Micron Electronics Reports Second Quarter Results
Nampa, Idaho, March 22, 1999—Micron Electronics, Inc. (www.micronpc.com, Nasdaq: MUEI), a leading direct vendor of personal computers, today reported its financial results for the second quarter of fiscal 1999 ended March 4, 1999. Revenues for the second fiscal quarter were $373.6 million compared to $403.5 million in the first fiscal quarter of 1999. Excluding estimated costs for the consolidation and closure of the Company's Japanese operations, net income for the second fiscal quarter was $6.5 million, or $0.07 per diluted share. These results compare to net income of $11.7 million, or $0.12 per diluted share, in the first quarter of fiscal 1999. Reported results for the second fiscal quarter of 1999, including the costs of consolidating and closing the Japanese operation, showed net income of $4.2 million, or $0.04 per diluted share. During the second quarter of 1998, the Company reported net income of $24.8 million, or $0.26 per diluted share, on net sales of $494.8 million. Net income for the second quarter of fiscal 1998 includes a pre-tax loss of $108.4 million which was more than offset by a $156.2 million pre-tax gain from the sale on February 26, 1998 of 90% of the Company's wholly-owned contract manufacturing services subsidiary ("MCMS").
In line with its earnings advisory statement issued March 1, 1999, the Company experienced a consolidated sequential revenue decline of 7% over the first quarter of fiscal 1999. As stated in that advisory, results of the second fiscal quarter of 1999 were unfavorably impacted by factors including: an anticipated seasonal slowdown in the Company's strategic government segment; continued industry pricing pressure in its consumer business; and purchase deferrals from the early promotion and late-quarter timing of Intel's Pentium III processor introduction. The second quarter 1999 sequential revenue decline of 7% compares to a second quarter 1998 sequential revenue decline of 13% excluding net sales of MCMS.
As the Company continues to execute its strategic business transformation plan, other business operations showed continued progress during the quarter, including day's sales of PC inventory at seven days and maintaining an industry-leading position for its cash conversion cycle of negative 21 days. In addition, and in accordance with its plan, the Company experienced solid growth in its mid-market commercial PC business with second fiscal quarter sales increasing by more than 20% when compared to the first fiscal quarter of 1999.
"It was a challenging quarter for Micron Electronics; however, we continued to make progress executing our direct model fundamentals and we began accelerating our business transformation," explained Micron Electronics Chairman and CEO Joel Kocher. "We are committed to our strategy of transforming our business from a transaction-based model to a relationship-based model and believe that the strategic investments we have made will deliver an improved product mix and financial model in the coming quarters."
For the first six months of fiscal 1999, net sales were $777.1 million, compared to net sales for the first six months of the prior year of $911.9 million, which is adjusted to exclude net sales for MCMS of $141.7 million. Net income for the first six months of fiscal 1999 was $15.8 million, or $0.16 per diluted share, compared to net income of $25.8 million, or $0.27 per diluted share, for the corresponding period in fiscal 1998.
Net sales of PC systems declined in the second quarter of fiscal 1999 compared with the first quarter of the fiscal year primarily as a result of a 14% decrease in unit sales which was partially offset by a 4% increase in average selling prices during the quarter. Net sales of SpecTek semiconductor memory products for the second quarter of fiscal 1999 were 27% higher than sales in the first quarter of fiscal 1999 due primarily to an increase in demand.
The Company's consolidated gross margin in the second quarter of fiscal 1999 was 17.0%, compared to the 17.1% reported in the first quarter of fiscal 1999 and 0.9% in the second quarter of fiscal 1998. The Company's PC gross margins in the second quarter of fiscal 1999 were 13.8%, compared to 15.0% in the first quarter of fiscal 1999 and a negative 1.6% in the second quarter of fiscal 1998. The decline in PC gross margin from the first quarter of fiscal 1999 relates primarily to increasing pricing pressure and seasonally higher returns in the consumer segment and the business mix impact from relatively higher consumer and seasonally lower government sales. SpecTek's margin was 37.7%, compared to 36.4% in the first quarter of fiscal 1999 and 15.9% in the second quarter of fiscal 1998.
Selling, general and administrative expenses for the second quarter of fiscal 1999 were $56.2 million versus $52.4 million for the first quarter of fiscal 1999 and $91.9 million in the second quarter of fiscal 1998. The increase over the first quarter includes higher personnel costs due to field sales force expansion, seasonally higher service and support costs in our consumer segment, and higher broadcast and print advertising expenses due to supplemental advertising to counteract the anticipated impact from the early promotion of the Pentium III processor. As a percentage of sales, SG&A expenses were 15.0% in the second quarter of fiscal 1999 versus 13.0% for the first quarter of fiscal 1999 and 18.6% in the second quarter of 1998. The operating loss in the second quarter of fiscal 1998 includes a charge of $13.0 million for employee severance costs and other costs to consolidate the Company's domestic and international PC operations.
Special Note
A brief conference call for the investment community will be held at 3:00pm Mountain Standard Time today. Participants can access the call by dialing 312-470-7207 and the pass code is Micron U.
Statements contained in this press release that are not purely historical are forward-looking statements and are being provided in reliance upon the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding improvement of product mix and financial model. All forward-looking statements are made as of the current date and are based on current management expectations. Micron Electronics assumes no obligation to update any forward-looking statement. Forward-looking statements involve a number of risks and uncertainties. Actual results could differ materially from those contemplated in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, general economic conditions, competitive products and pricing, overall product demand, inventory risks due to shifts in market demand, changes in customer markets, varying costs of operations, changes in technology and other risks identified in the Company's filings with the Securities and Exchange Commission.
