Business Context and Reporting Period
Company: Micron Technology, Inc. (MTI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 28, 1998 (Third Quarter of Fiscal Year 1998)
Business Overview: MTI designs, develops, manufactures, and markets semiconductor memory products, primarily DRAM. Through its subsidiary Micron Electronics, Inc. (MEI), the company also develops and markets PC systems. The semiconductor industry is currently experiencing an unprecedented downturn with average selling prices for memory products declining approximately 95% since the first quarter of fiscal 1996.
Key Financial Metrics
| Metric (in millions) | Q3 1998 | Q3 1997 | 9 Months 1998 | 9 Months 1997 |
|---|---|---|---|---|
| Net Sales | $609.9 | $965.0 | $2,320.0 | $2,569.3 |
| Net Income (Loss) | $(106.1) | $96.8 | $(144.7) | $260.2 |
| Operating Income (Loss) | $(172.3) | $168.9 | $(362.2) | $277.1 |
| Gross Margin % | 1.0% | 32.6% | 10.3% | 26.8% |
| Cash & Equivalents | $507.9 | $619.5 | $507.9 | $433.5 |
| Total Debt (Current + Long-term) | $811.3 | $878.3 | $811.3 | $878.3 |
| Operating Cash Flow (9 Months) | $124.6 | $432.9 | $124.6 | $432.9 |
Note: Q3 1998 results include a $30 million inventory write-down for semiconductor memory products. The 9-month 1998 results include a $157.1 million pre-tax gain from the sale of a 90% interest in the contract manufacturing subsidiary MCMS.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 37% in Q3 1998 compared to Q3 1997, driven by a 68% drop in average selling prices for semiconductor memory products. While megabits shipped increased 80%, price erosion outpaced volume growth.
- Profitability Reversal: The company swung from a net income of $96.8 million in Q3 1997 to a net loss of $106.1 million in Q3 1998. Operating loss for the quarter was $172.3 million.
- Gross Margin Compression: Gross margin percentage collapsed from 32.6% in Q3 1997 to 1.0% in Q3 1998. Semiconductor memory gross margin turned negative (-20%) due to price declines and inventory write-downs.
- Cash Flow Deterioration: Operating cash flow for the first nine months of 1998 was $124.6 million, a significant decrease from $432.9 million in the prior year period, as the rate of price decline surpassed the rate of cost reduction.
- Asset Reduction: Total assets decreased from $4,851.3 million to $4,733.3 million, primarily due to reductions in cash, liquid investments, and receivables.
Guidance, Outlook, and Risks
Pending Acquisitions
- Texas Instruments (TI): On June 18, 1998, MTI agreed to acquire substantially all of TI's memory operations. The deal involves issuing ~28.9 million shares of MTI stock, $740 million in convertible notes, and $210 million in subordinated notes, while assuming ~$190 million of debt. MTI will receive $750 million in cash. Management expects this to have a near-term adverse effect on results due to higher per-unit costs at acquired facilities.
- Rendition, Inc.: On June 22, 1998, MTI agreed to acquire Rendition (graphics accelerators) in a stock-for-stock merger.
Liquidity and Capital Resources
- Financing Needs: Management states that if current market conditions continue, internal liquidity will be insufficient to fund operations. The company is evaluating external financing alternatives.
- Credit Facilities: MTI has a $500 million revolving credit agreement (no borrowings outstanding as of May 28, 1998). On June 16, 1998, the agreement was amended to collateralize the facility and modify the maximum operating loss covenant for Q3 1998.
- Capital Expenditures: Estimated spending for fiscal 1998 is approximately $900 million for equipment and construction. Outstanding commitments are ~$483.8 million for equipment and $24.8 million for buildings.
Key Risks
- Market Conditions: Continued decline in average selling prices for DRAMs, exacerbated by Asian currency devaluations and overcapacity.
- Lehi Facility: Completion of the Lehi, Utah facility (cost to complete estimated at $1.6 billion) is suspended pending market conditions. Failure to complete could result in a material write-off.
- Integration Risk: Successful integration of TI operations depends on transferring technology and restructuring joint ventures (TECH and KTI).
- Intellectual Property: Ongoing litigation risks regarding patent infringement.
Investor Verification Checklist
- Acquisition Closing: Verify the status of regulatory approvals and conditions for the Texas Instruments and Rendition acquisitions.
- Liquidity Status: Monitor the company's ability to secure external financing given the warning that internal cash flows may be insufficient.
- Covenant Compliance: Track compliance with the amended $500 million revolving credit agreement covenants, specifically the maximum operating loss covenant.
- Lehi Facility Decision: Watch for updates on the decision to resume or write off the suspended Lehi, Utah manufacturing facility.
- Price/Cost Dynamics: Assess whether the rate of decline in DRAM selling prices continues to outpace the company's ability to reduce manufacturing costs.