UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:58)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 2, 2004
OR
□
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-10658
Micron Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
8000 S. Federal Way, Boise, Idaho
(Address of principal executive offices)
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.10 per share
75-1618004
(IRS Employer
Identification No.)
83716-9632
(Zip Code)
(208) 368-4000
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 ⌧ No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ⌧
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ⌧ No (cid:133)
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of such stock
on March 4, 2004, as reported by the New York Stock Exchange, was approximately $6.7 billion. Shares of common stock held by
each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of outstanding shares of the registrant’s common stock as of October 5, 2004, was 612,413,709.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant’s 2004 Annual Meeting of Shareholders to be held on November 18, 2004, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
Item 1. Business
PART I
The following discussion contains trend information and other forward-looking statements that involve a number of risks
and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in “Products”
regarding the Company’s expectation of a significant increase in sales of DDR2 products in 2005, the predominance of 512
Meg density devices by the end of 2005, growth in sales of the Company’s PSRAM and SDRAM products in 2005, the shipment
of commercial volumes of RLDRAM in 2005 and significant growth in the markets for NAND Flash memory and CMOS image
sensors; and in “Manufacturing” regarding the Company’s expectation to transition to 95nm line-width process technology in
2005. The Company’s actual results could differ materially from the Company’s historical results 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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Certain
Factors.” All period references are to the Company’s fiscal periods unless otherwise indicated.
Corporate Information
Micron Technology, Inc., and its subsidiaries are hereinafter referred to collectively as the “Company.” Micron
Technology, Inc., a Delaware corporation, was incorporated in 1978. The Company’s executive offices are located at 8000
South Federal Way, Boise, Idaho 83716-9632 and its telephone number is (208) 368-4000. Information about the Company is
available on the internet at www.micron.com. Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, as well as any amendments to these reports, are available through the
Company’s website as soon as reasonably practicable after they are electronically filed with the Securities and Exchange
Commission. The Company’s Corporate Governance Guidelines, Business Code of Conduct and Ethics, Audit Committee
Charter, and Governance and Compensation Committee Charter are also available on the Company’s website. Information
contained or referenced on the Company’s website is not incorporated by reference and does not form a part of this Annual
Report on Form 10-K.
Overview
The Company is a global manufacturer and marketer of Dynamic Random Access Memory (“DRAM”), Flash memory and
CMOS image sensors. The Company has been in the DRAM business since 1980, and in recent years it has been the second or
third largest supplier of DRAM in the world. Flash memory and CMOS image sensors have been added to the Company’s
product portfolio in the last couple of years. The Company’s products are used in a broad range of electronic devices,
including personal computers, workstations, servers, cell phones, digital still cameras, and other consumer and industrial
products.
The Company’s products are offered in a wide variety of package and configuration options, architectures, and
performance characteristics tailored to meet application and customer needs. Individual devices take advantage of the
Company’s advanced silicon processing technology and manufacturing expertise. The Company continually introduces new
generations of products that offer lower costs per megabit and improved performance characteristics.
Products
Dynamic Random Access Memory (“DRAM”) DRAM products are high density, low-cost-per-bit, random access
memory devices that provide high-speed data storage and retrieval. DRAM products constituted 92%, 96% and 95% of the
Company’s net sales in 2004, 2003 and 2002, respectively. The Company offers DRAM products with a variety of
performance, pricing and other characteristics. The Company’s DRAM products may be classified as Core DRAM or
Specialty memory.
Core DRAM Core DRAM consists of standardized, high-volume, products that are sold primarily for use as
main system memory in computers. With the development, introduction and acceptance in the marketplace of new
memory architectures, computer main memory has transitioned over time from extended data out (“EDO”) DRAM to
synchronous DRAM (“SDRAM”) and most recently to Double Data Rate Synchronous DRAM (“DDR”) and DDR2.
As a result, the composition of the Company’s Core DRAM products has also shifted over time. The Company’s
Core DRAM products currently consist of DDR and DDR2. EDO and SDRAM products are currently sold primarily
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for use in applications other than computers, and are now classified as Specialty memory. DDR products constituted
most of the Company’s Core DRAM sales in 2004 and accounted for approximately 57%, 57% and 20% of the
Company’s net sales in 2004, 2003 and 2002, respectively. Next generation DDR2 products, which offer increased
performance characteristics such as greater clock frequency and bandwidth, began shipping in 2004 and are expected
to grow noticeably in 2005 as new applications designed to take advantage of their superior performance are
introduced.
In response to changes in the DRAM market, the Company has broadened its Core DRAM product offerings in
recent years. The Company offers DDR products in 128 Meg, 256 Meg, 512 Meg and 1 Gig densities. The Company
also offers 256 Meg and 512 Meg DDR2 products and has begun sampling 1 Gig DDR2. The Company offers its
DDR and DDR2 products in multiple configurations, speeds and package types. In 2004, most of the Company’s
Core DRAM products were 256 Meg density devices. The Company expects 512 Meg devices to become the
predominant density by the end of 2005.
Specialty Memory The Company’s Specialty memory products include the Company’s legacy DRAM, pseudo-
static RAM (“PSRAM”), mobile SDRAM and reduced latency DRAM (“RLDRAM™”) products. Specialty memory
products are generally targeted to applications with specific performance characteristics and sold in lower volumes
than Core DRAM products.
Legacy DRAM Legacy DRAM consists of SDRAM and EDO products which are primarily used in
consumer applications, such as cell phones, handheld devices, computer peripherals and other
communications equipment. SDRAM sales constituted 31%, 37% and 70% of the Company’s net sales in
2004, 2003 and 2002, respectively, declining as personal computer manufacturers transitioned to DDR
products. The Company offers 64 Meg, 128 Meg, 256 Meg and 512 Meg SDRAM products and 16 Meg and
64 Meg EDO products.
PSRAM PSRAM products, marketed by the Company under the name CellularRAM™, are DRAM
products with an SRAM-like interface. PSRAM combines the minimal power consumption of SRAM with a
much lower cost-per-bit to create an economical alternative to SRAM. PSRAM products are used primarily
in cellular phone applications. The Company offers PSRAM products in 16 Meg, 32 Meg, 64 Meg and 128
Meg densities. The Company began selling commercial volumes of PSRAM products in 2004 and sales are
expected to increase significantly in 2005.
Mobile SDRAM Mobile SDRAM products are specialty SDRAM memory devices designed for
applications that demand minimal power consumption, primarily handheld electronic devices such as
personal digital assistants (PDAs), smart phones, GPS devices, and digital still cameras. The Company
began selling commercial volumes of Mobile SDRAM products in 2004 and sales are expected to grow
rapidly in 2005.
RLDRAM RLDRAM products are low-latency DRAM memory devices with high clock rates targeted
at network applications. The Company began sampling RLDRAM products in 2004 and expects to begin
shipping commercial volumes in 2005.
Flash Memory Flash products are electrically re-writeable, non-volatile semiconductor devices that retain memory
content when power is turned off. Flash memory is used in networking applications, workstations, servers, personal
computers, and handheld electronic devices such as digital cellular phones, digital still cameras and digital music players.
There are two primary types of flash memory: NOR Flash and NAND Flash. NOR Flash has a random access interface to data
that enables fast read speeds, making it ideal for storage of program code that needs to be infrequently updated. NAND Flash
only allows sequential access to data, which reduces read time for some applications but offers faster erase and write times,
higher density, and lower cost per bit than NOR Flash. In addition, NAND Flash has significantly increased cycle endurance
making it ideal for mass-storage devices.
Through 2004, the Company’s commercial Flash memory offerings consisted solely of NOR-based products. The
Company’s future plans for Flash memory are focused on NAND Flash, which uses semiconductor technology similar to
DRAM. The market for NAND Flash products has grown rapidly and is expected to continue to grow rapidly due to demand
for removable and embedded storage devices. Removable storage devices such as USB and Flash memory cards are used with
applications such as personal computers, digital still cameras, MP3 players and mobile phones. Embedded NAND-based
storage devices are also beginning to be utilized in mobile phones in addition to, or in lieu of, NOR-based Flash storage. The
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Company has been developing NAND Flash products and expects to begin shipping commercial volumes of its 2 Gig NAND
Flash products in 2005.
The Company plans to leverage its DRAM product and process technologies to compete in the NAND Flash memory
market. The Company’s NAND Flash designs feature a small cell structure that enables higher densities for demanding
applications. To compete in the NAND Flash market, the Company must successfully introduce new products, rapidly ramp
production of products to commercial volumes and manufacture products cost-efficiently.
Complementary Metal-Oxide Semiconductor (“CMOS”) Image Sensors CMOS image sensors are semiconductor
devices that capture and process images into pictures or video for a variety of consumer and industrial applications. The
Company’s CMOS image sensors are used in products such as cellular phone cameras, digital still cameras, pill cameras for
medical use, automotive and other emerging applications. The Company offers image sensors in a range of pixel resolutions
from its VGA (video graphics array) products to its higher-end 3.1 megapixel products. Image sensors are sold either as
individual components or combined with integrated circuitry to create complete camera system-on-a-chip (“SOC”) solutions.
In 2004, the Company’s primary image sensor product was a VGA SOC sensor. The Company began shipping commercial
volumes of its higher resolution 1.3 megapixel, 2.0 megapixel and 3.1 megapixel image sensors in 2004.
The Company’s CMOS image sensors incorporating its DigitalClarity™ technology have many advantages over other
CMOS image sensors and charge-coupled device (“CCD”) sensors, which have dominated the image sensor market until recent
periods. Unlike CCD sensors, which rely on specialized fabrication requiring dedicated, and costly manufacturing processes,
CMOS image sensors can be manufactured using standardized semiconductor processes resulting in substantially lower costs.
The Company’s low-leakage DRAM processes are particularly well suited for the manufacture of CMOS image sensors. The
Company’s CMOS image sensors employ an “active-pixel” design architecture that enables them to achieve performance
comparable to high-end CCD devices and higher than competitor’s CMOS image sensors. The Company’s CMOS image
sensors consume substantially less power than CCD devices, a critical advantage in the battery-dependent portable device
applications where most image sensors are used. The market for image sensors is expected to increase significantly over the
next several years due to the growth forecasted for applications such as phone cameras and digital still cameras.
Manufacturing
The Company’s manufacturing facilities are located in the United States, Italy, Japan, Puerto Rico, Scotland and
Singapore. The Company’s manufacturing facilities operate 24 hours per day, 7 days per week.
The Company’s process for manufacturing semiconductor products is complex, involving a number of precise steps,
including wafer fabrication, assembly, burn-in and final test. Efficient production of semiconductor products requires
utilization of advanced semiconductor manufacturing techniques and effective deployment of these techniques across multiple
facilities. The primary determinants of manufacturing cost are die size, number of mask layers, number of fabrication steps
and number of acceptable die produced on each wafer. Other factors that contribute to manufacturing costs are wafer size, cost
and sophistication of manufacturing equipment, equipment utilization, process complexity, cost of raw materials, labor
productivity, package type and cleanliness of the manufacturing environment. The Company is continuously enhancing
production processes, reducing die sizes and transitioning to higher density products. In 2004, the Company substantially
completed the migration of its manufacturing operations to its 110 nanometer (“nm”) line-width process technology. The
Company expects to begin transitioning its manufacturing operations to 95nm line-width process technology in 2005.
Wafer fabrication occurs in a highly controlled, clean environment to minimize dust and other yield- and quality-limiting
contaminants. Despite stringent manufacturing controls, dust particles, equipment errors, minute impurities in materials,
defects in photomasks and circuit design marginalities or other problems cause wafers to be scrapped or individual circuits to
be nonfunctional. Success of the Company’s manufacturing operations depends largely on minimizing defects and thereby
maximizing yield of high-quality circuits. In this regard, the Company employs rigorous quality controls throughout the
manufacturing, screening and testing processes. The Company is able to recover many nonstandard devices by testing and
grading them to their highest level of functionality.
