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 quarter period ended June 3, 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 July
8, 1999 was 250,777,049 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)
June 3, September 3,
As of 1999 1998
- --------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and equivalents $ 350.6 $ 558.8
Liquid investments 1,309.9 90.8
Receivables 561.5 489.5
Inventories 441.5 291.6
Prepaid expenses 18.5 8.5
Deferred income taxes 72.8 61.7
-------- --------
Total current assets 2,754.8 1,500.9
Product and process technology, net 213.8 84.9
Property, plant and equipment, net 3,644.5 3,035.3
Other assets 172.5 82.4
-------- --------
Total assets $6,785.6 $4,703.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 597.3 $ 460.7
Short-term debt -- 10.1
Deferred income 13.0 7.5
Equipment purchase contracts 81.8 168.8
Current portion of long-term debt 105.2 98.6
-------- --------
Total current liabilities 797.3 745.7
Long-term debt 1,553.6 758.8
Deferred income taxes 264.3 284.2
Other liabilities 82.0 61.4
-------- --------
Total liabilities 2,697.2 1,850.1
-------- --------
Minority interests 162.9 152.1
Commitments and contingencies
Common Stock, $0.10 par value, authorized 1.0 billion shares, issued
and outstanding 250.6 million and 217.1 million shares respectively 25.1 21.7
Class A Common Stock, $0.10 par value, authorized 32 million shares,
issued and outstanding 15.8 million shares 1.6 --
Additional capital 1,837.4 565.4
Retained earnings 2,062.9 2,114.3
Accumulated other comprehensive loss (1.5) (0.1)
-------- --------
Total shareholders' equity 3,925.5 2,701.3
-------- --------
Total liabilities and shareholders' equity $6,785.6 $4,703.5
======== ========
Certain fiscal 1998 amounts have been restated as a result of a pooling-of-
interests merger.
See accompanying notes to consolidated financial statements.
1
MICRON TECHNOLOGY, INC.
Consolidated Statement of Operations
(Amounts in millions, except for per share data)
(Unaudited)
June 3, May 28,
For the quarter ended 1999 1998
- ---------------------------------------------------------------------------------------------
Net sales $ 863.8 $ 612.7
------- --------
Costs and expenses:
Cost of goods sold 674.8 606.0
Selling, general and administrative 124.1 111.4
Research and development 81.6 70.7
Other operating expense, net 11.1 3.4
------- --------
Total costs and expenses 891.6 791.5
------- --------
Operating loss (27.8) (178.8)
Gain on issuance of subsidiary stock, net -- 0.2
Interest income (expense), net (14.4) 0.5
------- --------
Loss before income taxes and minority interests (42.2) (178.1)
Income tax benefit 17.1 70.8
Minority interests in net income (2.6) (2.1)
------- --------
Net loss $ (27.7) $ (109.4)
======= ========
Loss per share:
Basic $ (0.10) $ (0.51)
Diluted (0.10) (0.51)
Number of shares used in per share calculations:
Basic 266.3 215.8
Diluted 266.3 215.8
Certain fiscal 1998 amounts have been restated as a result of a pooling-of-
interests merger.
See accompanying notes to consolidated financial statements.
2
MICRON TECHNOLOGY, INC.
Consolidated Statement of Operations
(Amounts in millions, except for per share data)
(Unaudited)
June 3, May 28,
For the nine months ended 1999 1998
- ---------------------------------------------------------------------------------------------
Net sales $2,683.2 $2,333.2
Costs and expenses:
Cost of goods sold 2,097.6 2,093.6
Selling, general and administrative 352.7 376.0
Research and development 234.7 209.9
Other operating expense, net 37.3 32.1
-------- --------
Total costs and expenses 2,722.3 2,711.6
-------- --------
Operating loss (39.1) (378.4)
Gain (loss) on sale of investments and subsidiary stock, net (0.1) 157.1
Gain on issuance of subsidiary stock, net 1.6 0.8
Interest income (expense), net (34.0) 1.0
-------- --------
Loss before income taxes and minority interests (71.6) (219.5)
Income tax benefit 28.5 77.1
Minority interests in net income (8.3) (11.4)
-------- --------
Net loss $ (51.4) $ (153.8)
======== ========
Loss per share:
Basic $ (0.20) $ (0.72)
Diluted (0.20) (0.72)
Number of shares used in per share calculations:
Basic 258.8 215.2
Diluted 258.8 215.2
Certain fiscal 1998 amounts have been restated as a result of a pooling-of-
interests merger.
See accompanying notes to consolidated financial statements.
3
MICRON TECHNOLOGY, INC.
Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)
June 3, May 28,
For the nine months ended 1999 1998
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (51.4) $ (153.8)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 612.9 434.7
Change in assets and liabilities, net of effects of acquisition and
sale of MCMS
Decrease in receivables 32.4 17.9
Decrease (increase) in inventories (117.7) 52.4
Increase (decrease) in accounts payable and accrued
expenses, net of plant and equipment payables 41.9 (45.0)
Tax effect of stock options in additional paid in capital 36.9 3.7
Increase (decrease) in long-term product and process
rights liability 1.8 (33.4)
Gain on sale and issuance of subsidiary stock (1.6) (157.9)
Other 8.8 (13.3)
---------- --------
Net cash provided by operating activities 564.0 105.3
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (513.8) (564.2)
Proceeds from sale of subsidiary stock, net of MCMS cash -- 235.9
Purchase of available-for-sale and held-to-maturity securities (2,368.4) (611.3)
Proceeds from sales and maturities of securities 1,116.1 796.6
Other 3.6 9.2
---------- --------
Net cash used for investing activities (1,762.5) (133.8)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received in conjunction with acquisition 681.1 --
Proceeds from issuance of common stock 583.7 15.2
Proceeds from issuance of debt 34.0 31.4
Repayments of debt (93.4) (99.4)
Payments on equipment purchase contracts (218.6) (32.5)
Other 3.5 1.1
---------- --------
Net cash provided by (used for) financing activities 990.3 (84.2)
---------- --------
Net decrease in cash and equivalents (208.2) (112.7)
Cash and equivalents at beginning of period 558.8 621.5
---------- --------
Cash and equivalents at end of period $ 350.6 $ 508.8
========== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ (67.4) $ (36.1)
Income taxes refunded (paid), net 185.5 (41.3)
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and capital leases 135.3 130.2
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) $ --
========== ========
Certain fiscal 1998 amounts have been restated as a result of a pooling-of-
interests merger.
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" or "MTI"),
and their consolidated results of operations and cash flows. The Company has
restated its prior period financial statements, as a result of the merger with
Rendition, Inc. ("Rendition") which was accounted for as a business combination
using the pooling-of-interests method.
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 3, 1998.
