Some excerpts from the 10-Q:
Management's Discussion and Analysis of Financial Condition and Results
RESULTS OF OPERATIONS
...Average selling prices per megabit of memory declined
approximately 50% from the second quarter of 1997 to the second quarter of 1998
and 46% from the first six months of 1997 to the first six months of 1998. The
Company's principal memory product in the second quarter and first six months of
1998 was the 16 Meg DRAM, which comprised approximately 78% and 84% of the net
sales of semiconductor memory in the second quarter and first six months of
1998, respectively. The 16 Meg SDRAM comprised approximately 40% and 28% of the
total net sales of semiconductor memory in the second quarter and first six
months of 1998, respectively. Total megabits shipped increased by 47% and 85%,
respectively, for the second quarter and first six months of 1998 as compared to
the same periods in 1997, and total megabits produced increased by approximately
70% and 100%, respectively. These production increases were principally the
result of the transition to the 16 Meg DRAM as the Company's principal memory
product, ongoing transitions to successive reduced die size ("shrink") versions
of existing memory products, and enhanced yields on existing memory products.
Net sales of semiconductor memory products for the second quarter of 1998
decreased by 36% as compared to the first quarter of 1998 as a result of a 26%
decline in average selling prices per megabit of memory and a 13% decrease in
megabits shipped. The decrease in megabit shipments from the first quarter to
the second quarter of 1998 was principally due to constraints on the Company's
test capacity. These test capacity constraints were resolved in the last few
weeks of the second quarter, allowing for a 10% increase in megabit production
for the second quarter.
Net sales of PC systems were flat for the second quarter of 1998 compared to
the second quarter of 1997 and increased by 15% for the first six months of 1998
compared to the first six months of 1997. Unit sales of PC systems increased by
7% and 20%, respectively, comparing the second quarter and first six months of
1998 with the corresponding periods of 1997. Average per unit revenue for the
Company's PC systems declined, while non-system revenue increased for the second
quarter and first six months of 1998 compared to the corresponding periods of
1997. Non-system revenue is revenue received from the sale of PC related
products and services separate from the sale of a PC system. Net sales of PC
systems for the second quarter of 1998 were 11% lower than for the first quarter
of 1998 primarily due to a 10% decrease in unit sales of PC systems and a lower
level of non-system revenue...
...Research and development efforts are focused
on advanced process technology, which is the primary determinant in
transitioning to next generation products. Application of advanced process
technology currently is concentrated on development of the Company's 64 Meg and
128 Meg SDRAMs, Double Data Rate (DDR), SynchLink and Rambus memory products.
The PC industry is in the process of transitioning from EDO to SDRAM. The
Company has transitioned to SDRAM as its primary DRAM technology, and is in the
process of increasing the ratio of 64 Meg DRAMs relative to 16 Meg DRAMs in its
product mix. Other research and development efforts are devoted to the design
and development of Flash, SRAM, embedded memory, RIC, flat panel display
products and PC systems.
The Company anticipates completion of the transition from .30 micron (u) to
.25 (u) in fiscal 1999 and anticipates that process technology will move to line
widths of .21 (u), .18 (u), and .15 (u) in the next few years as needed for the
development of future generation semiconductor products.
LIQUIDITY AND CAPITAL RESOURCES
As of February 26, 1998, the Company had cash and liquid investments totaling
$935 million, representing a decrease of $53 million during the first six months
of 1998. Approximately $351 million of the Company's consolidated cash and liquid investments was held by MEI. Cash generated by MEI is not readily available or anticipated to be available to finance operations or other
expenditures of MTI.
The Company's principal sources of liquidity during the first six months of
1998 were net cash proceeds totaling $236 million from the sale of a 90%
interest in MEI's contract manufacturing subsidiary, MCMS, and net cash flow
from operations of $126 million. Cash flow from operations depends
significantly on average selling prices and variable cost per unit for the
Company's semiconductor memory products. The principal uses of funds in the
first six months of 1998 were $381 million for property, plant and equipment and
$93 million for repayments of equipment contracts and debt.
