can commence manufacturing at the Lehi facility in a timely, cost effective
manner that enables it to take advantage of the improved market conditions.
The semiconductor and PC industries have experienced a substantial amount of
litigation regarding patent and other intellectual property rights. In the
future, litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, or to defend the Company
against claimed infringement of the rights of others. 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 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.
13
Adverse determinations that the Company's manufacturing processes or products
have infringed on 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 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,
particularly as the Company adds different product types to its product line,
which will 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, government entities and other
organizations. In recent periods, the Company has experienced increased
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.
14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
- -------------------------------------------------------
The registrant's 1997 Annual Meeting of Shareholders was held on November 25,
1997. At the meeting, the following items were submitted to a vote of the
shareholders:
(a) The following nominees for Directors were elected. Each person elected
as a Director will serve until the next annual meeting of shareholders or until
such person's successor is elected and qualified.
Votes Votes Cast
Name of Nominee Cast For Against/Withheld
- ---------------------------- ----------- ----------------
Steven R. Appleton 189,948,273 2,392,942
James W. Bagley 190,476,132 1,865,083
Jerry M. Hess 190,473,599 1,867,616
Robert A. Lothrop 189,870,675 2,470,540
Thomas T. Nicholson 190,442,144 1,899,071
Don J. Simplot 189,851,706 2,489,509
John R. Simplot 189,721,948 2,619,267
Gordon C. Smith 190,432,525 1,908,690
(b) The amendment to the 1994 Stock Option Plan to increase the number of
shares reserved for issuance thereunder to 32,000,000 shares was approved with
94,834,478 votes in favor, 55,013,642 votes against, 1,130,052 abstentions and
41,363,043 broker non-votes.
(c) The ratification and appointment of Coopers & Lybrand L.L.P. as
independent public accountants of the Company for the fiscal year ending
September 3, 1998 was approved with 191,163,783 votes in favor, 604,724 votes
against, 572,708 abstentions and 0 broker non-votes.
15
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
------ ----------------------
10.110 1994 Stock Option Plan
11 Computation of per share earnings for the quarters
ended November 27, 1997 and November 28, 1996
27 Financial Data Schedule
(b) The registrant did not file any reports on Form 8-K during the fiscal
quarter ended November 27, 1997.
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 12, 1998 /s/ Wilbur G. Stover, Jr.
-----------------------------------------------
Wilbur G. Stover, Jr. Vice President of Finance
and Chief Financial Officer (Principal Financial
and Accounting Officer)
17