2. Supplemental balance sheet information June 3, September 3,
1999 1998
- ----------------------------------------------------------------------------------
Receivables
- ----------------------------------------------------------------------------------
Trade receivables $ 409.1 $ 294.4
Income taxes receivable 87.7 191.9
Allowance for returns and discounts (23.9) (11.9)
Allowance for doubtful accounts (7.9) (6.5)
Other receivables 96.5 21.6
------- ----------
$ 561.5 $ 489.5
======= ==========
Inventories
- ----------------------------------------------------------------------------------
Finished goods $ 238.6 $ 93.3
Work in progress 146.6 139.6
Raw materials and supplies 56.3 58.7
------- ----------
$ 441.5 $ 291.6
======= ==========
Product and process technology
- ----------------------------------------------------------------------------------
Product and process technology, at cost $ 315.7 $ 161.7
Less accumulated amortization (101.9) (76.8)
-------- ----------
$ 213.8 $ 84.9
======== ==========
Property, plant and equipment
- ----------------------------------------------------------------------------------
Land $ 42.2 $ 34.8
Buildings 1,130.6 915.5
Equipment 3,840.8 3,025.7
Construction in progress 734.7 704.6
-------- ----------
5,748.3 4,680.6
Less accumulated depreciation and amortization (2,103.8) (1,645.3)
-------- ----------
$3,644.5 $ 3,035.3
======== ==========
As of June 3, 1999, property, plant and equipment included total
unamortized costs of $709.5 million for the Company's semiconductor memory
manufacturing facility in Lehi, Utah, of which $649.1 million has not been
5
Notes to Consolidated Financial Statements, continued
placed in service and is not being depreciated. Timing of the 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. The Company
continues to evaluate the carrying value of the facility and as of June 3, 1999,
it was determined to have no impairment.
Depreciation expense was $196.9 million and $569.1 million, respectively,
for the third quarter and first nine months of 1999, and $139.0 million and
$406.9 million for the third quarter and first nine months of 1998.
June 3, September 3,
1999 1998
- -------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses
- -------------------------------------------------------------------------------------------------
Accounts payable $ 353.4 $ 235.6
Salaries, wages and benefits 86.9 85.6
Interest payable 27.1 7.7
Taxes payable other than income 23.6 44.5
Product and process technology payable 40.2 46.4
Other 66.1 40.9
---------- ----------
$ 597.3 $ 460.7
========== ==========
Debt
- -------------------------------------------------------------------------------------------------
Convertible Subordinated Notes payable, due October 2005, with
an effective yield to maturity of 8.4%, net of unamortized
discount of $66.8 million $ 673.2 $ --
Convertible Subordinated Notes payable, due July 2004,
interest rate of 7% 500.0 500.0
Subordinated Notes payable, due October 2005, with an effective
yield to maturity of 10.7%, net of unamortized discount of
$39.2 million 170.8 --
Notes payable in periodic installments through July 2015,
weighted average interest rate of 7.37% and 7.38%,
respectively 279.9 315.2
Capitalized lease obligations payable in monthly installments
through August 2004, weighted average interest rate of
7.55% and 7.61%, respectively 34.9 42.2
---------- ----------
1,658.8 857.4
Less current portion (105.2) (98.6)
---------- ----------
$ 1,553.6 $ 758.8
========== ==========
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, a
stated interest rate of 6.5% and are convertible into shares of the Company's
common stock at $60 per share. The Convertible Notes are not subject to
redemption prior to October 2000 and are redeemable from that date through
October 2002 only if the common stock price is at least $78.00 for a specified
trading period. The Convertible Notes have not been registered with the
Securities and Exchange Commission, however the holder has registration rights.
(See note 7 - "Acquisition")
6
Notes to Consolidated Financial Statements, continued
The 7% convertible subordinated notes due July 2004 are convertible into
shares of the Company's common stock at $67.44 per share. The notes are
redeemable through July 2001 if the common stock price is at least $87.67 for a
specified trading period. 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. The subordinated
notes due October 2005 with a yield to maturity of 10.7% have a face value of
$210 million and a stated interest rate of 6.5%.
The Company has a $400 million secured revolving credit agreement which
expires May 2000. The interest rate on borrowed funds is based on various
pricing options at the time of borrowing. The agreement contains certain
restrictive covenants pertaining to the Company's semiconductor operations,
including a maximum debt to equity covenant. As of June 3, 1999, MTI had no
borrowings outstanding under the agreement.
Micron Electronics, Inc. ("MEI"), an approximately 63% owned subsidiary of
the Company, 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 June 3, 1999, MEI was eligible to borrow the full
amount under its credit agreement but had no borrowings outstanding.
3. Other operating expense, net
Other operating expense for the third quarter of 1999 includes a net $13.4
million loss from the write down and disposal of semiconductor memory operations
equipment. Other operating expense for the first nine months of 1999 includes a
$15.0 million second quarter charge to write down certain flat panel display
assets, partially offset by a $5.1 million reduction in employee benefit
accruals in the third quarter and $5.2 million from cancellation of a
compensation program in the second quarter.
Other operating expense for the first nine months of 1998 includes charges
associated with PC operations of $13.0 million resulting from employee
termination benefits and consolidation of domestic and international operations
and $5.2 million from the write off of software development costs, as well as
$9.3 million related to the disposal and write down of semiconductor memory
operations equipment.
4. Income taxes
The effective tax rate for the third quarter and first nine months of 1999
was approximately 40%, primarily reflecting the U.S. corporate income tax rate
and the net effect of state taxation. The Company is currently evaluating
permanent reinvestment of foreign earnings associated with certain of the
Company's international operations which have been granted favorable tax
treatment. Taxes on earnings of domestic subsidiaries not consolidated for tax
purposes may cause the effective tax rate to vary significantly from period to
period.
The effective tax rate for the third quarter and first nine months of 1998
was 40% and 35%, respectively. The income tax rate for the third quarter and
first nine months of 1998 reflects the write off in the second quarter of 1998
of a $4 million deferred tax asset relating to the Company's consolidation of
its NetFRAME enterprise server operations.
7
Notes to Consolidated Financial Statements, continued
5. 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. Earnings per share computations exclude stock options
and potential shares for convertible debentures to the extent that their effect
would have been antidilutive.
Quarter ended Nine months ended
June 3, May 28, June 3, May 28,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Net loss available for common shareholders,
Basic and Diluted $ (27.7) $ (109.4) $ (51.4) $ (153.8)
======== ========= ========= ==========
Weighted average common stock outstanding - Basic 266.3 215.8 258.8 215.2
Net effect of dilutive stock options -- -- -- --
-------- --------- --------- ----------
Weighted average common stock and common stock
equivalents - Diluted 266.3 215.8 258.8 215.2
======== ========= ========= ==========
Basic loss per share $ (0.10) $ (0.51) $ (0.20) $ (0.72)
======== ========= ========= ==========
Diluted loss per share $ (0.10) $ (0.51) $ (0.20) $ (0.72)
======== ========= ========= ==========
Antidilutive shares excluded from computation 6.0 12.6 0.6 10.9
======== ========= ========= ==========
6. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," as of the first quarter of 1999. SFAS
No. 130 establishes rules for the reporting and display of comprehensive income
and its components.