After fabrication, silicon wafers are separated into individual die. Functional die are sorted, connected to external leads
and encapsulated in plastic packages. The Company assembles products in a variety of packages, including TSOP (thin small
outline package), TQFP (thin quad flat package) and FBGA (fine pitch ball grid array). Each completed package is then
inspected and tested. The Company also sells semiconductor products in unpackaged die form. The Company tests its
products at various stages in the manufacturing process, performs high temperature burn-in on finished products and conducts
numerous quality control inspections throughout the entire production flow. In addition, the Company uses its proprietary
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AMBYX™ line of intelligent test and burn-in systems to perform simultaneous circuit tests of DRAM die during the burn-in
process, capturing quality and reliability data and reducing testing time and cost.
A significant portion of the Company’s memory products are assembled into memory modules for sale to customers.
Memory modules consist of an array of memory components attached to printed circuit boards (“PCBs”) that connect to
computer systems or other electronic devices. Memory components are attached to PCBs in a soldering process performed by
screen printing machines and high speed automated pick and place machines. Completed modules are tested by custom
equipment and visually inspected.
In 2004, the Company qualified its first product at its 300mm wafer fabrication plant in Virginia. The 512 Meg DDR
device was produced on the Company’s 110nm process technology and is the industry’s first memory device in production to
utilize copper interconnects. The Company is ramping production at the Virginia wafer fabrication facility. As of the end of
2004, production at the Virginia facility had not reached levels necessary to achieve mature product yield and cost-efficient
utilization of the facility. The Company is assessing which of its other facilities will be converted to 300mm wafer fabrication
and when those facilities will be converted.
TECH Semiconductor Singapore Pte. Ltd. (“TECH”) TECH is a memory manufacturing joint venture in Singapore
among Micron Technology, Inc., the Singapore Economic Development Board, Canon Inc. and Hewlett-Packard Company.
TECH’s semiconductor manufacturing facilities use the Company’s product and process technology. Subject to specific terms
and conditions, the Company has agreed to purchase all of the products manufactured by TECH. TECH supplied
approximately 30%, 30% and 20% of the total megabits of memory produced by the Company in 2004, 2003 and 2002,
respectively. The Company generally purchases semiconductor memory products from TECH at prices determined quarterly,
based on a discount from average selling prices realized by the Company for the immediately preceding fiscal quarter. The
Company performs assembly and test services on product manufactured by TECH. The Company also provides certain
technology, engineering and training to support TECH. All of these transactions with TECH are recognized as part of the net
cost of products purchased from TECH.
Availability of Raw Materials
The Company’s production processes require raw materials that meet exacting standards, including several that are
customized for, or unique to, the Company. The Company generally has multiple sources of supply; however, only a limited
number of suppliers are capable of delivering certain raw materials that meet the Company’s standards. Various factors could
reduce the availability of raw materials such as silicon wafers, photomasks, chemicals, gases, lead frames, molding compound
and other materials. In addition, any transportation problems could delay the Company’s receipt of raw materials. Although
raw materials shortages or transportation problems have not interrupted the Company’s operations in the past, shortages may
occur from time to time in the future. Also, lead times for the supply of raw materials have been extended in the past. If the
Company’s supply of raw materials is interrupted, or lead times are extended, results of operations could be adversely affected.
Marketing and Customers
The Company’s products are sold into computing and consumer, networking and telecommunications, and imaging
markets. Approximately 75% of the Company’s net sales for 2004 were to the computing market. Sales to both Dell
Computer Corporation and Hewlett-Packard Company exceeded 10% of the Company’s net sales in 2004, 2003 and 2002, and
aggregated 27%, 28% and 28% of the Company’s net sales in 2004, 2003 and 2002, respectively.
The Company markets its semiconductor products primarily through its own direct sales force. The Company maintains
inventory at locations in close proximity to certain key customers to facilitate rapid delivery of product shipments. The
Company’s products are also offered through independent sales representatives, distributors and Crucial Technology, the
Company’s web-based customer direct sales division. The Company’s products are offered under the Micron, SpecTek and
Crucial brand names, and under other private labels. The Company maintains sales offices in all of its primary markets around
the world. Independent sales representatives obtain orders subject to final acceptance by the Company and are compensated on
a commission basis. The Company makes shipments against these orders directly to the customer. Distributors carry the
Company’s products in inventory and typically sell a variety of other semiconductor products, including competitors’ products.
Segmentation of the DRAM market continues, with diverse memory needs being driven by the different requirements of
desktop and notebook personal computers, servers, workstations, handheld devices, and communications, industrial and other
applications that demand specific memory solutions. Many of the Company’s customers require a thorough review or
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qualification of semiconductor products, which may take several months. As the Company further diversifies its product lines
and reduces the die sizes of existing memory products, more products become subject to qualification which may delay volume
introduction of specific devices by the Company.
Backlog
Volatile industry conditions make customers reluctant to enter into long-term, fixed-price contracts. Accordingly, new
order volumes for the Company’s semiconductor products fluctuate significantly. Orders are typically accepted with
acknowledgment that the terms may be adjusted to reflect market conditions at the date of shipment. Customers can change
delivery schedules or cancel orders without significant penalty. For these reasons, the Company does not believe that its order
backlog as of any particular date is a reliable indicator of actual sales for any succeeding period.
Product Warranty
Because the design and manufacturing process for semiconductor products is highly complex, it is possible that the
Company may produce products that do not comply with customer specifications, contain defects or are otherwise
incompatible with end uses. In accordance with industry practice, the Company generally provides a limited warranty that its
products are in compliance with Company specifications existing at the time of delivery. Under the Company’s general terms
and conditions of sale, liability for certain failures of product during a stated warranty period is usually limited to repair or
replacement of defective items or return of, or a credit with respect to, amounts paid for such items. Under certain
circumstances the Company may provide more extensive limited warranty coverage and general legal principles may impose
more extensive liability than that provided under the Company’s general terms and conditions.
Competition
The Company faces intense competition from a number of companies, including Elpida Memory, Inc., Hynix
Semiconductor Inc., Infineon Technologies AG and Samsung Electronics Co., Ltd. Additionally, the Company faces
competition from emerging companies in Taiwan and China who have announced plans to significantly expand the scale of
their operations. Some of the Company’s competitors are large corporations or conglomerates that may have greater resources
to withstand downturns in the semiconductor markets in which the Company competes, invest in technology and capitalize on
growth opportunities. The Company’s competitors seek to increase silicon capacity, improve yields, reduce die size and
minimize mask levels in their product designs. These factors have significantly increased worldwide supply and put downward
pressure on prices.
Historically, various governments have provided economic assistance to international competitors, which has enabled, or
artificially supported, competitors’ production of semiconductor memory, particularly DRAM. This factor may continue to
affect the supply of DRAM and other semiconductor products in future periods.
Research and Development
To compete in the semiconductor memory industry, the Company must continue to develop technologically advanced
products and processes. The Company believes that expansion of its semiconductor product offerings is necessary to meet
expected market demand for specific memory solutions. The Company has several product design centers around the world,
the largest located at its corporate headquarters in Boise, Idaho. In addition, the Company has a facility at its Boise site to
develop leading edge photolithography mask technology.
R&D expenses vary primarily with the number of development wafers processed, the cost of advanced equipment
dedicated to new product and process development, and personnel costs. Because of the lead times necessary to manufacture
the Company’s products, the Company typically begins to process wafers before completion of performance and reliability
testing. The Company deems development of a product complete once the product has been thoroughly reviewed and tested
for performance and reliability and is internally qualified for sale to customers. R&D expenses can vary significantly
depending on the timing of product qualification. Product development costs are recorded as R&D expense. The Company’s
R&D expenses were $754.9 million, $656.4 million and $561.3 million in 2004, 2003 and 2002, respectively.
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The Company’s process technology R&D efforts are focused primarily on development of 95nm and 78nm and smaller
line-width process technologies, which are designed to facilitate the Company’s transition to next generation products.
Additional R&D efforts include process development to support the Company’s 300mm wafer manufacturing, CMOS image
sensors, Flash memory, Specialty memory products including PSRAM and RLDRAM and new memory manufacturing
materials. Efforts toward the design and development of new products are concentrated on the Company’s 512 Meg and 1 Gig
DDR, DDR2 and DDR3 DRAM products as well as NAND Flash memory, CMOS image sensors and Specialty memory
products.
International Sales
Sales to customers outside the United States totaled $2.6 billion for 2004 and included $863.7 million in sales to Europe,
$559.8 million in sales to China, $354.8 million in sales to Japan and $632.9 million in sales to the rest of the Asia Pacific
region, excluding China and Japan. International sales totaled $1.7 billion for 2003 and $1.4 billion for 2002. (See “Item 8.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Geographic Information.”)
Patents and Licenses
As of September 2, 2004, the Company owned approximately 11,300 U.S. patents and 1,000 foreign patents. In addition,
the Company has numerous U.S. and foreign patent applications pending. The Company’s patents have terms expiring
through 2023.
The Company has a number of patent and intellectual property license agreements. Some of these license agreements
require the Company to make one time or periodic payments. The Company may need to obtain additional patent licenses or
renew existing license agreements in the future. The Company is unable to predict whether these license agreements can be
obtained or renewed on acceptable terms.
Employees
As of September 2, 2004, the Company had approximately 17,900 employees, including approximately 11,900 in the
United States, 2,700 in Singapore, 1,700 in Italy, 1,100 in Japan and 300 in the United Kingdom. The Company’s employees
in Italy are represented by labor organizations that have entered into national and local labor contracts with the Company. The
Company’s employment levels can vary depending on market conditions and the level of the Company’s production, research
and product and process development. Many of the Company’s employees are highly skilled, and the Company’s continued
success depends in part upon its ability to attract and retain such employees. The loss of key Company personnel could have a
material adverse effect on the Company’s business, results of operations or financial condition.
Environmental Compliance
Government regulations impose various environmental controls on discharges, emissions and solid wastes from the
Company’s manufacturing processes. In 2004, the Company’s wafer fabrication facilities continued to conform to the
requirements of ISO 14001 certification. To continue certification, the Company met annual requirements in environmental
policy, compliance, planning, management, structure and responsibility, training, communication, document control,
operational control, emergency preparedness and response, record keeping and management review. While the Company has
not experienced any materially adverse effects on its operations from environmental regulations, changes in the regulations
could necessitate additional capital expenditures, modification of operations or other compliance actions.
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Directors and Executive Officers of the Registrant
Officers of the Company are appointed annually by the Board of Directors. Directors of the Company are elected annually
by the shareholders of the Company. Any directors appointed by the Board of Directors to fill vacancies on the Board serve
until the next election by the shareholders. All officers and directors serve until their successors are duly chosen or elected and
qualified, except in the case of earlier death, resignation or removal.
As of September 2, 2004, the following executive officers and directors of the Company were subject to the reporting
requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended.
Name
Steven R. Appleton ..........................
Kipp A. Bedard ................................
Robert M. Donnelly .........................
Jan du Preez .....................................
D. Mark Durcan ...............................
Robert J. Gove .................................
Jay L. Hawkins.................................
Roderic W. Lewis ............................
Michael W. Sadler ...........................
Wilbur G. Stover, Jr. ........................
James W. Bagley..............................
Ronald C. Foster ..............................
Robert A. Lothrop............................
Thomas T. Nicholson.......................
Gordon C. Smith ..............................
William P. Weber.............................