Micron Electronics, Inc., and its subsidiaries manufacture electronic products and provide services for a wide range of computing and digital applications. The Company develops, markets, manufactures and supports a full line of award-winning PC systems and network servers for consumer, business, government and educational use. The Company's SpecTek semiconductor memory products operation processes and markets various grades of memory products under the SpecTek brand name. Micron Electronics, Inc. common stock trades on the Nasdaq Stock Market under the symbol MUEI. The Company is majority owned by Micron Technology, Inc. Product information is available by calling 1-800-515-9197 or via the Micron Electronics home page on the Internet at www.micronpc.com.
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MICRON ELECTRONICS, INC. FINANCIAL SUMMARY
(Tabular amounts in thousands, except per share amounts)
Quarter Ended Six Months Ended
March 4, 1999 February 26, 1998 March 4, 1999 February 26, 1998
Net Sales:
PC Systems $323,471 $403,044 $687,630 $862,084
SpecTek Memory Products 50,129 20,194 89,467 49,843
Contract Manufacturing --- 71,522 --- 141,723
Total 373,600 494,760 777,097 1,053,650
Gross Margin:
PC Systems 44,479 (6,262) 98,984 52,616
SpecTek Memory Products 18,913 3,213 33,226 11,458
Contract Manufacturing --- 7,507 --- 17,598
Total 63,392 4,458 132,210 81,672
Gross Margin Percent:
PC Systems 13.8% (1.6)% 14.4% 6.1%
SpecTek Memory Products 37.7% 15.9% 37.1% 23.0%
Contract Manufacturing --- 10.5% --- 12.4%
Total 17.0% 0.9% 17.0% 7.8%
Selling, general and administrative $56,150 $91,938 $108,546 $164,196
Research and development 1,128 3,759 2,579 7,341
Other operating expenses (income) 3,864 19,196 3,906 21,003
Gain on sale of MCMS --- 156,222 --- 156,222
Interest income, net 4,531 1,989 8,559 4,183
Income tax provision 2,611 23,011 9,910 23,707
Net Income 4,169 24,765 15,828 25,830
Earnings per share:
Basic 0.04 0.26 0.16 0.27
Diluted 0.04 0.26 0.16 0.27
Number of shares used in per share calculation:
Basic 96,173 95,622 96,045 95,587
Diluted 97,080 95,735 97,174 95,798
As of March 4, 1999 As of September 3, 1998
Cash and cash equivalents $307,719 $328,537
Liquid investments 61,299 29,204
Receivables 140,043 128,269
Inventories 27,673 30,848
Total current assets 559,307 538,462
Property, plant and equipment, net 154,137 147,912
Total Assets 718,867 692,443
Accounts payable and accrued expenses 234,837 214,930
Current debt 6,599 16,798
Total current liabilities 259,420 250,313
Long-term debt 8,566 11,730
Shareholders' equity 436,996 416,894
A. Periodically, the Company is made aware that technology used by the Company may infringe on intellectual property 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. Resolution of these claims could have a material adverse effect on future results of operations and could require changes in the Company's products or processes.
During the third quarter of fiscal 1997, the Company began to collect and remit applicable sales or use taxes in nearly all states. In association therewith, the Company is party to agreements with nearly all states which generally limit the liability of the Company, if any, for non-remittance of sales and use taxes prior to such agreements' effective dates. The Company has previously accrued a liability for the estimated settlement costs of issues related to sales and use taxes not covered by such agreements. Management believes the resolution of any matters relating to the non-remittance of sales and use taxes will not materially affect the Company's business and results of operations.
B. On February 26, 1998, the Company completed the sale of 90% of its interest in MCMS, Inc. ("MCMS"), formerly Micron Custom Manufacturing Services, Inc. and a wholly-owned subsidiary of the Company, for $249.2 million in cash. Results of operations in the second quarter of fiscal 1998 include a pre-tax gain of $156.2 million, $94.5 million or $0.99 per diluted share, net of taxes, realized from the sale.
C. On December 21, 1998, the Company announced it is consolidating and closing its Micron Electronics Japan operation. The costs associated with this resulted in a pre-tax charge, included in other operating expenses (income), net, of approximately $3.9 million in the second quarter of fiscal 1999. The charge includes those costs associated with employee severance, fixed asset write-downs, lease obligations and other closure related costs. The Company has a remaining liability of $1.6 million, included in Accounts payable and accrued expenses, as of March 4, 1999. All other costs have been settled in the second fiscal quarter of 1999.
D. Depreciation and amortization for the six months ended March 4, 1999 and February 26, 1998 totaled $15.9 million and $21.8 million, respectively. Effective September 4, 1998, the Company revised its estimated useful lives of certain information technology assets, including enterprise software, enterprise hardware and telecommunications systems. The effect of this change was to reduce the second fiscal quarter 1999 depreciation and amortization by $1.1 million ($0.7 million net of tax) or $0.01 per diluted share, net of taxes. For the first six months of fiscal 1999, the effect of this change was to reduce depreciation and amortization by $2.5 million ($1.5 million net of tax) or $0.02 per diluted share, net of taxes. Expenditures for property, plant and equipment for the six months ended March 4, 1999 and February 26, 1998 were $25.3 million and $44.5 million, respectively.
E. The Company adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" as of the first quarter of fiscal 1999. SOP 98-1 requires companies to capitalize certain costs of computer software developed or obtained for internal use, provided that those costs are not research and development. As a result of adopting SOP 98-1, the Company capitalized $0.6 million of software development costs in the second fiscal quarter of 1999. For the first six months of fiscal 1999, the Company capitalized $1.6 million of software development costs.
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