The components of comprehensive income are as follows:
June 3, May 28,
For the quarter ended 1999 1998
- --------------------------------------------------------------------------------
Net loss $ (27.7) $ (109.4)
Unrealized loss on investments (0.1) --
-------- --------
Total comprehensive loss (27.8) (109.4)
======== ========
June 3, May 28,
For the nine months ended 1999 1998
- --------------------------------------------------------------------------------
Net loss $ (51.4) $ (153.8)
Foreign currency translation adjustment -- (0.5)
Unrealized loss on investments (1.4) --
-------- --------
Total comprehensive loss $ (52.8) $ (154.3)
======== ========
8
Notes to Consolidated Financial Statements, continued
7. Acquisition
On September 30, 1998, the Company completed its 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, the Company 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, the Company 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. The Company and TI also entered into a
ten-year, royalty-free, life-of-patents, patent cross license that commenced on
January 1, 1999. The Company 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 as if the Acquisition had taken place at
the beginning of each period presented.
June 3, May 28,
For the nine months ended 1999 1998
- --------------------------------------------------------------------------
Net sales $2,738.5 $2,958.9
Net loss (68.7) (433.9)
Basic loss per share (0.26) (1.78)
Diluted loss per share (0.26) (1.78)
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. Merger
On September 14, 1998, the Company completed its merger with Rendition. The
Company issued approximately 3.6 million shares of Common Stock in exchange for
all of the outstanding stock of Rendition. The merger qualified as a tax-free
exchange and was accounted for as a business combination using the "pooling-of-
interests" method. Accordingly, the Company's financial statements have been
restated to include the results of Rendition for all periods presented. The
following table presents a reconciliation of net sales and net income (loss) as
previously reported by the Company for the quarter and nine months ended May 28,
1998, to those presented in the accompanying consolidated financial statements.
For the quarter ended MTI Rendition Combined
- --------------------------------------------------------------------------------
Net sales $ 609.9 $ 2.8 $ 612.7
Net loss $ (106.1) $ (3.3) $ (109.4)
For the nine months ended MTI Rendition Combined
- --------------------------------------------------------------------------------
Net sales $2,320.0 $ 13.2 $2,333.2
Net loss $ (144.7) $ (9.1) $ (153.8)
9
Notes to Consolidated Financial Statements, continued
9. Equity investment
On October 19, 1998, the Company issued to Intel approximately 15.8 million
stock rights (the "Rights") for a purchase price of $500 million. The Rights
were converted into non-voting Class A Common Stock of the Company on January
14, 1999. The Class A Common Stock represented approximately 6% of the
Company's outstanding common stock as of June 3, 1999. The Class A Common Stock
will automatically be converted into the Company's common stock upon a transfer
to a holder other than Intel or a 90% owned subsidiary of Intel. 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.
The Company 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 the Company, to the
Company's Board of Directors.
In consideration for Intel's investment, the Company has agreed to commit
to the development of direct Rambus DRAM ("RDRAM") and to certain production and
capital expenditure milestones and to make available to Intel a certain
percentage of its semiconductor memory output over a five-year period, subject
to certain limitations. The conversion ratio of the Class A Common Stock is
subject to adjustment under certain formulae at the election of Intel in the
event MTI fails to meet the production or capital expenditure milestones. No
adjustment will occur to the conversion ratio under such formulae (i) unless the
price of the Company's common stock for a twenty day period ending two days
prior to such milestone dates is lower than $31.625 (the market price of the
Company's common stock at the time of investment), or (ii) if the Company
achieves the production and capital expenditure milestones. In addition, if an
adjustment occurs, in no event will the Company be obligated to issue more than:
(a) a number of additional shares having a value exceeding $150 million, or (b)
15,810,277 shares.
10. Joint Ventures
In connection with the Acquisition, the Company acquired a 30% ownership
interest in TECH Semiconductor Singapore Pte. Ltd. ("TECH") and a 25% ownership
interest in KMT Semiconductor Limited ("KMT"). TECH and KMT operate wafer
fabrication facilities for the manufacture of DRAM products. TECH, which
operates in Singapore, is a joint venture between the Company, the Singapore
Economic Development Board, Canon Inc., and Hewlett-Packard Company. KMT, which
operates in Japan, is a joint venture between the Company and Kobe Steel, Ltd.
TECH and KMT are collectively referred to herein as the "JVs." The Company has
rights and obligations to purchase all of the production meeting its
specifications from the JVs at prices determined quarterly. In addition, the
Company is a party to various agreements whereby the Company receives fees for
services performed on behalf of the JVs. All JV transactions are recognized as
part of the net cost of JV output. The Company accounts for its investments in
these JVs under the equity method.
The Company is amortizing the purchase price allocated to the JV supply
arrangements on a straight-line basis over the remaining contractual life of the
arrangements. Amortization expense from the JV supply arrangements was $0.7
million and $1.9 million, respectively, for the third quarter and first nine
months of 1999.
The Company incurred net costs of $106.1 million and $221.3 million for
product purchases from the JVs in the third quarter and first nine months of
1999, respectively. The Company sold semiconductor memory manufacturing
equipment to the JVs totaling $2.1 million and $3.5 million in the third quarter
and first nine months of 1999, respectively. Aggregate receivables from and
payables to the JVs were $45.5 million and $42.8 million, respectively, as of
June 3, 1999.
10
Notes to Consolidated Financial Statements, continued
11. Commitments and contingencies
As of June 3, 1999, the Company had commitments of approximately $585.6
million for equipment purchases and $46.2 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
effect on the Company's financial position or results of operations.
12. Asset Sale
On May 19, 1999, the Company completed the sale of certain of its flat
panel display assets to PixTech, Inc. ("PixTech"). Pursuant to the terms of the
transaction, in exchange for the transfer of certain assets (including
manufacturing equipment and $4.35 million in cash) and liabilities to PixTech,
the Company received 7,133,562 shares of PixTech Common Stock and warrants to
purchase an additional 310,000 shares of PixTech Common Stock at an exercise
price of $2.25. The Company wrote down its flat panel display assets by $15
million during the second quarter of 1999 in anticipation of this transaction.
13. Subsequent Event
Subsequent to the end of the third quarter, the Company decided to
discontinue funding of its radio frequency identification development ("RFID")
efforts as the Company continues to focus its resources on its core
semiconductor efforts. It is anticipated that the Company's majority owned RFID
subsidiary, Micron Communications, Inc., will cease operations in the fourth
quarter of 1999 resulting in a consolidated pre-tax charge of $9 to $12 million.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
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 63% owned subsidiary, Micron Electronics, Inc.
("MEI"), develops, markets, manufactures and supports PC systems.
On September 30, 1998, the Company completed the acquisition (the
"Acquisition") of substantially all of the semiconductor memory operations (the
"Acquired Operations") of Texas Instruments Incorporated ("TI"). The Company's
results of operations for the first nine months of 1999 reflect eight months'
results of operations for the Acquired 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, 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 3, 1998. All period references are to the Company's fiscal periods
ended June 3, 1999, September 3, 1998, or May 28, 1998, unless otherwise
indicated. All per share amounts are presented on a diluted basis unless
otherwise stated. All 1998 financial data of the Company has been restated to
include the results of operations of Rendition, Inc., which was merged with the
Company on September 11, 1998.