Vice President of Networking and Communications Group
Chief Technical Officer and Vice President of Research and Development
Vice President of Imaging Group
Age Position
44 Chairman, Chief Executive Officer and President
45 Vice President of Investor Relations
65 Vice President of Computing and Consumer Group
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43
50
44 Vice President of Operations
49 Vice President of Legal Affairs, General Counsel and Corporate Secretary
46 Vice President of Worldwide Sales
51 Vice President of Finance and Chief Financial Officer
65 Director
54 Director
78 Director
68 Director
75 Director
64 Director
Steven R. Appleton joined the Company in February 1983 and has served in various capacities with the Company and its
subsidiaries. Mr. Appleton first became an officer of the Company in August 1989 and has served in various officer positions
with the Company since that time. From April 1991 until July 1992 and since May 1994, Mr. Appleton has served on the
Company’s Board of Directors. Since September 1994, Mr. Appleton has served as the Chief Executive Officer, President and
Chairman of the Board of Directors of the Company. Mr. Appleton is a member of the Board of Directors of National
Semiconductor Corporation. Mr. Appleton holds a BA in Business Management from Boise State University.
Kipp A. Bedard joined the Company in November 1983 and has served in various capacities with the Company and its
subsidiaries. Mr. Bedard first became an officer of the Company in April 1990 and has served in various officer positions
since that time. Since January 1994, Mr. Bedard has served as Vice President of Investor Relations for the Company. Mr.
Bedard holds a BBA in Accounting from Boise State University.
Robert M. Donnelly joined the Company in September 1988 and has served in various technical positions with the
Company and its subsidiaries. Mr. Donnelly first became an officer of the Company in August 1989 and has served in various
officer positions since that time. Mr. Donnelly holds a BS in Electrical Engineering from the University of Louisville.
Jan du Preez joined the Company in June 2002 as Vice President of Networking and Communications Group. Mr. du
Preez served as the President of Infineon Technologies North America Corporation from August 2000 until he joined the
Company in June 2002. From October 1996 through July 2000, Mr. du Preez served as the Vice President of Memory
Products Group for Infineon Technologies North America Corporation (formerly Siemens Semiconductors). Mr. du Preez
holds Bachelors Degrees in Public Administration and Business Economics from the University of Pretoria and a Masters
Degree in Commerce from Rand University.
D. Mark Durcan joined the Company in June 1984 and has served in various technical positions with the Company and its
subsidiaries since that time. Mr. Durcan served as Vice President, Process Research and Development from June 1996 through
June 1997, at which time he became Chief Technical Officer and Vice President of Research and Development. Mr. Durcan
holds a BS and MChE in Chemical Engineering from Rice University.
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Robert J. Gove joined the Company in March 1999 as Senior Director of Engineering and has served in various positions
with the Company. In March 2002, he was appointed Vice President of Imaging. Prior to joining the Company, Mr. Gove
served as Vice President, Engineering, of Equator Technologies, Inc. Mr. Gove holds a BS in Electrical Engineering from the
University of Washington and an MS in Electrical Engineering and Ph.D. in Electrical Engineering from Southern Methodist
University.
Jay L. Hawkins joined the Company in March 1984 and has served in various manufacturing positions for the Company
and its subsidiaries. Mr. Hawkins served as Vice President, Manufacturing Administration from February 1996 through June
1997, at which time he became Vice President of Operations. Mr. Hawkins holds a BBA in Marketing from Boise State
University.
Roderic W. Lewis joined the Company in August 1991 and has served in various capacities with the Company and its
subsidiaries. Mr. Lewis has served as Vice President of Legal Affairs, General Counsel and Corporate Secretary since July
1996. Mr. Lewis holds a BA in Economics and Asian Studies from Brigham Young University and a JD from Columbia
University School of Law.
Michael W. Sadler joined the Company in September 1992 as a Regional Sales Manager and has held various sales and
marketing positions since that time. Mr. Sadler became an officer of the Company in July 1997 and has served as Vice
President of Worldwide Sales since November 2001. Mr. Sadler holds a BS in Information Systems and an MBA from the
University of Santa Clara.
Wilbur G. Stover, Jr. joined the Company in June 1989 and has served in various financial positions with the Company
and its subsidiaries. Since September 1994, Mr. Stover has served as the Company’s Vice President of Finance and Chief
Financial Officer. Mr. Stover holds a BA in Business Administration from Washington State University.
James W. Bagley became the Chairman and Chief Executive Officer of Lam Research Corporation (“Lam”), a supplier of
semiconductor manufacturing equipment, in August 1997. Mr. Bagley is a member of the Board of Directors of Teradyne, Inc.
He has served on the Company’s Board of Directors since June 1997. Mr. Bagley holds a BS and MS in Electrical Engineering
from Mississippi State University.
Ronald C. Foster joined the Board of Directors in June 2004. Since February 2003, Mr. Foster has served as Executive
Vice President and Chief Financial Officer of JDS Uniphase Corporation. From November 1998 to February 2003, Mr. Foster
served in various management positions with Novell Corporation, including three years as Senior Vice President and Chief
Financial Officer. Mr. Foster has an MBA from the University of Chicago and a BA in Economics from Whitman College.
Robert A. Lothrop served as Senior Vice President of J.R. Simplot Company, an agribusiness company, from January 1986
until his retirement in January 1991. From August 1986 until July 1992 and since May 1994, Mr. Lothrop has served on the
Board of Directors of the Company. Mr. Lothrop holds a BS in Engineering from the University of Idaho.
Thomas T. Nicholson has served as Vice President and a Director of Honda of Seattle and Toyota of Seattle since 1988.
Mr. Nicholson served from 1982 to May 2000 as President, and since May 2000 as Vice President, of Mountain View
Equipment Company. He has served on the Company’s Board of Directors since May 1980. Mr. Nicholson holds a BS in
Agriculture from the University of Idaho.
Gordon C. Smith has served as Chairman and Chief Executive Officer of G.C. Smith L.L.C., a holding company for ranch
operations and other investments, since May 2000. From July 1980 to March 1994, Mr. Smith served in various management
positions with J. R. Simplot Company, including four years as President and Chief Executive Officer, and seven years as Chief
Financial Officer. From February 1982 until February 1984 and since September 1990, he has served on the Company’s Board
of Directors. Mr. Smith holds a BS in Accounting from Idaho State University.
William P. Weber served in various capacities with Texas Instruments Incorporated, a semiconductor manufacturing
company, and its subsidiaries from 1962 until April 1998. From December 1986 until December 1993 he served as the
President of Texas Instruments’ worldwide semiconductor operations and from December 1993 until his retirement in April
1998, he served as Vice Chairman of Texas Instruments Incorporated. He has served on the Company’s Board of Directors
since July 1998. Mr. Weber holds a BS in Engineering from Lamar University and a MS in Engineering from Southern
Methodist University.
There is no family relationship between any director or executive officer of the Company.
8
Item 2. Properties
The Company’s corporate headquarters and principal semiconductor manufacturing, engineering, research and
development, administrative and support facilities are located in Boise, Idaho. The Company has a number of other properties
including wafer fabrication facilities located in Avezzano, Italy, Nishiwaki-City, Japan, and Manassas, Virginia; a
semiconductor manufacturing facility located in Lehi, Utah, a portion of which is being used to perform test operations; an
assembly and test facility located on leased property in Singapore; a test facility located in Nampa, Idaho; and module
assembly and test facilities located in East Kilbride, Scotland, and leased in Aguadilla, Puerto Rico. The Company also owns
and leases a number of other facilities in locations throughout the world that are used for design, research and development,
and sales and marketing activities.
The Company’s existing facilities are suitable and adequate for its present purposes. The Company’s manufacturing
facilities in Virginia and Utah are only partially utilized. A portion of the Virginia facility is being used for 300mm wafer
fabrication and a portion of the Utah facility is being used for component test operations. Increased utilization of these
facilities is dependent upon market conditions, including, but not limited to, worldwide market supply of, and demand for,
semiconductor products and the Company’s operations, cash flows and alternative capacity utilization opportunities.
Item 3. Legal Proceedings
On August 28, 2000, the Company filed a complaint against Rambus, Inc. (“Rambus”) in U.S. District Court for the
District of Delaware seeking monetary damages and declaratory and injunctive relief. Among other things, the Company’s
complaint (as amended) alleges violation of federal antitrust laws, breach of contract, fraud, deceptive trade practices, and
negligent misrepresentation. The complaint also seeks a declaratory judgment (a) that certain Rambus patents are not infringed
by the Company, are invalid, and/or are unenforceable (b) that the Company has an implied license to those patents and (c) that
Rambus is estopped from enforcing those patents against the Company. On February 15, 2001, Rambus filed an answer and
counterclaim in Delaware denying that the Company is entitled to relief, alleging infringement of the eight Rambus patents
named in the Company’s declaratory judgment claim, and seeking monetary damages and injunctive relief. A number of other
suits are currently pending in Europe alleging that certain of the Company’s SDRAM and DDR SDRAM products infringe
various of Rambus’ country counterparts to its European patent 525 068, including: on September 1, 2000, Rambus filed suit
against Micron Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany; on September 13, 2000,
Rambus filed suit against Micron Europe Limited in the High Court of Justice, Chancery Division in London, England; on
September 22, 2000, Rambus filed a complaint against the Company and Reptronic (a distributor of the Company’s products)
in Court of First Instance of Paris, France; on September 29, 2000, the Company filed suit against Rambus in the Civil Court of
Milan, Italy, alleging invalidity and non-infringement. In addition, on December 29, 2000, the Company filed suit against
Rambus in the Civil Court of Avezzano, Italy, alleging invalidity and non-infringement of the Italian counterpart to European
patent 1 004 956. On August 10, 2001, Rambus filed suit against the Company and Assitec (an electronics retailer) in the Civil
Court of Pavia, Italy, alleging that certain DDR SDRAM products infringe the Italian counterpart to European patent 1 022
642. In the European suits against the Company, Rambus is seeking monetary damages and injunctive relief. These lawsuits
pertain to certain of the Company’s SDRAM and DDR DRAM products, which account for a significant portion of the
Company’s net sales. The Company is unable to predict the outcome of these suits.
On January 8, 2004, Motorola, Inc. (“Motorola”) filed suit against the Company in the U.S. District Court for the Western
District of Texas (Austin) alleging infringement of ten Motorola patents. On March 15, 2004, the Company filed an answer
and a counterclaim alleging infringement of seventeen of the Company’s patents. Freescale Semiconductor, Inc., a subsidiary
of Motorola (“Freescale”), was later added as a party with Motorola. On March 30, 2004, the Company filed a separate action
against Motorola in the U.S. District Court for the Western District of Wisconsin (Madison) alleging infringement of six
additional of the Company’s patents, and the Company added a seventh patent in an amended complaint filed on April 23,
2004. On June 10, 2004, the Wisconsin court granted Motorola’s motion to transfer the case to Texas, and the two cases
subsequently were consolidated. These lawsuits pertain to certain of the Company’s SDRAM and DDR DRAM products,
which account for a significant portion of the Company’s net sales. The Company is unable to predict the outcome of these
suits.
A court determination that the Company’s products or manufacturing processes infringe the product or process intellectual
property rights of others could result in significant liability and/or require the Company to make material changes to its
products and/or manufacturing processes. Any of the foregoing results could have a material adverse effect on the Company’s
business, results of operations or financial condition.
9
On June 17, 2002, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of
California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”)
into possible antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry. The Company is
cooperating fully and actively with the DOJ in its investigation. Subsequent to the commencement of the DOJ investigation, a
number of purported class action lawsuits were filed against the Company and other DRAM suppliers. Sixteen cases were
filed between June 21, 2002, and September 19, 2002, in the following federal district courts: one in the Southern District of
New York, five in the District of Idaho and ten in the Northern District of California. The foregoing federal district court cases
were transferred to the U.S. District Court for the Northern District of California (San Francisco) for consolidated proceedings.