The Company currently estimates it will spend approximately
$1 billion in fiscal 1998 for purchases of equipment and construction and
improvement of buildings. As of February 26, 1998, the Company had entered into
contracts extending into fiscal 2000 for approximately $536 million for
equipment purchases and approximately $55 million for the construction of
facilities. Should the Company elect to cancel its outstanding equipment
purchase commitments, the Company could be subject to cancellation fees in
excess of $135 million. Future capital expenditures will be used primarily to
enhance manufacturing efficiencies and product and process technology at the
Company's existing facilities. As the Company considers its product and process
technology enhancement programs and technology diversification objectives, the
Company has evaluated, and continues to evaluate, possible acquisitions and
strategic alliances. The Company has a $1 billion shelf registration statement
under which $500 million in convertible subordinated notes were issued in July
1997 and under which may be issued from time to time up to an additional $500
million in debt or equity securities.
MTI has a $500 million unsecured revolving credit agreement expiring in May
2000. The agreement contains certain restrictive covenants pertaining to the
Company's semiconductor operations, including a minimum fixed charge coverage
ratio and a maximum operating loss covenant. As of February 26, 1998, MTI was
in compliance with all covenants under the facility and had no borrowings
outstanding under the agreement. There can be no assurance that MTI will
continue to be able to meet the terms of the covenants and conditions and be
able to borrow under the credit agreement.
MEI has an aggregate of $142 million in revolving credit agreements which
contain certain restrictive covenants pertaining to MEI's operations, including
a minimum EBITDA covenant, certain minimum financial ratios and limitations on
the amount of dividends declared or paid by MEI.
For the quarter ended February
26, 1998, MEI was in violation of its ratio of debt to EBITDA covenant, which
excludes the effect of the gain on the sale of MCMS. MEI obtained a waiver for
the violation of the covenant, and as a result was eligible to borrow
approximately $42 million under the credit lines, and had aggregate borrowings
of approximately $9 million outstanding under the agreements.
For most of fiscal 1997 the rate at which the Company was able to
decrease per unit manufacturing costs exceeded the rate of decline in average
selling prices, due mainly to a transition to a higher density product.
However, in the fourth quarter of 1997 and the first six months of 1998 the
Company was unable to decrease per unit manufacturing costs at a rate
commensurate with the decline in average selling prices. In the event that
average selling prices continue to decline at a faster rate than that at which
the Company is able to decrease per unit manufacturing costs, the Company could
be materially adversely affected in its operations, cash flows and financial
condition. Although worldwide excess capacity exists, certain Asian competitors
continue to add capacity for the production of semiconductor memory products.
The amount of capacity to be placed into production and future yield
improvements by the Company's competitors could dramatically increase worldwide
supply of semiconductor memory and increase downward pressure on pricing.
Further, the Company has no firm information with which to determine inventory
levels of its competitors, or to determine the likelihood that substantial
inventory liquidation may occur and cause further downward pressure on pricing.
Worldwide semiconductor pricing is influenced by currency fluctuations. In
calendar 1997 the Korean Won, the New Taiwan Dollar and the Japanese Yen were
devalued significantly, dropping approximately 100%, 20% and 10%, respectively,
compared to the U.S. dollar. The devaluation of these currencies was
particularly severe in the fourth quarter of calendar 1997 and contributed to
the current South Korean credit crisis. South Korean semiconductor competitors
are likely to be particularly affected by the currency devaluations as a result
of substantial debt structures denominated in U.S. dollars. The currency
devaluations and the credit crisis could have a significant adverse impact on
DRAM pricing if the Company's Asian, and particularly Korean, competitors offer
products at significantly lower prices in an effort to maximize cash flows to
service near-term dollar denominated obligations. While the Company cannot
predict the overall impact of the Asian currency devaluations and the Korean
credit crisis, its products may be subject to further downward pricing pressure.