Results of Operations
Third Quarter Nine Months
--------------------- ---------------------
1999 1998 1999 1998
--------------------- ---------------------
Net sales $863.8 $ 612.7 $2,683.2 $2,333.2
Net income (loss) (27.7) (109.4) (51.4) (153.8)
Earnings (loss) per share (0.10) (0.51) (0.20) (0.72)
Per megabit pricing for the Company's semiconductor memory products
declined approximately 26% and 39%, respectively, for the third quarter and
first nine months of 1999 as compared to the corresponding periods of 1998.
Average selling prices per megabit for the Company's entire line of
semiconductor memory products declined 21% comparing the third quarter of 1999
to the second quarter of 1999. Average selling prices for the Company's primary
product, the 64 Meg Synchronous DRAM ("SDRAM") declined by 27% in the same
period. This deterioration in average selling prices has had an adverse effect
on the Company's results of operations. The Company is unable to predict pricing
conditions for future periods.
For the second quarter of 1999, net income was $22 million, or $0.08 per
share, on net sales of $1,026 million. Results of operations for the first nine
months of 1999 were adversely affected by a $15 million write down of certain of
the Company's flat panel display assets in the second quarter.
Net Sales
Third Quarter Third Quarter
------------------------------------ -------------------------------------
1999 1998 1999 1998
------------------------------------ -------------------------------------
Net Sales % Net Sales % Net Sales % Net Sales %
------------------------------------ -------------------------------------
Semiconductor memory products $ 593.0 68.7 $ 290.2 47.4 $ 1,699.6 63.3 $ 1,013.8 43.4
PC systems 270.8 31.3 310.3 50.6 932.4 34.8 1,151.9 49.4
Other 0.0 0.0 12.2 2.0 51.2 1.9 167.5 7.2
------- ----- ------- ----- --------- ----- --------- -----
Total net sales $ 863.8 100.0 $ 612.7 100.0 $ 2,683.2 100.0 $ 2,333.2 100.0
======= ===== ======= ===== ========= ===== ========= =====
Semiconductor memory products' net sales include MTI semiconductor memory
products incorporated in MEI PC products. Such sales totaled $10.6 million and
$5.8 million in the third quarters of 1999 and 1998, respectively,
12
and $35.7 million and $23.4 million in the first nine months of 1999 and 1998,
respectively. "Other" net sales for the first nine months of 1998 include
revenue of $123.6 million from MEI's contract manufacturing subsidiary, which
was sold in February 1998.
Net sales of semiconductor memory products for the third quarter and first
nine months of 1999 increased by 104% and 68%, respectively, as compared to the
corresponding periods of 1998. The increase in net sales for these periods was
primarily due to an increase in megabits of semiconductor memory sold and was
partially offset by lower average selling prices. Total megabits sold increased
by approximately 175% for both the third quarter and first nine months of 1999,
as compared to the corresponding periods of 1998. Megabit sales increased as
the Company increased its market share with major OEMs and expanded its customer
base. The Company's ability to meet these increased shipments was the result of
production gains principally due to shifts in the Company's mix of semiconductor
memory products to higher average density products, ongoing transitions to
successive reduced die size ("shrink") versions of existing memory products and,
to a lesser extent, additional output from the Acquired Operations. Average
selling prices per megabit of memory declined 26% comparing the third quarter of
1999 to the third quarter of 1998 and declined 39% comparing the first nine
months of 1999 to the first nine months of 1998. The Company's principal memory
product in the third quarter and first nine months of 1999 was the 64 Meg SDRAM,
which comprised approximately 66% of the net sales of semiconductor memory for
these periods. Net sales of semiconductor memory products decreased by 15% in
the third quarter of 1999 as compared to the second quarter of 1999 principally
due to a 21% decline in per megabit pricing, partially offset by an 8% increase
in total megabits sold.
Net sales of PC systems were lower in the third quarter and first nine months
of 1999 compared to the corresponding periods of 1998 primarily as a result of
declines in overall average selling prices of 6% and 13%, respectively. Unit
sales were relatively flat comparing the third quarter and first nine months of
1999 with the corresponding periods of 1998. Net sales of PC systems for the
third quarter of 1999 were lower than for the second quarter of 1999 primarily
as a result of a 13% decrease in unit sales. Declining sales in the consumer
business, partially offset by an increase in commercial and government sales,
was the primary reason for the overall decline in sales of the Company's PC
systems. Average selling prices for PC systems were relatively flat comparing
the third quarter of 1999 with the second quarter of 1999.
Gross Margin
Third Quarter Nine Months
---------------------------- ---------------------------
1999 % Change 1998 1999 % Change 1998
---------------------------- ---------------------------
Gross margin $189.0 2,720.9% $ 6.7 $585.6 144.4% $239.6
as a % of net sales 21.9% 1.1% 21.8% 10.3%
The Company's gross margin percentage on sales of semiconductor memory
products was 23% for the third quarter and first nine months of 1999, compared
to (20)% and 10%, respectively, for the corresponding periods of 1998. The
increase in gross margin percentage on sales of semiconductor memory products
for the third quarter and first nine months of 1999 compared to the
corresponding periods in 1998 was primarily the result of decreases in per
megabit manufacturing costs. Comparative decreases in per megabit manufacturing
costs were achieved primarily through shifts in the Company's mix of
semiconductor memory products to higher average density products and transitions
to shrink versions of existing products. The effect of these factors was
partially offset by decreases in average selling prices, and to a lesser extent,
the inclusion of eight months of results for the Acquired Operations which have
higher per-unit manufacturing costs.
The gross margin percentage on the Company's semiconductor memory products for
the second quarter of 1999 was 32%. The decline in gross margin percentage for
semiconductor memory products in the third quarter as compared to the second
quarter of 1999 was primarily the result of the 21% decline in average selling
prices per megabit of memory. The effect on gross margin of this decline in
average selling prices was partially offset by decreases in per megabit
manufacturing costs achieved through continued increases in production
efficiencies, including ongoing transitions to shrink versions of existing
memory products, shifts in the Company's mix of semiconductor memory products to
higher average density products, and an increase in the number of wafers
processed. In the third quarter of 1999, the Company produced approximately 17%
more megabits of memory than in the second quarter.
13
In connection with the Acquisition, the Company acquired the right and
obligation to purchase all of the production meeting its specifications from two
joint ventures, TECH Semiconductor Singapore Pte. Ltd. ("TECH") and KMT
Semiconductor Limited ("KMT"). TECH and KMT are collectively referred to herein
as the "JVs." The Company purchases assembled and tested components from the
JVs at prices determined quarterly and which are based on the Company's average
sales prices. Primarily as a result of the rate of decline in average selling
prices, the Company essentially broke even on gross margins for JV products sold
in the third quarter of 1999. In any future reporting period, gross margins
resulting from the Company's sales of JV product may positively or negatively
impact gross margins otherwise realized for semiconductor memory products
manufactured in the Company's wholly-owned facilities.