On October 6, 2003, the plaintiffs filed a consolidated amended class action complaint. The consolidated amended complaint
purports to be on behalf of a class of individuals and entities who purchased DRAM directly from the various DRAM suppliers
during the period from approximately November 1, 2001 through at least June 30, 2002. The consolidated amended complaint
alleges price-fixing in violation of the Sherman Act and seeks treble monetary damages, costs, attorneys’ fees, and an
injunction against the allegedly unlawful conduct. Eight additional cases were filed between August 2, 2002, and March 11,
2003, in the following California state superior courts: five in San Francisco County, one in Santa Clara County, one in Los
Angeles County and one in Humboldt County. The foregoing California state cases were transferred to San Francisco County
Superior Court for consolidated proceedings. On October 15, 2003, the plaintiffs filed a consolidated amended class action
complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who purchased
DRAM indirectly from the various DRAM suppliers during the period from November 1, 2001 through June 30, 2002. The
consolidated amended complaint alleges violations of California’s Cartwright Act and state unfair competition law and unjust
enrichment and seeks treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful
conduct. On March 16, 2004, a related case was filed in state court in Salem, Massachusetts. It purports to be on behalf of a
class of individuals and entities who indirectly purchased DRAM in Massachusetts between November 1, 2001 and June 30,
2002. The complaint alleges unjust enrichment relating to the sale and pricing of DRAM products and seeks an unspecified
amount of restitution. The case was removed to the Massachusetts federal district court and transferred to the U.S. District
Court for the Northern District of California (San Francisco) for consolidated proceedings. However, a motion by the plaintiff
to remand the case to Massachusetts is still pending. On May 25, 2004, a related case was filed in state court in Collier
County, Florida. It purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM in Florida
and nineteen other states between November 1, 2001 and June 30, 2002. The complaint alleges violation of the Florida
Deceptive and Unfair Trade Practices Act and unjust enrichment relating to the sale and pricing of DRAM products and seeks
compensatory damages, costs, attorneys’ fees, and disgorgement or restitution. On August 19, 2004, a related case was filed in
state court in Middlesex County, Massachusetts. It purports to be on behalf of a class of individuals and entities who indirectly
purchased DRAM in Massachusetts between September 1, 2001 and June 30, 2002. The complaint alleges violations of the
Massachusetts Consumer Protection Act relating to the sale and pricing of DRAM products and seeks treble monetary
damages, costs, and attorneys’ fees. On September 29, 2004, a related case was filed in state court in Brooke County, West
Virginia. It purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM in West Virginia
from at least 1999 through the filing of the complaint. The complaint alleges violations of the West Virginia Antitrust Act
relating to the sale and pricing of DRAM products and seeks treble monetary damages, costs and attorneys’ fees. On October
4, 2004, a related case was filed in state court in Mecklenburg County, North Carolina. It purports to be on behalf of a class of
individuals and entities who indirectly purchase DRAM and/or products containing DRAM in North Carolina between at least
1999 and the filing of the complaint. The complaint alleges violations of the North Carolina Statutes for Antitrust and Unfair
Competition relating to the sale and pricing of DRAM products and seeks actual damages, treble damages, interest, costs, and
attorneys’ fees. On October 5, 2004, a related case was filed in state court in Wayne County, Michigan. It purports to be on
behalf of a class of individuals and entities who indirectly purchase DRAM and/or products containing DRAM in Michigan
from at least 1999 through the filing of the complaint. The complaint alleges violations of the Michigan Antitrust Reform Act
relating to the sale and pricing of DRAM products and seeks treble monetary damages, costs, interest, and attorneys’ fees. On
October 6, 2004, a related case was filed in state court in Broward County, Florida. It purports to be on behalf of a class of
individuals and entities who indirectly purchase DRAM in Florida from at least July 1999 through at least June of 2002. The
complaint alleges violations of Florida Deceptive and Unfair Trade Practices Act relating to the sale and pricing of DRAM
products and seeks monetary damages, restitution, costs, and attorneys’ fees. Based upon the Company’s analysis of the claims
made and the nature of the DRAM industry, the Company believes that class treatment of these cases is not appropriate and
that any purported injury alleged by plaintiffs would be more appropriately resolved on a customer-by-customer basis. The
Company is unable to predict the outcome of these suits. A court determination against the Company could result in
significant liability and could have a material adverse effect on the Company’s business, results of operations or financial
condition.
On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against
the Company and other DRAM suppliers. The complaint alleges certain causes of action under California state law including a
conspiracy to restrict output and fix prices on Rambus DRAM (“RDRAM”), a conspiracy to monopolize various relevant
markets, intentional interference with prospective economic advantage relating to RDRAM, and unfair competition to
10
disadvantage RDRAM. The complaint seeks treble damages, punitive damages, attorneys’ fees, costs, and a permanent
injunction enjoining the defendants from the conduct alleged in the complaint. The Company is unable to predict the outcome
of the suit. A court determination against the Company could result in significant liability and could have a material adverse
effect on the Company’s business, results of operations or financial condition.
(See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Certain
Factors.”)
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of 2004.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Market for Common Stock
PART II
The Company’s common stock is listed on the New York Stock Exchange and is traded under the symbol “MU.” The
following table represents the high and low closing sales prices for the Company’s common stock for each quarter of 2004 and
2003, as reported by Bloomberg L.P.
2004:
4th quarter
3rd quarter
2nd quarter
1st quarter
2003:
4th quarter
3rd quarter
2nd quarter
1st quarter
High
Low
$ 15.31
17.96
16.42
15.13
$ 15.38
11.22
15.81
18.76
$ 11.06
13.50
11.50
12.16
$ 11.14
7.42
6.76
11.75
Holders of Record
As of October 5, 2004, there were 3,944 shareholders of record of the Company’s common stock.
Dividends
The Company has not declared or paid cash dividends since 1996 and does not intend to pay cash dividends on its
common stock for the foreseeable future.
Equity Compensation Plan Information
The information required by this item is incorporated by reference to the information set forth in Item 12 of this Annual
Report on Form 10-K.
11
Item 6. Selected Financial Data
2004
2003
2002
(amounts in millions except per share amounts)
2001
2000
Net sales
Gross margin
Operating income (loss)
Income (loss) from continuing operations
Loss from discontinued PC Operations, net of
$ 4,404.2
1,314.7
249.7
157.2
$ 3,091.3
$ 2,589.0
(20.7)
(110.6)
(1,186.5) (1,025.3)
(907.0)
(1,273.2)
$ 6,362.4
$ 3,935.9
3,248.1
110.7
(976.5) 2,392.7
(521.2) 1,547.7
taxes and minority interest
Net income (loss)
--
157.2
--
(1,273.2)
--
(907.0)
(43.5)
(103.8)
(625.0) 1,504.2
Diluted earnings (loss) per share:
Continuing operations
Discontinued operations
Net income (loss)
Cash and short-term investments
Total current assets
Property, plant and equipment, net
Total assets
Total current liabilities
Long-term debt
Redeemable common stock
Total shareholders’ equity
$
0.24
--
0.24
$ 1,231.0
2,638.7
4,712.7
7,760.0
972.1
1,027.9
--
5,614.8
$
(2.11) $
(1.51) $
--
(2.11)
--
(1.51)
(0.88) $
(0.18)
(1.05)
2.63
(0.07)
2.56
$ 921.8
2,037.0
4,510.5
7,158.2
993.0
997.1
66.5
4,971.0
$ 985.7
2,118.8
4,699.5
7,555.4
752.7
360.8
--
6,306.4
$ 1,678.3
3,137.7
4,704.1
8,363.2
687.0
445.0
--
7,134.8
$ 2,466.4
4,720.1
4,171.7
9,391.9
1,447.1
931.4
--
6,432.0
On August 6, 2001, Micron Electronics, Inc. (“MEI”) completed its merger with Interland, Inc., in a stock-for-stock
acquisition (the “Interland Merger”). Upon completion of the Interland Merger, MEI changed its name to Interland, Inc.
(“Interland”) and the Company’s ownership interest was reduced from 61% to 43% of Interland’s outstanding common stock.
On August 30, 2001, the Company contributed all of its shares of Interland common stock to the Micron Technology
Foundation.
On May 31, 2001, MEI, then a 61% owned subsidiary of the Company, completed the disposition of its PC business. The
selected financial data above presents the net effect of discontinued PC operations separate from the results of the Company’s
continuing operations.
Per share amounts reflect a two-for-one stock dividend on May 1, 2000.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Certain Factors”
and “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements.”
12
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains trend information and other forward-looking statements that involve a number of risks
and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in “Overview”
regarding growth for CMOS image sensor and NAND Flash markets and allocation of wafer starts to products other than
Core DRAM; “Net Sales” regarding future megabit production growth, production increases and allocation of wafer starts to
DDR2 products, CMOS image sensors, PSRAM products and Flash memory products; “Gross Margin” regarding
manufacturing cost reductions in future periods and relative selling prices of DDR2 and Specialty memory products; in
“Selling, General and Administrative” regarding the level of expected selling, general and administrative expenses in the first
quarter of 2005; in “Research and Development” regarding the level of expected research and development expenses in the
first quarter of 2005; in “Income Taxes” regarding future provisions for income taxes and in “Liquidity and Capital
Resources” regarding capital spending in 2005. The Company’s actual results could differ materially from the Company’s
historical results 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 Consolidated Financial Statements and accompanying notes for the year ended September 2, 2004. All period
references are to the Company’s fiscal periods unless otherwise indicated. All per share amounts are presented on a diluted
basis. All tabular dollar amounts are in millions. Unless otherwise stated, all production data reflects production of the
Company and its TECH joint venture.
Overview
The Company is a global manufacturer and marketer of semiconductor memory devices, principally DRAM and Flash,
and CMOS image sensor devices. Its products are used in a broad range of electronic applications including personal
computers, workstations, servers, cell phones, digital still cameras, and other consumer and industrial products. The
Company’s customers are principally original equipment manufacturers and memory module retailers located around the
globe.
The markets for the Company’s products behave in a manner similar to commodity markets as the products are generally
standardized with selling prices that fluctuate based on industry-wide relationships of supply and demand. Enhancing
operating results and strengthening financial condition in these types of markets is likely dependent upon leading the industry
in low cost production, capital efficiency and return on research and development investments. Historically, the semiconductor
memory market has been subject to subsidization, thereby leading to the entry of new competitors and, at times, excess supply.
The Company’s proprietary product and process technology allows sophisticated semiconductor memory and imaging
devices to be manufactured with progressively smaller die sizes. Historically, the Company has been able to reduce the cost of
its memory products by implementing new product and process technologies. These new technologies enable the Company to
produce more megabits of memory on each wafer, primarily by reducing the size of the circuits (“shrinking”) that make up
each memory cell. In 2004, the Company introduced products featuring its 6F² Hypershrink™ array architecture technology
that enables it to further increase megabits produced per wafer. This 6F² technology reduces the size of memory cells
approximately 20% from industry standard 8F² products without significant additional investment in equipment. The
Company continually introduces new generations of products that offer lower costs per megabit and improved performance
characteristics such as higher data transfer rates, reduced package size per megabit and lower power consumption.
The Company has made substantial investments in its manufacturing facilities in the United States, Europe and Asia. A
significant portion of semiconductor manufacturing equipment is replaced every three to five years with more advanced
equipment to process leading edge technology and reduce cost per part. Because the Company owns most of its manufacturing
capacity, a significant portion of the Company’s operating costs are fixed. In general, these costs do not vary with changes in
the Company’s utilization of its manufacturing capacity and, accordingly, margins fluctuate with utilization. The Company
must generate sufficient cash flow from operations for reinvestment in manufacturing capability or obtain external financing.