If average selling prices for semiconductor memory products continue to decline,
the Company's results of operations will continue to be adversely affected.
If pricing for the Company's semiconductor products remains at current levels
for an extended period of time or declines further, the Company may be required
to make changes in its operations, including but not limited to, reduction of
the amount or changes in timing of its capital expenditures, renegotiation of
existing debt agreements, reduction of production and workforce levels,
reduction of research and development, or changes in the products produced.
Approximately 70% of the Company's sales of semiconductor memory products
during the second quarter of 1998 were directly into the PC or peripheral
markets. DRAMs are the most widely used semiconductor memory component in most
PC systems. Should the rate of growth of sales of PC systems or the rate of
growth in the amount of memory per PC system decrease, the growth rate for sales
of semiconductor memory could also decrease, placing further downward pressure
on selling prices for the Company's semiconductor memory products. The Company
is unable to predict changes in industry supply, major customer inventory
management strategies, or end user demand, which are significant factors
influencing pricing for the Company's semiconductor memory products.
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In recent periods the PC industry has seen a shift in demand towards sub-$1000
PCs. While the Company cannot predict with any degree of accuracy the future
impact on the PC and semiconductor industry of this shift, possible effects
include, but are not limited to, further downward pricing pressure on PC systems
and further downward pricing pressure on semiconductor memory products.
The Company's transition to SDRAM products
reached approximately 59% of DRAM wafer starts at the end of the second quarter
of 1998. The Company's transition from the 16 Meg to the 64 Meg SDRAM as its
primary memory product is expected to occur in late summer of 1998. It is not
unusual to encounter difficulties in manufacturing while transitioning to shrink
versions of existing products or new generation products. Future gross margins
will be adversely impacted if the Company is unable to efficiently transition to
shrink versions of the 64 Meg SDRAM.
Historically, the Company has reinvested substantially all cash flow from
semiconductor memory operations in capacity expansion and enhancement programs.
The Company's cash flow from operations depends primarily on average selling
prices and per unit manufacturing costs of the Company's semiconductor memory
products. If for any extended period of time average selling prices decline
faster than the rate at which the Company is able to decrease per unit
manufacturing costs, the Company may not be able to generate sufficient cash
flows from operations to sustain operations. The Company has a $500 million
unsecured revolving credit agreement which is available to finance its
semiconductor operations. However, the agreement contains certain restrictive
covenants, including a minimum fixed charge coverage ratio and a maximum
operating losses covenant, which the Company may not be able to meet if
semiconductor market conditions continue to deteriorate. In the event that the
Company does not comply with the covenants, there can be no assurance that the
Company would be able to successfully renegotiate the agreement or obtain a
waiver to the covenants of the existing agreement. In either event, the Company
may not be able to draw on the credit facility. Cash generated by, and credit
lines available to, MEI are not anticipated to be available to finance other MTI
operations.
Completion of the Company's semiconductor manufacturing facility in Lehi, Utah
was suspended in February 1996, as a result of the decline in average selling
prices for semiconductor memory products. As of February 26, 1998 the Company
had invested approximately $655 million in the Lehi facility. The cost to
complete the Lehi facility is estimated to approximate $1.6 billion. Although
additional test capacity for Boise production is anticipated to be provided in
Lehi in 1998, completion of the remainder of the Lehi production facilities is
dependent upon market conditions. Market conditions which the Company expects to
evaluate include, but are not limited to, worldwide market supply and demand of
semiconductor products and the Company's operations, cash flows and alternative
uses of capital. There can be no assurance that the Company will be able to fund
the completion of the Lehi manufacturing facility. The failure by the Company to
complete the facility would likely result in the Company
being required to write off all or a portion of the facility's cost, which could
have a material adverse effect on the Company's business and results of
operations. In addition, in the event that market conditions improve, there can
be no assurance that the Company can commence manufacturing at the Lehi facility
in a timely, cost effective manner that enables it to take advantage of the
improved market conditions. |