The gross margin percentage for the Company's PC operations for the third
quarter and first nine months of 1999 was 16% and 15%, respectively, compared to
19% and 10% for the corresponding periods of 1998. The gross margin for the
Company's PC operations was 14% for the second quarter of 1999. The gross
margin in the first nine months of 1998 was negatively impacted by a decline in
average selling prices of the Company's notebook products. Absent the effects
of sales of notebook systems in the third quarter of 1998 which were sold at
prices higher than anticipated in the write down of such products in the
preceding quarter, the Company's overall PC gross margin percentage would have
been approximately 17% in the third quarter of 1998. PC gross margins in the
third quarter of 1999 improved from the second quarter of 1999 primarily due to
better product line management and reduced levels of product returns. The
Company expects to continue to experience significant pressure on PC gross
margins as a result of intense competition in the PC industry and consumer
expectations of more powerful PC systems at lower prices.
Selling, General and Administrative
Third Quarter Nine Months
------------------------------ ---------------------------
1999 % Change 1998 1999 % Change 1998
------------------------------ ---------------------------
Selling, general and administrative $124.1 11.4% $111.4 $352.7 (6.2)% $376.0
as a % of net sales 14.4% 18.2% 13.1% 16.1%
Selling, general and administrative expenses were higher in the third quarter
and lower in the first nine months of 1999 as compared to the corresponding
periods of 1998. Selling, general and administrative expenses for the Company's
PC operations decreased substantially for these comparative periods primarily as
a result of enhanced operational efficiencies and cost reductions achieved by
the Company's PC operations and the sale of 90% of MEI's interest in its
contract manufacturing subsidiary in fiscal 1998. Selling, general and
administrative expenses associated with the Company's semiconductor memory
operations increased significantly for the third quarter and first nine months
of 1999 as compared to the corresponding periods of 1998 and include
approximately $11 million and $33 million, respectively, in expenses associated
with the Acquired Operations. Selling, general and administrative expenses for
the first nine months of 1998 reflect a $6 million contribution to a university
in support of engineering education. Selling, general and administrative
expenses were flat comparing the third quarter to the second quarter of 1999.
Implementation of new business software systems within the Company's
semiconductor memory operations may increase depreciation expense by up to $3
million per quarter by the end of fiscal 2000.
Research and Development
Third Quarter Nine Months
--------------------------- ----------------------------
1999 % Change 1998 1999 % Change 1998
--------------------------- ----------------------------
Research and development $81.6 15.4% $70.7 $234.7 11.8% $209.9
as a % of net sales 9.4% 11.5% 8.7% 9.0%
Research and development expenses relating to the Company's semiconductor
memory operations, which constitute substantially all of the Company's 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 design of shrink versions of the Company's 64 and 128 Meg SDRAMs
and on design and development of the Company's 256 Meg SDRAM and direct Rambus
DRAM ("RDRAM"), Double Data Rate ("DDR"), SyncLink DRAM ("SLDRAM"), Flash and
SRAM memory products. Other research and development
14
efforts are currently devoted to the design and development of graphics
accelerator products, PC systems and PC core logic.
Research and development expenses in the third quarter and first nine months
of 1999 include costs of resources obtained in the Acquisition being utilized to
broaden the Company's range of DRAM product offerings. The expansion of product
offerings is considered necessary to support the customer base required for sale
of the Company's increased production.
The Company substantially transitioned all operations from .25 micron (u) to
.21u process technology at its Boise site early in the second quarter of 1999
and expects to further transition such operations to .18u in late calendar 1999.
The Company anticipates that process technology will move to .15u line widths in
the next few years as needed for the development of future generation
semiconductor products. Transitions to smaller line widths at the Acquired
Operations are expected to lag behind transitions at the Boise site by several
months as process technology development and initial manufacturing is expected
to be completed first at the Boise site.
Other Operating Expense, net
Other operating expense for the third quarter of 1999 includes a net $13
million loss from the write down and disposal of semiconductor memory operations
equipment. Other operating expense for the first nine months of 1999 includes a
$15 million second quarter charge to write down flat panel display assets,
partially offset by a $5 million reduction in employee benefit accruals in the
third quarter and $5 million from the cancellation of a compensation program in
the second quarter.
Other operating expense for the first nine months of 1998 includes charges
associated with the Company's PC Operations of $13 million resulting from
employee termination benefits and consolidation of domestic and international
operations and $5 million from the write off of software development costs, as
well as $9 million related to the disposal and write down of semiconductor
memory operations equipment.
It is anticipated that the Company will record a consolidated pre-tax charge
of $9 to $12 million to other expense in the fourth quarter as the result of the
discontinuation of its radio frequency identification ("RFID") development
efforts. (See "Subsequent Event")
Income Taxes
The effective tax rate for the third quarter and first nine months of 1999 was
approximately 40%, primarily reflecting the U.S. corporate income tax rate and
the net effect of state taxation. The Company is currently evaluating permanent
reinvestment of foreign earnings associated with certain of the Company's
international operations which have been granted favorable tax treatment. Taxes
on earnings of domestic subsidiaries not consolidated for tax purposes may cause
the effective tax rate to vary significantly from period to period.
The effective tax rate for the third quarter and first nine months of 1998 was
40% and 35%, respectively. The income tax rate for the first nine months of
1998 reflects the write off in the second quarter of 1998 of a $4 million
deferred tax asset relating to the Company's consolidation of its NetFRAME
enterprise server operations.
Recently Issued Accounting Standards
Recently issued accounting standards include Statement of Financial Accounting
Standards ("SFAS") No. 131 "Disclosures about Segments of an Enterprise and
Related Information," issued by the FASB in June 1997, 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 SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," issued by the
FASB in June 1998.
SFAS No. 131 requires public 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 operating decision-makers.
Implementation of SFAS No. 131 is required for the Company's year end 1999.
15
SOP 98-1 requires companies to capitalize certain costs of computer software
developed or obtained for internal use. The Company, which currently
capitalizes costs of purchased internal-use computer software and expenses costs
of internally developed internal-use software as incurred, expects to adopt the
standard in the first quarter of 2000 for developmental costs incurred in that
quarter and thereafter. The adoption is expected to result in an initial
decrease in selling, general and administrative expense due to the
capitalization of certain business system software costs that are not being
capitalized under the Company's current practice. Subsequent period expenses
are expected to reflect a higher level of depreciation expense resulting from
the relatively higher carrying value of the Company's capitalized software
accounted for under SOP 98-1.
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 Company is currently
evaluating the effect SFAS 133 will have on its future results of operations and
financial position.