Historically, the Company has accessed external markets to fund a portion of its cash requirements.
Maximizing returns from investments in research and development (“R&D”) is dependent on developing process
technology that effectively reduces production costs, leveraging required investments across a substantial scale of production,
and designing new products that can be successfully brought to market. The Company must invest heavily in R&D to expand
its product offering and enable development of leading-edge product and process technologies. The Company has made
significant R&D investments in recent periods to develop products that will enable it to enter new markets.
13
In recent years, approximately 80% of the Company’s products were sold into computer and computer peripheral markets.
The computing market for a number of decades has had an extremely high growth rate. As with any maturing market, it is
likely that future growth rates will more closely parallel broader macroeconomic trends.
The Company is strategically diversifying its business into semiconductor products other than Core DRAM. The
Company’s non-Core DRAM products include Specialty memory, Flash memory and CMOS image sensors. These products
leverage the Company’s competencies in semiconductor memory manufacturing and product and process technology. Non-
Core DRAM products are typically of lower density and are manufactured in lower volumes than Core DRAM, and allow the
Company to use prior generation processes and equipment. Unlike Core DRAM, these products are typically used in electronic
devices other than computers and in many cases the Company can differentiate them from competitor’s products based on
performance characteristics.
Markets for some of the Company’s non-DRAM products are expected to grow rapidly, in particular the markets for
NAND Flash and CMOS image sensors. The Company believes that its product and process technology and manufacturing
competencies position it well to compete in these markets. Accordingly, the Company plans to allocate an increasing portion
of its manufacturing capacity to these products in 2005. Success in these markets is dependent in part on the Company’s
ability to timely develop new products that are well received by customers and gain sufficient market share.
Results of Operations
Net sales
Gross margin
Selling, general and administrative
Research and development
Restructure and other charges
Operating income (loss)
$ 4,404.2
1,314.7
332.0
754.9
(22.5)
249.7
2004
2002
2003
(amounts in millions and as a percent of net sales)
$ 2,589.0
100.0 %
(110.6)
29.9 %
332.3
7.5 %
561.3
17.1 %
(0.5) %
--
(1,025.3)
5.7 %
$ 3,091.3
(20.7)
358.2
656.4
116.3
(1,186.5)
100.0 %
(0.7) %
11.6 %
21.2 %
3.8 %
(38.4) %
100.0 %
(4.3)%
12.8 %
21.7 %
--
(39.6) %
The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. The Company’s
fiscal 2004 contained 53 weeks.
Net Sales
Net sales for 2004 increased by 42% as compared to 2003 primarily due to a 20% increase in megabits sold and a 16%
increase in average per megabit selling prices for the Company’s memory products as a result of generally improved market
conditions. During 2004, the Company increased its allocation of manufacturing capacity to Specialty memory products,
including pseudo-static RAM (“PSRAM”), CMOS image sensors and legacy DRAM products. The shift in product mix
contributed to the increase in average per megabit selling prices for 2004 as Specialty memory products and legacy DRAM
products on average had higher selling prices per megabit than the Company’s Core DRAM products. The Company’s overall
megabit production for 2004 increased approximately 23% from 2003 primarily due to manufacturing efficiencies. The growth
rate in megabit production for 2004 was constrained in part by the allocation of wafers to CMOS image sensors, Specialty
memory products and legacy DRAM products which do not require leading edge process technology and therefore inherently
have a lower production growth rate than the Company’s advanced Core DRAM products. Megabit output per wafer is also
lower for Specialty memory and legacy DRAM products because of their relatively lower density and greater complexity.
Further, the Company’s diversification of product mix and prioritization of Specialty memory products necessitated production
changes to optimize long-term wafer process efficiency that resulted in a temporary reduction of wafer output in 2004. DDR
products constituted 57% of the Company’s net sales for both 2004 and 2003 and 20% of net sales in 2002. For 2004, megabit
production was slightly higher than megabit sales. Finished goods inventories at the end of 2004 remained at relatively low
levels.
The Company expects to achieve significant growth in megabit production during 2005 from manufacturing efficiencies
and increased wafer output resulting from the production ramp of its 300mm wafer fabrication facility. Growth in future
megabit production over the next several quarters, however, is expected to be adversely affected by an increased allocation of
wafers to the manufacture of DDR2 products, which have a relatively larger die size, CMOS image sensors, Specialty memory
products and Flash memory.
14
Net sales for 2003 increased by 19% as compared to 2002, primarily due to a 44% increase in megabits of memory sold.
This increase was partially offset by a 17% decrease in average selling prices in 2003 as compared to 2002 for the Company’s
semiconductor memory products. Megabits produced increased 43% in 2003 as compared to 2002, principally due to
manufacturing efficiencies.
Gross Margin
The Company’s reported gross margin percentage for 2004 increased to 30% from a negative 1% for 2003 primarily due to
the 16% increase in average per megabit selling prices and reduced costs per megabit. In addition, compared to 2003, reported
gross margin for 2004 benefited from relatively higher margins on sales of products purchased from the Company’s TECH
joint venture. The Company reduced its overall average cost per megabit for 2004 as compared to 2003 through manufacturing
efficiencies achieved by improving product yields and continuing its transition to products utilizing 110nm process technology
and 6F² technology. The Company’s 6F² technology enables it to produce approximately 20% more potential die per wafer
than standard products, which use 8F² technology. Per megabit cost reductions in the near term will be limited by the effects of
increased production of DDR2 products and Specialty memory products but the Company expects that average selling prices
per megabit for these products will be higher than its primary DDR product. Per megabit cost reductions will also be limited
by higher costs associated with the limited volumes of production at the Company’s 300mm manufacturing facility in Virginia.
The Company’s reported gross margin for 2003 improved as compared to 2002, primarily due to a decrease in per megabit
manufacturing costs, partially offset by the 17% decrease in average selling prices for the Company’s semiconductor products
and the net effects of inventory write-downs. The Company was able to significantly reduce per megabit manufacturing costs
in 2003 through improvements in manufacturing efficiencies. During 2003, the Company completed its migration to 130nm
process technology and continued to transition to 110nm technology.
Inventory write-downs: The Company records charges to cost of goods sold in accordance with generally accepted
accounting principles to write down the carrying values of work in process and finished goods inventories when they exceed
their estimated market values. The inventory write-downs reflect estimates of future market pricing relative to the costs of
production and inventory carrying values and projected timing of product sales. Many of the Company’s semiconductor
components have characteristics similar to commodities that are generally standardized products with selling prices that
fluctuate significantly based on industry-wide relationships of supply and demand. In recent years, a combination of global
economic conditions and a slowing growth rate in demand for personal computers, coupled with worldwide increases in
semiconductor production capacity, caused significant declines in average selling prices for semiconductor components. In all
quarters of fiscal 2002 and 2003, market values of products held in finished goods and work in process inventories at a quarter
end date were below the Company’s manufacturing cost of these products and the Company recognized a charge to cost of
goods sold to write down the carrying value of inventories to their estimated market values. As such charges are recorded in
advance of when inventory subject to the write-down is sold, gross margins in the period of sale are higher than they would be
absent the effect of the previous write-downs. No write-down was necessary for 2004 and, as of September 2, 2004, only a de
minimis amount of previous write-downs remains in ending inventory. As a result, write-downs of inventories prior to 2004
will not have a significant effect on operating results in future periods.
The following table sets forth adjusted gross margins absent the inventory write-downs and the estimated effect of
previous write-downs. These write-downs may not be infrequent or nonrecurring in nature but are a result of significant
market-driven declines in average selling prices. The presentation of these adjusted amounts vary from numbers presented in
accordance with U.S. GAAP and therefore may not be comparable to amounts reported by other companies. However, the
Company believes this information is significant to understanding the Company’s gross margins and analyzing the Company’s
gross margin trends. This non-GAAP information is important to analyzing the Company’s cost of goods sold since the effect
of inventory write-downs must be separated from the manufacturing cost component in order to have a reasonable basis for
understanding trends in cost of goods sold. When evaluating performance and making decisions on how to allocate Company
resources, management uses this non-GAAP data and believes investors should have access to similar data when making their
investment decisions.
2004
2003
(amounts in millions and as a percent of net sales)
2002
Gross margin:
As reported
Inventory write-downs
Estimated effect of previous write-downs
As adjusted
$1,314.7
--
(61.0)
$1,253.7
29.9 %
28.5 %
$ (20.7)
307.0
(481.9)
$ (195.6)
(0.7) %
(6.3) %
$ (110.6)
376.1
(700.3)
$ (434.8)
(4.3) %
(16.8) %
15
“Inventory write-downs” are calculated based on estimates of future market pricing relative to the Company’s costs of
production and inventory carrying values and the projected timing of product sales. The reduction in cost of goods sold
resulting from sales of written-down inventory is reflected as the “Estimated effect of previous write-downs” in the table
above. The estimated effect of previous write-downs is calculated by computing cost of goods sold for each applicable period
as if no write-downs had been recorded and comparing it to cost of goods sold as calculated in accordance with generally
accepted accounting principles. In calculating the estimated effect of previous write-downs, the Company uses the same
judgments and estimates that are used to calculate cost of goods sold.
TECH Semiconductor Singapore Pte. Ltd. (“TECH”): The TECH joint venture supplied approximately 30%, 30% and
20% of the total megabits of memory produced by the Company in 2004, 2003 and 2002, respectively. The Company
generally purchases memory products from TECH at prices determined quarterly, based on a discount from average selling
prices realized by the Company for the immediately preceding quarter. Depending on market conditions, the gross margin
from the sale of TECH products may be higher or lower than the gross margin from the sale of products manufactured by the
Company’s wholly-owned operations. In 2004, 2003 and 2002, the Company realized higher gross margin percentages on
sales of TECH products than for products manufactured by its wholly-owned operations.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses for 2004 were 7% lower than for 2003 primarily due to lower costs
associated with outstanding legal matters and reduced depreciation costs, partially offset by higher levels of performance-based
compensation expense and other personnel costs. Selling, general and administrative (“SG&A”) expenses for 2003 were 8%
higher than for 2002 primarily due to higher costs associated with outstanding legal matters. SG&A expenses for the first
quarter of 2005 are expected to approximate $90 million.
Research and Development
Research and development (“R&D”) expenses vary primarily with the number of development wafers processed, the cost
of advanced equipment dedicated to new product and process development, and personnel costs. Because of the lead times
necessary to manufacture the Company’s products, the Company typically begins to process wafers before completion of
performance and reliability testing. The Company deems development of a product complete once the product has been
thoroughly reviewed and tested for performance and reliability. R&D expenses can vary significantly depending on the timing
of product qualification.
R&D expenses for 2004 increased 15% from 2003 principally due to an increase in development wafers processed during
2004 as the Company increased its product diversification and ramped production at its 300mm wafer fabrication facility,
which primarily ran development wafers in 2004. Higher R&D costs in 2004 also reflect a higher level of expenses related to
CMOS image sensors, Flash memory and Specialty memory products. R&D expenses for 2003 increased 17% from 2002
primarily due to an increase in development wafers processed as the Company expanded its product development efforts and
began ramping production of 300mm development wafers. R&D expenses for the first quarter of 2005 are expected to
approximate $175 million.
