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To: Skeeter Bug who wrote (39444)	9/30/1998 4:12:00 PM
From: Trey McAtee	Respond to of 53903

skeeter-- well, i understand the need to create a positive, and there is one. but for it to be realized the company HAS GOT TO MAKE MONEY. it isnt. to me there is nothing further to understand or look at. good luck to all, trey

To: Skeeter Bug who wrote (39444)	10/1/1998 2:45:00 AM
From: Carl R.	Read Replies (1) \| Respond to of 53903

Never mind the prior post. Apparently you really don't understand. Ed tried to explain it to you, and I will take one more stab at it. When you compute MU's income (or loss), depreciation is subtracted to arrive at a figure called profit. However, Cash Flow is a different number. To get cash flow, start with profit and add back depreciation. The depreciation did not generate the cash, its just that to arrive at profit you subtracted a non-cash expense. In Ed's example you had 20,000 of rent and 20,000 of depreciation, so you report no profit, and end up with 20,000 of cash. Yes the depreciation helps prevent paying taxes, but that isn't the point. The point is that you had cash in your hand, but no profit. Compare that to another business where you buy 20,000 of product and sell it for 20,000. There you have no profit, but this time you have no cash. See the difference? The reason you recognize depreciation is because your asset presumably becomes less valuable. This is where the real estate example isn't appropriate - despite the depreciation the real estate may get more valuable, whereas MU's fab definitely will get a lot less valuable. Looking specifically at MU's year end financials, they reported a net loss of $234 million for the year, but this includes a non-cash expense (depreciation) of $606 million. Thus MU actually generated a positive cash flow from operations of $372 million. The problem was that in order to continue to stay competitive they need to upgrade their equipment again. To end up with the same quality of equipment they would presumably need to buy $606 million worth of equipment, and they didn't generate enough income to do so, so they have a loss. In actuality the new equipment will cost $800 million to 1 billion. When you are expanding it is normal to buy more equipment every year than you have in depreciation, thus consuming cash. So I suppose you could look at it two ways. You could look at net profit, and then figure that in order to expand they need in addition to any loss, they need the difference between their capital budget and their depreciation. Or the simpler way is to look at profit plus depreciation less new equipment purchases. Thus if MU loses $200m next year and has $650 m in depreciation and buys $800 million in equipment they will burn $400 million in cash. Since they have $250m now, they need to come up with the other $150 million somehow if they lose $200m. If they break even, they can fund the expansion with the cash on hand. Hope this clears it up, but I probably just muddied the waters further. The mistake you are making is looking at net loss and thinking that that is how much cash disappeared. Don't think of the depreciation as a source of cash, but rather as a non-cash expense. Carl