Liquidity and Capital Resources
As of June 3, 1999, the Company had cash and liquid investments totaling $1.7
billion, representing an increase of $1.0 billion during the first nine months
of 1999. In the first quarter of 1999, the Company received $681 million in
conjunction with the Acquisition and $500 million from the sale of stock to
Intel Corporation. The Company's other principal source of liquidity during the
first nine months of 1999 was net cash flow from operations of $564 million.
The principal uses of funds during the first nine months of 1999 were $514
million for property, plant and equipment expenditures, $312 million for
repayments of equipment contracts and debt and a $118 million increase in
inventory.
The Company believes that in order to transition the Acquired Operations to
the Company's product and process technology, 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 1999 for purchases of equipment and for construction and
improvement of buildings, of which it has spent approximately $649 million to
date. As of June 3, 1999, the Company had entered into contracts extending into
2000 for approximately $586 million for equipment purchases and approximately
$46 million for the construction of facilities.
The Company has an aggregate of $500 million in revolving credit agreements,
including a $400 million secured agreement expiring in May 2000 which contains
certain restrictive covenants pertaining to the Company's semiconductor memory
operations, including a maximum total debt to equity ratio. As of June 3, 1999,
the Company was in compliance with all covenants under the facilities and had no
borrowings outstanding under the agreements. There can be no assurance that the
Company will continue to be able to meet the terms of the covenants and
conditions in the agreements, borrow under the agreements or negotiate
satisfactory successor agreements.
As of June 3, 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
16
Significant Transactions - Acquisition
On September 30, 1998, the Company completed its acquisition of substantially
all of TI's memory operations. The Acquisition was consummated through the
issuance of debt and equity securities. TI received 28.9 million shares of MTI
common stock, $740 million principal amount of convertible notes (the
"Convertible Notes") and $210 million principal amount of subordinated notes
(the "Subordinated Notes"). In addition to TI's net memory assets, the Company
received $681 million in cash. The Company and TI also entered into a ten-year,
royalty-free, life-of-patents, patent cross license that commenced on January 1,
1999.
The MTI common stock, Convertible Notes and Subordinated Notes issued in the
transaction have not been registered under the Securities Act of 1933, as
amended, and are, therefore, subject to certain restrictions on resale. The
Company and TI entered into a securities rights and restrictions agreement as
part of the transaction which provides TI with certain registration rights and
places certain restrictions on TI's voting rights and other activities with
respect to shares of MTI common stock. The Convertible Notes and the
Subordinated Notes issued in the transaction bear interest at the rate of 6.5%
and have a term of seven years. The Convertible Notes are convertible into 12.3
million shares of MTI common stock at a conversion price of $60 per share. The
Convertible Notes are not subject to redemption prior to October 2000 and are
redeemable from that date through October 2002 only if the common stock price is
at least $78.00 for a specified trading period. The Subordinated Notes are
subordinated to the Convertible Notes, the Company's outstanding 7% Convertible
Subordinated Notes due July, 2004, and substantially all of the Company's other
indebtedness.
The assets acquired by the Company in the Acquisition include a wafer
fabrication operation in Avezzano, Italy, an assembly/test operation in
Singapore, and an inactive wafer fabrication facility in Richardson, Texas. Also
included in the Acquisition was TI's minority interest in two joint ventures,
TECH and KMT, and TI's rights and obligations to purchase 100% of the joint
venture production meeting the Company's specifications. TECH, which operates in
Singapore, is now owned by the Company, Canon, Inc., Hewlett-Packard Singapore
(Private) Limited, a subsidiary of Hewlett Packard Company, and EDB Investments
Pte. Ltd., which is controlled by the Economic Development Board of the
Singapore government; and KMT, which operates in Japan, is now owned by the
Company and Kobe Steel, Ltd. MTI acquired a 30% interest in TECH and a 25%
interest in KMT. The Company filed Form 8-K/A on October 16, 1998, which
incorporates historical and pro forma financial information with respect to the
Acquisition. Pro forma financial information is also included in the notes to
the financial statements in this Form 10-Q.
Although the Company believes the Acquisition further leverages its
technology, the Company anticipates that the Acquisition will continue to have a
near term adverse impact upon the Company's results of operations and cash
flows. The Company is in the process of transferring its .21u and .18u product
and process technology into the Acquired Operations (primarily the wholly owned
fabrication facilities in Avezzano, Italy and the joint-venture facilities) and
expects the transfer to be substantially complete by 1999 calendar year end.
Output of the Company's semiconductor memory products has increased directly as
a result of the manufacturing capacity obtained in the Acquisition and should
increase further as a result of the transfer of the Company's product and
process technology to the Acquired Operations. Until the Company is able to
complete the transfer of its product and process technology into the Acquired
Operations, the Company expects that the per unit costs associated with products
manufactured at the Acquired Operations will continue to significantly exceed
the per unit costs of products manufactured at the Company's Boise, Idaho
facility, resulting in a near-term adverse impact on the Company's gross margin
percentage. The ten-year, royalty-free, life-of-patents, patent cross license
entered into with TI resulted in a reduction in the Company's royalty expenses
beginning January 1999.
Subsequent Event
Subsequent to the end of the third quarter, the Company decided to discontinue
funding of its RFID development efforts as the Company continues to focus its
resources on its core semiconductor efforts. It is anticipated that the
Company's majority owned RFID subsidiary, Micron Communications, Inc., will
cease operations in the fourth quarter resulting in a consolidated pre-tax
charge of $9 to $12 million.
17
Year 2000
Like many other companies, the Year 2000 computer issue creates risks for the
Company. If internal systems do not correctly recognize and process date
information beyond the year 1999, the Company's operations could be adversely
impacted as a result of system failures and business process interruption.
Semiconductor Operations
The Company has been addressing the Year 2000 computer issue for its
semiconductor operations with a plan that began in early 1996. To manage its
Year 2000 program, the Company has divided its efforts into the primary program
areas of: (i) information technology ("IT"), which includes computer and network
hardware, operating systems, purchased development tools, third-party and
internally developed software, files and databases, end-user extracts and
electronic interfaces; (ii) embedded technology within manufacturing and
facilitation equipment; and (iii) external dependencies, which include
relationships with suppliers and customers.
The Company is following four general steps for each of these program areas:
"Ownership," wherein each department manager is responsible for assigning
ownership for the various Year 2000 issues to be tested; "Identification" of
systems and equipment and the collection of Year 2000 data in a centralized
place to track results of compliance testing and subsequent remediation;
"Compliance Testing," which includes the determination of the specific test
routine to be performed on the software or equipment and determination of year
2000 compliance for the item being tested; and "Remediation," which involves
implementation of corrective action, verification of successful implementation,
finalization of, and, if need be, execution of, contingency plans.