The Company’s process technology R&D efforts are focused primarily on development of 95nm, 78nm and smaller line-
width process technologies, which are designed to facilitate the Company’s transition to next generation products. Additional
R&D efforts include process development to support the Company’s 300mm wafer manufacturing, CMOS image sensors,
Flash memory, Specialty memory products including PSRAM and reduced latency DRAM (“RLDRAM”) and new
manufacturing materials. Efforts toward the design and development of new products are concentrated on the Company’s 512
Meg and 1 Gig DDR, DDR2 and DDR3 DRAM products as well as NAND Flash memory, CMOS image sensors and
Specialty memory products.
Restructure and Other Charges
In the second quarter of 2003 the Company announced a plan to restructure its operations. The restructure plan included
the shutdown of the Company’s 200mm production line in Virginia, the discontinuance of certain memory products, including
SRAM and TCAM products, and an approximate 10% reduction of the Company’s worldwide workforce. In connection with
the plan, the Company recorded $109.2 million of restructure charges and additional restructure-related charges of $7.1
million, which are included in cost of goods sold for 2003. The credit to restructure in 2004 primarily reflects gains on sales of
equipment associated with operations shut down in the restructure. The generally higher equipment sales prices reflect
improved market conditions across the semiconductor industry. The Company has substantially completed the restructure
plan. As of August 28, 2003, the Company’s accounts payable and accrued expenses included $3.1 million for remaining costs
16
accrued in connection with the restructure plan. Through September 2, 2004, the Company had paid essentially all of the
severance and other termination benefits and other costs incurred in connection with the restructure plan. The components of
the restructure charge and additional restructure related charges were as follows:
Restructure charge:
Write-down of equipment
Severance and other termination benefits
Write-down of intangible assets
Other
Total restructure charge
Other charges to write down raw materials and
work in process inventories
Total restructure and other charges
2004
2003
(amounts in millions)
$ (21.6)
(0.4)
--
(0.5)
(22.5)
$ 50.7
26.3
18.6
13.6
109.2
--
$ (22.5)
7.1
$ 116.3
Other Operating Expense, Net
Other operating expense for 2004 includes losses of $17.2 million from changes in currency exchange rates. Other
operating income for 2004 includes $7.2 million from the Commonwealth of Virginia for meeting investment commitments at
the Virginia wafer fabrication facility and net gains of $3.9 million on write-downs and disposals of semiconductor equipment.
Other operating expense for 2003 includes net losses on write-downs and disposals of semiconductor equipment of $41.5
million and losses of $10.7 million from changes in currency exchange rates. Other operating expense for 2003 is net of $14.4
million in receipts from the U.S. government in connection with anti-dumping tariffs. Other operating expense for 2002
includes net losses on write-downs and disposals of semiconductor equipment of $27.3 million.
Income Taxes
Income taxes for 2004, 2003 and 2002 primarily reflect taxes on the Company’s non-U.S. operations. U.S. operating
results are not expected to reflect an income tax provision, until such time as the Company utilizes a substantial portion of its
U.S. net operating loss carryforwards and unused tax credits, as any such provision is substantially offset by a corresponding
reduction in the deferred tax valuation allowance. As of September 2, 2004, the Company had aggregate U.S. tax net operating
loss carryforwards of $2.8 billion and unused U.S. tax credits of $106.7 million, which expire through 2024. The Company
also has unused state tax net operating loss carryforwards of $1.7 billion for tax purposes which expire through 2024 and
unused state tax credits of $123.9 million for tax and financial reporting purposes which expire through 2018.
Liquidity and Capital Resources
The Company’s liquidity is highly dependent on average selling prices for its semiconductor memory products and the
timing of capital expenditures, both of which can vary significantly from period to period. As of September 2, 2004, the
Company had cash and marketable investments totaling $1,231.0 million compared to $921.8 million as of August 28, 2003.
Operating Activities: For 2004, net cash provided by operating activities was $1,158.8 million primarily reflecting
improved average selling prices for semiconductor memory products. Cash generated from operations in 2004 principally
reflects the Company’s $157.2 million of income adjusted by $1,217.5 million for non-cash depreciation and amortization
expense partially offset by a $160.5 million increase in inventories consisting primarily of work in process inventories resulting
from transitions in the Company’s product mix and a $130.9 million increase in accounts receivable associated with the
Company’s higher level of sales.
Investing Activities: For 2004, net cash used by investing activities was $1,312.7 million including expenditures for
property, plant and equipment of $1,080.7 million. The Company believes that to 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 expects 2005 capital spending to approximate $1.5 billion. As of September 2, 2004, the Company had
commitments extending into 2006 of approximately $360 million for the acquisition of property, plant and equipment.
17
Financing Activities: For 2004, net cash provided by financing activities was $69.7 million including $450 million
received from Intel Corporation (“Intel”). Payments on equipment purchase contracts and debt were $450.6 million for 2004.
In 2004, the Company received $101.1 million in net proceeds from the issuance of notes payable and sales-leaseback
transactions. In the first quarter of 2004, the Company paid $67.5 million to Toshiba Corporation to redeem the 1.5 million
shares of common stock issued in connection with the acquisition of the Company’s Virginia facility from Toshiba.
In the first quarter of 2004, the Company received $450 million from Intel in exchange for the issuance of stock rights
exchangeable into approximately 33.9 million shares of the Company’s common stock. In conjunction with the issuance of the
stock rights, the Company agreed to achieve operational objectives through May 2005, including certain levels of DDR2
production and 300mm wafer processing capacity. In the event the Company fails to achieve certain 2005 milestones and the
Company’s common stock price is then below Intel’s per share purchase price of $13.29, the Company could be obligated to
pay Intel amounts not to exceed $135 million, a substantial portion of which is payable, at the Company’s election, in the
Company’s common stock.
In the second quarter of 2003, the Company issued $632.5 million of 2.5% Convertible Subordinated Notes (the “Notes”).
Holders of the Notes may convert all or some of their Notes at any time prior to maturity, unless previously redeemed or
repurchased, into the Company’s common stock at a conversion rate of 84.8320 shares for each $1,000 principal amount of the
Notes. This conversion rate is equivalent to a conversion price of approximately $11.79 per share. The Company may redeem
the Notes at any time after February 6, 2006, at declining premiums to par.
Concurrent with the issuance of the Notes, the Company purchased call spread options (the “Call Spread Options”)
covering 53.7 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the
Notes in full. The Call Spread Options have a lower strike price of $11.79, a higher strike price of $18.19, may be settled at the
Company’s option either in cash or net shares and expire on January 29, 2008. Settlement of the Call Spread Options in cash
on January 29, 2008, would result in the Company receiving an amount ranging from zero if the market price per share of the
Company’s common stock is at or below $11.79 to a maximum of $343.4 million if the market price per share of the
Company’s common stock is at or above $18.19.
During the fourth quarter of 2001, the Company received $480.2 million from the issuance of warrants to purchase 29.1
million shares of the Company’s common stock. The warrants entitle the holders to exercise their warrants and purchase
shares of Common Stock for $56.00 per share (the “Exercise Price”) at any time through May 15, 2008 (the “Expiration
Date”). Warrants exercised prior to the Expiration Date will be settled on a “net share” basis, wherein investors receive
common stock equal to the difference between $56.00 and the average closing sale price for the common shares over the 30
trading days immediately preceding the Exercise Date. At expiration, the Company may elect to settle the warrants on a net
share basis or for cash, provided certain conditions are satisfied. As of September 2, 2004, there have been no exercises of
warrants and all warrants issued remain outstanding.
Access to capital markets has historically been important to the Company. Depending on market conditions, the Company
may, from time to time, issue registered or unregistered securities to raise capital to fund a portion of its operations.
Contractual Obligations: The following table summarizes the Company’s significant contractual obligations at
September 2, 2004, and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future
periods.
Total
Less than
1 year
1-3 years
(amounts in millions)
3-5 years
More than
5 years
Notes payable
Capital lease obligations
Operating leases
Purchase obligations
Other long-term liabilities
Total
$ 1,029.6
87.2
62.5
504.2
103.2
$ 1,786.7
$
$
51.2
23.9
16.3
484.9
--
576.3
$
$
305.6
46.9
16.4
17.8
53.1
439.8
$
$
30.3
16.4
6.0
1.5
11.2
65.4
$
$
642.5
--
23.8
--
38.9
705.2
The obligations disclosed above do not include contractual obligations recorded on the Company’s balance sheet as current
liabilities except for the current portion of long-term debt. The expected timing of payment amounts of the obligations
discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different
depending on the time of receipt of goods or services, market prices or changes to agreed-upon amounts for some obligations.
18
Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that
meet any of the following criteria: (1) they are noncancelable, (2) the Company would incur a penalty if the agreement was
cancelled, or (3) the Company must make specified minimum payments even if it does not take delivery of the contracted
products or services (“take-or-pay”). If the obligation to purchase goods or services is noncancelable, the entire value of the
contract was included in the above table. If the obligation is cancelable, but the Company would incur a penalty if cancelled,
the dollar amount of the penalty was included as a purchase obligation. Contracted minimum amounts specified in take-or-pay
contracts are also included in the above table as they represent the portion of each contract that is a firm commitment.
The Company has an agreement with its TECH joint venture to purchase all of TECH’s output of semiconductor memory
components subject to specific terms and conditions. As the purchase quantities are based on qualified production output, the
agreement does not contain a fixed or minimum purchase quantity and therefore the Company did not include the agreement in
its purchase obligations. In addition to purchase quantities, the TECH purchase obligation fluctuates based on average selling
prices for semiconductor memory components which can change significantly from period to period. In 2004, the net cost of
semiconductor components purchased from TECH was $453.8 million.
Recently Issued Accounting Standards
In December 2003, the Financial Accounting Standards Board (“FASB”) issued a revised Interpretation No. 46,
“Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” which provides guidance on the identification
of and reporting for variable interest entities. The Company adopted Interpretation No. 46 in the third quarter of 2004.
Adoption of Interpretation No. 46 did not have a significant impact on the Company’s results of operations or financial
condition.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.
Estimates and judgments are based on historical experience, forecasted future events and various other assumptions that the
Company believes to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions
or conditions. The Company evaluates its estimates and judgments on an ongoing basis. Management believes the accounting
policies below are critical in the portrayal of the Company’s financial condition and results of operations and require
management’s most difficult, subjective or complex judgments.
Contingencies: The Company is subject to the possibility of losses from various contingencies. Considerable judgment is
necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made when it is probable
that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. The
Company accrues a liability and charges operations for the estimated costs of adjudication or settlement of asserted and
unasserted claims existing as of the balance sheet date.
Income taxes: The Company is required to estimate its provision for income taxes and amounts ultimately payable or
recoverable in numerous tax jurisdictions around the world. Estimates involve interpretations of regulations and are inherently
complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of
any fiscal year. The Company is also required to evaluate the realizability of its deferred tax assets on an ongoing basis in
accordance with U.S. GAAP, which requires the assessment of the Company’s performance and other relevant factors when
determining the need for a valuation allowance with respect to these deferred tax assets. Realizability of deferred tax assets is
dependent on the Company’s ability to generate future taxable income.
Inventories: Inventories are stated at the lower of average cost or market value. Cost includes labor, material and
overhead costs, including product and process technology costs. Determining market value of inventories involves numerous
judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in
work in process inventories. To project average selling prices and sales volumes, the Company reviews recent sales volumes,
existing customer orders, current contract prices, industry analysis of supply and demand, seasonal factors, general economic
trends and other information. When these analyses reflect estimated market values below the Company’s manufacturing costs,
the Company records a charge to cost of goods sold in advance of when the inventory is actually sold. Differences in
forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the
estimated net realizable value of product inventories and accordingly the amount of write-down recorded. Due to the volatile
19
nature of the semiconductor memory industry, actual selling prices and volumes often vary significantly from projected prices
and volumes and, as a result, the timing of when product costs are charged to operations can vary significantly.
U.S. GAAP provides for products to be grouped into categories in order to compare costs to market values. The amount of
any inventory write-down can vary significantly depending on the determination of inventory categories. The Company’s
inventory has been categorized as semiconductor memory products or CMOS image sensors. The major characteristics the
Company considers in determining inventory categories are product type and markets.
Product and process technology: Costs incurred to acquire product and process technology or to patent technology
developed by the Company are capitalized and amortized on a straight-line basis over periods currently ranging up to 10 years.
The Company capitalizes a portion of costs incurred based on its analysis of historical and projected patents issued as a percent
of patents filed. Capitalized product and process technology costs are amortized over the shorter of (i) the estimated useful life
of the technology, (ii) the patent term or (iii) the term of the technology agreement.
Property, plant and equipment: The Company reviews the carrying value of property, plant and equipment for
impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be
recoverable from the estimated future cash flows expected to result from its use and/or disposition. In cases where
undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount
by which the carrying value exceeds the estimated fair value of the assets. The estimation of future cash flows involves
numerous assumptions which require judgment by the Company, including, but not limited to, future use of the assets for
Company operations versus sale or disposal of the assets, future selling prices for the Company’s products and future
production and sales volumes. In addition, judgment is required by the Company in determining the groups of assets for which
impairment tests are separately performed.
Research and development: Costs related to the conceptual formulation and design of products and processes are
expensed as research and development when incurred. Determining when product development is complete requires judgment
by the Company. The Company deems development of a product complete once the product has been thoroughly reviewed
and tested for performance and reliability.
Certain Factors
In addition to the factors discussed elsewhere in this Form 10-K, 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.
We have experienced dramatic declines in average selling prices for our memory products which have adversely
affected our business.
In several recent years, we experienced annual decreases in per megabit average selling prices for our semiconductor
memory products including: 17% in 2003, 53% in 2002, 60% in 2001, 37% in 1999, 60% in 1998 and 75% in 1997. At times,
average selling prices for our semiconductor products have been below our costs. If average selling prices for our memory
products decrease faster than we can decrease per megabit costs, our business, results of operations or financial condition could
be materially adversely affected.
Increased worldwide DRAM production or lack of demand for DRAM could lead to further declines in average selling
prices for DRAM.
The transition to smaller line-width process technologies and 300mm wafers in the industry could, depending upon the rate
of transition, lead to a significant increase in the worldwide supply of DRAM. Increases in worldwide supply of DRAM also
result from DRAM fab capacity expansions, either by way of new facilities, increased capacity utilization or reallocation of
other semiconductor production to DRAM production. Several of our competitors have announced plans to increase
production through construction of new facilities or expansion of existing facilities. Increases in worldwide supply of DRAM,
if not offset by increases in demand, could lead to further declines in average selling prices for our products and could
materially adversely affect our business, results of operations or financial condition.
20
As the computer industry matures and the growth rate of computers sold or growth rate of the amount of
semiconductor memory included in each computer decreases, sales of our semiconductor products could decrease.
We are dependent on the computing market as most of the semiconductor products we sell are used in computers, servers
or peripheral products. Approximately 75% of our sales of semiconductor products for 2004 were to the computing market.
DRAMs are the most widely used semiconductor memory components in computers. In recent years, the growth rate of
computers sold has slowed or declined largely due to the maturation of the computer industry. The reduction in the growth rate
of computers sold or growth rate of the average amount of semiconductor memory included in each computer could reduce
sales of our semiconductor products and our business, results of operations or financial condition could be materially adversely
affected.
We may be unable to reduce our per megabit manufacturing costs at the same rate as we have in the past.
Historically, we have decreased per megabit manufacturing costs through improvements in our manufacturing processes,
including reducing the die size of our existing products. In future periods, we may be unable to reduce our per megabit
manufacturing costs or reduce costs at historical rates. We manufacture products using highly complex processes that require
technologically advanced equipment and continuous modification to improve yields and performance. Each generation of new
products adds complexity to the manufacturing process and the initial production of new products is typically characterized by
relatively high costs due to lower product yields, reduced wafer throughput and less efficient use of assets. Reduction of per
megabit manufacturing costs in future periods is dependent on our ability to:
•
•
•
•
successfully develop product and process technology, including future transitions to 95nm and smaller line-width
process technologies;
ramp product and process technology improvements rapidly and effectively to commercial volumes across
facilities;
achieve acceptable levels of manufacturing wafer output and yields, which may decrease as we implement more
complex technologies, including our transition to 300mm wafer processing; and
offset increases in per megabit manufacturing costs resulting from shifts in product mix to CMOS image sensors,
Specialty memory products and Flash memory.
If we are unable to timely and efficiently convert our manufacturing operations to 300mm wafer processing, our
business, results of operations or financial condition could be materially adversely affected.
In 2004, we began ramping production of 300mm wafers at our wafer fabrication facility in Virginia. As of the end of
2004, production at the Virginia facility had not reached levels necessary to achieve mature product yield and cost-efficient
utilization of the facility. Until such time that production at the Virginia facility reaches mature product yields and significant
volume with regards to capacity utilization, it will adversely affect our results of operations. We are assessing which of our
other facilities will be converted to 300mm wafer fabrication and when those facilities will be converted. We may also
experience disruptions in manufacturing operations, reduced wafer output and reduced yields during our conversion of other
facilities to 300mm wafers.
We may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments.
Our cash flows from operations depend primarily on the volume of semiconductor memory sold, average selling prices and
per megabit manufacturing costs. To develop new product and process technologies, support future growth, achieve operating
efficiencies and maintain product quality, we must make significant capital investments in manufacturing technology, facilities
and capital equipment, research and development, and product and process technology. In addition to cash provided by
operations, we have from time to time utilized external sources of financing. Depending on general market and economic
conditions or other factors, we may not be able to generate sufficient cash flows to fund our operations and make adequate
capital investments or access capital markets for funds on acceptable terms.
The semiconductor memory industry is highly competitive.
We face intense competition from a number of companies, including Elpida Memory, Inc., Hynix Semiconductor Inc.,
Infineon Technologies AG and Samsung Electronics Co., Ltd. Additionally, we face competition from emerging companies in
Taiwan and China who have announced plans to significantly expand the scale of their operations. Some of our competitors
are large corporations or conglomerates that may have greater resources to withstand downturns in the semiconductor markets
21
in which we compete, invest in technology and capitalize on growth opportunities. Our competitors seek to increase silicon
capacity, improve yields, reduce die size and minimize mask levels in their product designs. These factors have significantly
increased worldwide supply and put downward pressure on prices.
Historically, various governments have provided economic assistance to international competitors, which has enabled, or
artificially supported, competitors’ production of semiconductor memory, particularly DRAM. This factor may continue to
increase the supply of DRAM and other semiconductor products in future periods.
Changes in foreign currency exchange rates could materially adversely affect our business, results of operations or
financial condition.
Our financial statements are prepared in accordance with U.S. GAAP and are reported in U.S. dollars. Across our multi-
national operations there are transactions and balances denominated in other currencies, primarily the Japanese yen and euro.
In the event that the U.S. dollar weakens significantly compared to the Japanese yen or euro, reported results of operations or
financial condition will be adversely affected.
Current economic and political conditions may harm our business.
Throughout most of the 1980s and 1990s, industry revenue for the DRAM market grew at a much faster rate than the
overall economy, driven by both growth in sales of computers and the amount of memory included in each computer sold. In
recent years, the DRAM market has grown at a significantly slower rate as the computer industry has continued to mature. As
a result, we expect that trends in the DRAM and computer industries will more closely parallel broader macroeconomic events
and trends. Global economic conditions and the effects of military or terrorist actions may cause significant disruptions to
worldwide commerce. If these disruptions result in delays or cancellations of customer orders, a decrease in corporate
spending on information technology or our inability to effectively market, manufacture or ship our products, our business,
results of operations or financial condition could be materially adversely affected. If, for any reason, we are unable to access
the capital markets over an extended period of time, we may be unable to make property, plant and equipment expenditures,
implement our research and development efforts or fund our operations, which could materially adversely affect our business,
results of operations or financial condition.
If our TECH joint venture experiences financial difficulty, or if our supply of semiconductor products from TECH is
disrupted, our business, results of operations or financial condition could be materially adversely affected.
TECH supplied approximately 30% of our total megabits of memory produced in 2004. We have agreements to purchase
all of the products manufactured by TECH subject to specific terms and conditions. In recent periods, we have realized higher
margins on products purchased from TECH than products manufactured by our wholly-owned facilities. Any reduction in
supply could materially adversely affect our business, results of operations or financial condition. As of September 2, 2004,
we had intangible assets with a net book value of $62.0 million relating to the supply arrangement to purchase product from
TECH. In the event that our supply of semiconductor products from TECH is reduced or eliminated, we may be required to
write off part or all of these assets and our revenues and results of operations would be adversely affected.
If we are unable to respond to customer demand for diversified semiconductor memory products or are unable to do so
in a cost-effective manner, we may lose market share and our business, results of operations or financial condition could
be materially adversely affected.
In recent periods, the semiconductor memory market has become increasingly segmented, with diverse memory needs
being driven by the different requirements of desktop and notebook computers, servers, workstations, handheld devices, and
communications, industrial and other applications that demand specific memory solutions. We offer customers a variety of
semiconductor memory products, including DDR, DDR2, SDRAM, EDO, Flash and PSRAM.
We need to dedicate significant resources to product design and development to respond to customer demand for the
continued diversification of semiconductor products. If we are unable to invest sufficient resources to meet the diverse
memory needs of customers, we may lose market share. In addition, as we diversify our product lines we may encounter
difficulties penetrating certain markets, particularly markets where we do not have existing customers. If we are unable to
respond to customer demand for market diversification in a cost-effective manner, our business, results of operations or
financial condition could be materially adversely affected.
22
An adverse determination that our products or manufacturing processes infringe the intellectual property rights of
others could materially adversely affect our business, results of operations or financial condition.
As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may
in the future assert, that our products or manufacturing processes infringe their intellectual property rights. We are engaged in
litigation with Rambus, Inc. (“Rambus”) relating to certain of Rambus’ patents and certain of our claims and defenses. On
August 28, 2000, we filed a complaint (amended) against Rambus in U.S. District Court for the District of Delaware seeking
monetary damages and declaratory and injunctive relief. Among other things, our amended complaint alleges violation of
federal antitrust laws, breach of contract, fraud, deceptive trade practices, and negligent misrepresentation. The complaint also
seeks a declaratory judgment (a) that certain Rambus patents are not infringed by us, are invalid, and/or are unenforceable (b)
that we have an implied license to those patents and (c) that Rambus is estopped from enforcing those patents against us. On
February 15, 2001, Rambus filed an answer and counterclaim in Delaware denying that we are entitled to relief, alleging
infringement of the eight Rambus patents named in our declaratory judgment claim, and seeking monetary damages and
injunctive relief. A number of other suits are currently pending in Europe alleging that certain of our SDRAM and DDR
SDRAM products infringe various of Rambus’ country counterparts to its European patent 525 068, including: on September
1, 2000, Rambus filed suit against Micron Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany;
on September 13, 2000, Rambus filed suit against Micron Europe Limited in the High Court of Justice, Chancery Division in
London, England; on September 22, 2000, Rambus filed a complaint against us and Reptronic (a distributor of our products) in
Court of First Instance of Paris, France; on September 29, 2000, we filed suit against Rambus in the Civil Court of Milan, Italy,
alleging invalidity and non-infringement. In addition, on December 29, 2000, we filed suit against Rambus in the Civil Court
of Avezzano, Italy, alleging invalidity and non-infringement of the Italian counterpart to European patent 1 004 956. On
August 10, 2001, Rambus filed suit against us and Assitec (an electronics retailer) in the Civil Court of Pavia, Italy, alleging
that certain DDR SDRAM products infringe the Italian counterpart to European patent 1 022 642. In the European suits
against us, Rambus is seeking monetary damages and injunctive relief. We also are engaged in litigation with Motorola, Inc.