As of June 3, 1999, the Ownership and Identification steps were essentially
complete for all three program areas: IT, manufacturing and facilitation
equipment and external dependencies. The Compliance Testing and Remediation
steps are substantially complete for the IT area at the Boise site. The Company
is relying in part on TI computer networks, information technology services and
licensed software with respect to certain of the recently acquired semiconductor
operations, much of which is currently used by TI in its manufacturing
processes. The Company is taking various steps to remove its dependence on the
TI systems, including the implementation of new business systems beginning in
September 1999. Nonetheless, dependency upon TI systems will span calendar years
1999 and 2000, and Year 2000 issues may arise. The Company is working with TI to
identify and correct any Year 2000 issues, and at this time does not anticipate
any material Year 2000 issues with respect to the TI systems. (See "Certain
Factors")
Compliance Testing of semiconductor manufacturing and facilitation equipment
is over 85% complete, and Remediation efforts for tested equipment is in excess
of 90% complete. The Company is working with suppliers of products and services
to determine and monitor their level of compliance and Compliance Testing. Year
2000 readiness of significant customers is also being assessed. The Company's
evaluation of Year 2000 compliance as it relates to the Company's external
dependencies is substantially complete.
As of June 3, 1999, the Company had incurred aggregate incremental costs of
approximately $2.5 million and estimates it will spend an additional $1 million
to address the Year 2000 issue with respect to its semiconductor operations. The
Company is executing its Year 2000 readiness plan solely through its employees.
Year 2000 Compliance Testing and reprogramming is being done in conjunction with
other ongoing maintenance and reprogramming efforts.
With respect to Remediation, the Company has prepared various types of
contingency plans to address potential problem areas with internal systems and
with suppliers and other third parties. Internally, each software and hardware
system has been assigned to on-call personnel who are responsible for bringing
the system back on line in the event of a failure. Externally, the Company's
Year 2000 plan includes identification of alternate sources for providers of
goods and services. The Company has completed its internal contingency plans and
expects its external contingency plans to be substantially complete by the third
calendar quarter of 1999.
18
PC operations
The Company's PC operations have been addressing the Year 2000 issue
independently but in a manner similar to the Company's semiconductor operations.
With respect to IT systems for the Company's PC operations, MEI believes, as
of June 3, 1999, that the inventory, assessment and remediation phases are
essentially complete, and quality assurance testing is approximately 25%
complete. With respect to non-IT systems, the inventory and assessment phases
are essentially complete and the remediation phase is approximately 90%
complete. MEI estimates August 1999 for completion of remediation of its mission
critical IT and non-IT systems, with the remainder of calendar 1999 to be used
for resolution of any unforeseen difficulties and quality assurance testing. As
of June 3, 1999, MEI had incurred aggregate incremental costs of approximately
$2 million and estimates it will spend an additional $1 to $2 million to address
the Year 2000 issue with respect to its PC operations.
MEI's contingency plan generally contemplates replacement or alternative
sources of those goods and services necessary to the Company's manufacturing and
business operations. MEI expects that development of contingency plans for its
PC operations will continue through calendar 1999.
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 3, 1998, 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 approximate 30% on an
annualized basis; however, significant fluctuations from this rate have occurred
from time to time, including in recent years.
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 has 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
Company's finished goods inventory increased substantially during the third
quarter due to the current market oversupply of semiconductor memory products
and the expansion of the Company's mix of semiconductor memory product
offerings. The semiconductor industry in general, and the DRAM market in
particular, has experienced a severe downturn. Per megabit prices declined
approximately 60% in 1998 following a 75% decline in 1997 and a 45% decline in
1996 and pricing is down approximately 39% for the first nine months of 1999 as
compared to the first nine months of 1998. The Company is unable to predict
pricing conditions for future periods. In the event that average selling prices
continue to 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 would be increasingly 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 capacity leading to further downward
pressures on prices. Consolidation by competitors in the semiconductor memory
industry may place the Company at a disadvantage in competing with competitors
that have greater capital resources and could create the potential for greater
worldwide investment in semiconductor memory capacity which could further exert
downward pressure on prices. In 1998, many of the Company's Korean and Japanese
semiconductor memory competitors were impacted by deteriorating economic
conditions in Southeast Asia, resulting in decreased capital investment by
Korean and Japanese DRAM manufacturers. Recent evidence of economic improvement
in the region, particularly Korea, could indicate increased sources of capital
may be or may become available to finance technology advancements and expansion
projects, and could result in a significant increase in worldwide supply leading
to
19
further downward pricing pressure. In addition, if the Company is successful in
the transfer of its product and process technology into the acquired fabrication
facilities, the amount of worldwide semiconductor memory capacity could
increase, resulting in further downward pricing pressure on the Company's
semiconductor memory products.
Approximately 85% of the Company's sales of semiconductor memory products
during the third quarter of 1999 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 that
influence prices for the Company's semiconductor memory products.
On September 30, 1998, the Company acquired substantially all of TI's memory
operations. The integration and successful operation of the Acquired Operations
is dependent upon a number of factors, including, but not limited to, the
Company's ability to transfer its product and process technology in a timely and
cost-effective manner into the wholly-owned acquired fabrication facility and
joint venture facilities. The Company is in the process of transferring its
.21 (micron) and .18 (micron) product and process technology into these
fabrication facilities and expects the transfer to be substantially complete
by the end of calendar 1999. However, there can be no assurance that the
Company will be able to meet this timeline. Until such time as the Company is
able to complete the transfer of its product and process technology into the
acquired fabrication facilities, it is expected that the per unit costs
associated with the products manufactured at the acquired fabrication
facilities will continue to significantly exceed the per unit costs of
products manufactured at the Company's Boise, Idaho, facility. As a result, it
is expected that the Acquisition will continue to have a near term adverse
effect on the Company's results of operations and cash flows.
Over the past several years the Company's productivity gains have continued
to increase its semiconductor memory output. In addition, as a result of the
Acquisition the Company expects its production levels to increase further in
the future. In recent periods, sales of additional output have been achieved
by increasing market share with several of the Company's 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 experiences reductions in the level of OEM orders, the Company's
results of operations and cash flows could be adversely affected.
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 RDRAM, DDR and
SLDRAM, 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 test and
assembly 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 increases 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 Acquisition is expected to continue to have a significant effect on the
Company's future results of operations and cash flows, including, but not
limited to: a negative impact on gross margin in the near term due in
20
part to significantly higher per unit manufacturing costs at the Acquired
Operations; costs related to the assimilation of the Acquired Operations;
increased selling, general and administrative expenses in support of the larger
and more geographically dispersed operations; increased research and development
expense associated with the Company's efforts to broaden its range of DRAM
product offerings; increased interest expense associated with the Convertible
Notes and Subordinated Notes issued in the transaction and increased capital
spending relating to the wholly-owned Acquired Operations in Avezzano, Italy and
Singapore.
The Company has limited experience in integrating or operating geographically
dispersed manufacturing facilities. The integration and operation of the
acquired facilities has placed, and continues to place, strains on the Company's
management and information systems resources. Failure by the Company to
effectively manage the integration of the acquired facilities could have a
material adverse effect on the Company's results of operations.
In connection with the Acquisition, the Company and TI entered into a
transition services agreement requiring TI to provide certain services and
support to the Company for specified periods following the Acquisition. Among
other items, TI is to provide information technology, finance and accounting,
human resources, equipment maintenance, facilities and purchasing services under
the services agreement. The successful integration and operation of the acquired
facilities is partially dependent upon the continued successful provision of
services by TI under the services agreement. There can be no assurance that the
services and support called for under the services agreement will be provided in
a manner sufficient to meet anticipated requirements. The failure to obtain
sufficient services and support could impair the Company's ability to
successfully integrate the acquired facilities and could have a material adverse
affect on the Company's results of operations.
In accordance with the transition services agreement, the Company continues to
rely in part on TI computer networks and information technology services with
respect to certain of the Acquired Operations. During this period and beyond,
the Company will also be utilizing software obtained or licensed from TI to
conduct specific portions of the business. Dependency upon TI systems will span
calendar years 1999 and 2000, during which period Year 2000 issues may arise.
The Company is planning for the implementation of new business systems beginning
in September 1999, which is expected to eliminate some of the Company's
dependence on TI systems. Failure to successfully implement the first stages of
these successor business systems would complicate the Company's dependence upon
TI systems. If unforeseen difficulties are encountered in ending the Company's
reliance upon TI's software, hardware or services or in segregating the
companies' information technology operations or with Year 2000 issues, the
Company's results of operations could be materially adversely affected.
In connection with the Acquisition, the Company acquired the right and
obligation to purchase all of the production meeting its specifications from its
JVs. The Company purchases assembled and tested components from the JVs at
prices determined quarterly and which are based on the Company's average sales
prices. Primarily as a result of the rate of decline in average selling prices,
the Company essentially broke even on gross margins for JV products sold in the
third quarter of 1999. In any future reporting period, gross margins resulting
from the Company's sales of JV product may positively or negatively impact gross
margins otherwise realized for semiconductor memory products manufactured in the
Company's wholly-owned facilities. In an ongoing industry condition of relative
over supply, both TECH and KMT may experience financial conditions requiring
additional financing to sustain operations. There can be no assurance that TECH
or KMT will be able to secure adequate financing, thereby potentially impacting
the Company's supply of product from one or both of these JVs.
International sales comprised approximately 27% and 28%, respectively, of the
Company's net sales in the third quarter and first nine months of 1999, as
compared to 20% in 1998. The Company expects international sales to continue to
increase as a result of the Acquisition. International sales and operations are
subject to a variety of risks, including those arising from currency
fluctuations, export duties, changes to import and export regulations, possible
restrictions on the transfer of funds, employee turnover, labor unrest, longer
payment cycles, greater difficulty in collecting accounts receivable, the
burdens and costs of compliance with a variety of international laws and, in
certain parts of the world, political 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 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,
21
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 and semiconductor
memory products, 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. 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.
The PC industry is highly competitive and has been 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. The Company's PC operations compete with a
number of PC manufacturers, which sell their products primarily through direct
channels, including Dell Computer Corp. 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, 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, retail
stores and direct sales forces, 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, consumer expectations of more powerful PC
systems at lower prices and the relatively recent introduction and proliferation
of products in the "sub-$1,000" PC markets.
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. Cash generated by MEI is not
readily available to finance operations or other expenditures of MTI's
semiconductor memory operations. The Company has an aggregate of $500 million in
revolving credit agreements, $100 million of which is available to PC operations
and $400 million of which is available to semiconductor memory operations. The
$400 million facility expires in May 2000 and the $100 million facility expires
in June 2001. There can be no assurance that either or both of the facilities
will be renewed. Each of the respective facilities contains certain financial
and other restrictive covenants pertaining to the Company's operations. There
can be no assurance that the Company will continue to be able to meet the terms
of the covenants or be able to borrow the full amount of the credit facilities.
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.
As of June 3, 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 June
3, 1999, the Company had convertible subordinated notes with a face value of
$500 million outstanding which are registered with the SEC and 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 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
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 June 3, 1999, the Company had
invested approximately $710 million in the Lehi facility. Timing of 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 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.
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 engages in worldwide operations and 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. The Company has experienced, and expects to
continue to experience, increased recruitment of its existing personnel by other
employers. The Company's ability to retain key acquired personnel will be a
critical factor in the Company's ability to successfully integrate the Acquired
Operations. 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.
23
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, and 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. The Company's results of operations and financial position for the
first nine months of 1999 reflect a higher volume of foreign currency
transactions and account balances than in previous periods related to the
foreign operations obtained through the Acquisition. As of June 3, 1999, the
Company held aggregate cash and receivables in foreign currency valued at
approximately US $41 million and aggregate foreign currency payables valued at
approximately US $87 million (including long-term liabilities denominated in
Italian Lira valued at approximately US $17 million). Foreign currency
receivables and payables are comprised primarily of Italian Lira, Singapore
Dollars, Japanese Yen and British Pounds.
24
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders
- --------------------------------------------------------
The registrant's 1998 Annual Meeting of Shareholders was held on January 14,
1999. 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 225,154,554 2,618,813
James W. Bagley 225,343,551 2,429,816
Robert A. Lothrop 225,138,478 2,634,889
Thomas T. Nicholson 225,312,482 2,460,885
Don J. Simplot 225,100,462 2,672,905
John R. Simplot 225,274,734 2,498,633
Gordon C. Smith 225,317,612 2,455,755
William P. Weber 225,346,282 2,427,085
(b) The amendment to the Company's Certificate of Incorporation was approved
with 177,536,151 votes in favor, 16,854,355 votes against, 1,030,526 abstentions
and 32,352,335 broker non-votes.
(c) The amendment to the 1989 Employee Stock Purchase Plan was approved with
222,791,913 votes in favor, 3,771,250 votes against, 1,210,204 abstentions and 0
broker non-votes.
(d) The 1998 Non-Employee Director Stock Incentive Plan was approved with
206,171,261 votes in favor, 20,189,950 votes against, 1,412,155 abstentions and
0 broker non-votes.
(e) The ratification and appointment of PricewaterhouseCoopers LLP as
independent public accountants of the Company for the fiscal year ending
September 2, 1999 was approved with 226,747,712 votes in favor, 360,382 votes
against, 665,273 abstentions and 0 broker non-votes.
Item 5. Other Matters
- ----------------------
On July 7, 1999, the Company filed a report on Form 8-K relating to the
resignation of Mr. John R. Simplot from the Company's Board of Directors.
25
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
10.110 1994 Stock Option Plan
10.128 Nonstatutory Stock Option Plan
10.132 1998 Nonstatutory Stock Option Plan
10.139 1989 Employee Stock Purchase Plan
10.140 1998 Non-Employee Director Stock Incentive Plan
27 Financial Data Schedule
(b) The registrant did not file any reports on Form 8-K during the fiscal
quarter ended June 3, 1999.
26
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: July 16, 1999 /s/ Wilbur G. Stover, Jr.
-------------------------------------------------
Wilbur G. Stover, Jr., Vice President of Finance
and Chief Financial Officer (Principal Financial
and Accounting Officer)
27