(“Motorola”) and Freescale Semiconductor, Inc., a subsidiary of Motorola (“Freescale”), relating to certain of our patents and
certain of Freescale’s patents. On January 8, 2004, Motorola filed suit against us in the U.S. District Court for the Western
District of Texas (Austin) alleging infringement of ten Motorola patents. On March 15, 2004, we filed an answer and a
counterclaim alleging infringement of seventeen of our patents. Freescale was later added as a party with Motorola. On March
30, 2004, we filed a separate action against Motorola in the U.S. District Court for the Western District of Wisconsin
(Madison) alleging infringement of six additional of our patents, and we added a seventh patent in an amended complaint filed
on April 23, 2004. On June 10, 2004, the Wisconsin court granted Motorola’s motion to transfer the case to Texas, and the two
cases subsequently were consolidated. The above lawsuits pertain to certain of our SDRAM and DDR DRAM products, which
account for a significant portion of our net sales. We are unable to predict the outcome of these suits. A court determination
that our products or manufacturing processes infringe the intellectual property rights of others could result in significant
liability and/or require us to make material changes to our products and/or manufacturing processes. Any of the foregoing
results could have a material adverse effect on our business, results of operations or financial condition.
We have a number of patent and intellectual property license agreements. Some of these license agreements require us to
make one time or periodic payments. We may need to obtain additional patent licenses or renew existing license agreements in
the future. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms.
Allegations of antitrust violations.
On June 17, 2002, we received a grand jury subpoena from the U.S. District Court for the Northern District of California
seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”) into possible
antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry. We are cooperating fully and actively
with the DOJ in its investigation of the DRAM industry.
Subsequent to the commencement of the DOJ investigation, a number of purported class action lawsuits were filed against
us and other DRAM suppliers. Sixteen cases were filed between June 21, 2002, and September 19, 2002, in the following
federal district courts: one in the Southern District of New York, five in the District of Idaho and ten in the Northern District
of California. The foregoing federal district court cases were transferred to the U.S. District Court for the Northern District of
California (San Francisco) for consolidated proceedings. On October 6, 2003, the plaintiffs filed a consolidated amended class
action complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who
purchased DRAM directly from the various DRAM suppliers during the period from approximately November 1, 2001 through
at least June 30, 2002. The consolidated amended complaint alleges price-fixing in violation of the Sherman Act and seeks
treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. Eight additional
cases were filed between August 2, 2002, and March 11, 2003, in the following California state superior courts: five in San
Francisco County, one in Santa Clara County, one in Los Angeles County and one in Humboldt County. Each of the California
23
state cases purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM during a specified
time period commencing December 1, 2001. The complaints allege violations of California’s Cartwright Act and state unfair
competition law and unjust enrichment and seek treble monetary damages, restitution, costs, attorneys’ fees, and an injunction
against the allegedly unlawful conduct. The foregoing California state cases were transferred to San Francisco County
Superior Court for consolidated proceedings. On October 15, 2003, the plaintiffs filed a consolidated amended class action
complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who purchased
DRAM indirectly from the various DRAM suppliers during the period from November 1, 2001 through June 30, 2002. The
consolidated amended complaint alleges violations of California’s Cartwright Act and state unfair competition law and unjust
enrichment and seeks treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful
conduct. On March 16, 2004, a related case was filed in state court in Salem, Massachusetts. It purports to be on behalf of a
class of individuals and entities who indirectly purchased DRAM in Massachusetts between November 1, 2001 and June 30,
2002. The complaint alleges unjust enrichment relating to the sale and pricing of DRAM products and seeks an unspecified
amount of restitution. The case was removed to the Massachusetts federal district court and transferred to the U.S. District
Court for the Northern District of California (San Francisco) for consolidated proceedings. However, a motion by the plaintiff
to remand the case to Massachusetts is still pending. On May 25, 2004, a related case was filed in state court in Collier
County, Florida. It purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM in Florida
and nineteen other states between November 1, 2001 and June 30, 2002. The complaint alleges violation of the Florida
Deceptive and Unfair Trade Practices Act and unjust enrichment relating to the sale and pricing of DRAM products and seeks
compensatory damages, costs, attorneys’ fees, and disgorgement or restitution. On August 19, 2004, a related case was filed in
state court in Middlesex County, Massachusetts. It purports to be on behalf of a class of individuals and entities who indirectly
purchased DRAM in Massachusetts between September 1, 2001 and June 30, 2002. The complaint alleges violations of the
Massachusetts Consumer Protection Act relating to the sale and pricing of DRAM products and seeks treble monetary
damages, costs, and attorneys’ fees. On September 29, 2004, a related case was filed in state court in Brooke County, West
Virginia. It purports to be on behalf of a class of individuals and entities who indirectly purchase DRAM in West Virginia
from at least 1999 through the filing of the complaint. The complaint alleges violations of the West Virginia Antitrust Act
relating to the sale and pricing of DRAM products and seeks treble monetary damages, costs and attorneys’ fees. On October
4, 2004, a related case was filed in state court in Mecklenburg County, North Carolina. It purports to be on behalf of a class of
individuals and entities who indirectly purchase DRAM and/or products containing DRAM in North Carolina between at least
1999 and the filing of the complaint. The complaint alleges violations of the North Carolina Statutes for Antitrust and Unfair
Competition relating to the sale and pricing of DRAM products and seeks actual damages, treble damages, interest, costs, and
attorneys’ fees. On October 5, 2004, a related case was filed in state court in Wayne County, Michigan. It purports to be on
behalf of a class of individuals and entities who indirectly purchase DRAM and /or products containing DRAM in Michigan
from at least 1999 through the filing of the complaint. The complaint alleges violations of the Michigan Antitrust Reform Act
relating to the sale and pricing of DRAM products and seeks treble monetary damages, costs, interest, and attorneys’ fees. On
October 6, 2004, a related case was filed in state court in Broward County, Florida. It purports to be on behalf of a class of
individuals and entities who indirectly purchase DRAM in Florida from at least July 1999 through at least June of 2002. The
complaint alleges violations of Florida Deceptive and Unfair Trade Practices Act relating to the sale and pricing of DRAM
products and seeks monetary damages, restitution, costs, and attorneys’ fees. We are unable to predict the outcome of these
suits. Based upon our analysis of the claims made and the nature of the DRAM industry, we believe that class treatment of
these cases is not appropriate and that any purported injury alleged by plaintiffs would be more appropriately resolved on a
customer-by-customer basis. We can give no assurance that final resolution of these civil suits will not result in significant
liability and will not have a material adverse effect on our business, results of operations or financial condition.
Allegations of anticompetitive conduct.
On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against
us and other DRAM suppliers. The complaint alleges certain causes of action under California state law including conspiracy
to restrict output and fix prices on Rambus DRAM (“RDRAM”), conspiracy to monopolize various relevant markets,
intentional interference with prospective economic advantage relating to RDRAM, and unfair competition to disadvantage
RDRAM. The complaint seeks treble damages, punitive damages, attorneys’ fees, costs, and a permanent injunction enjoining
the defendants from the conduct alleged in the complaint. We are unable to predict the outcome of the suit. A court
determination against us could result in significant liability and could have a material adverse effect on our business, results of
operations or financial condition.
24
New product development may be unsuccessful.
We are developing new products that complement our traditional memory products or leverage their underlying design or
process technology. We anticipate expending significant resources for new semiconductor product development over the next
several years. There can be no assurance that our product development efforts will be successful, that we will be able to cost-
effectively manufacture these new products, that we will be able to successfully market these products or that margins
generated from sales of these products will recover costs of development efforts.
We face risks associated with our international sales and operations that could materially adversely affect our business,
results of operations or financial condition.
Sales to customers outside the United States approximated 59% of our consolidated net sales for 2004. In addition, we
have manufacturing operations in Italy, Japan, Puerto Rico, Scotland and Singapore. Our international sales and operations are
subject to a variety of risks, including:
•
•
•
•
•
•
•
currency exchange rate fluctuations,
export duties, changes to import and export regulations, and restrictions on the transfer of funds,
political and economic instability,
problems with the transportation or delivery of our products,
issues arising from cultural or language differences and labor unrest,
longer payment cycles and greater difficulty in collecting accounts receivable, and
compliance with trade and other laws in a variety of jurisdictions.
These factors may materially adversely affect our business, results of operations or financial condition.
If our manufacturing process is disrupted, our business, results of operations or financial condition could be materially
adversely affected.
We manufacture products using highly complex processes that require technologically advanced equipment and
continuous modification to improve yields and performance. Difficulties in the manufacturing process can reduce yields or
disrupt production and may increase our per megabit manufacturing costs. From time to time, we have experienced minor
disruptions in our manufacturing process as a result of power outages or equipment failures. If production at a fabrication
facility is disrupted for any reason, manufacturing yields may be adversely affected or we may be unable to meet our
customers’ requirements and they may purchase products from other suppliers. This could result in a significant increase in
manufacturing costs or loss of revenues or damage to customer relationships, which could materially adversely affect our
business results of operations or financial condition.
Disruptions in our supply of raw materials could materially adversely affect our business, results of operations or
financial condition.
Our operations require raw materials that meet exacting standards. We generally have multiple sources of supply for our
raw materials. However, only a limited number of suppliers are capable of delivering certain raw materials that meet our
standards. Various factors could reduce the availability of raw materials such as silicon wafers, photomasks, chemicals, gases,
lead frames and molding compound. Shortages may occur from time to time in the future. In addition, any transportation
problems could delay our receipt of raw materials. Lead times for the supply of raw materials have been extended in the past.
If our supply of raw materials is disrupted or our lead times extended, our business, results of operations or financial condition
could be materially adversely affected.
25
If we fail to achieve certain milestones, we could be obligated to pay Intel Corporation amounts up to $135 million.
In conjunction with the issuance of stock rights to Intel in September 2003, we agreed to achieve operational objectives
through May 2005, including certain levels of DDR2 production and 300mm wafer processing capacity. If we fail to achieve
certain 2005 milestones and our common stock price is then below Intel’s purchase price of $13.29, we could be obligated to
pay Intel amounts up to $135 million, a substantial portion of which is payable, at our election, in our common stock.
Products that do not meet specifications or that contain, or are perceived by our customers to contain, defects or that
are otherwise incompatible with end uses could impose significant costs on us or otherwise materially adversely affect
our business, results of operations or financial condition.
Because the design and production process for semiconductor memory is highly complex, it is possible that we may
produce products that do not comply with customer specifications, contain defects or are otherwise incompatible with end uses.
If, despite design review, quality control and product qualification procedures, problems with nonconforming, defective or
incompatible products occur after we have shipped such products, we could be adversely affected in the following ways:
• we may replace product or otherwise compensate customers for costs incurred or damages caused by defective or
incompatible product, and
• we may encounter adverse publicity, which could cause a decrease in sales of our products.
We expect to make future acquisitions where advisable, which involve numerous risks.
We expect to make future acquisitions where we believe it is advisable to enhance shareholder value. Acquisitions involve
numerous risks, including:
•
•
•
•
•
increasing our exposure to changes in average selling prices for semiconductor memory products,
difficulties in integrating the operations, technologies and products of the acquired companies,
increasing capital expenditures to upgrade and maintain facilities,
increasing debt to finance any acquisition,
diverting management’s attention from normal daily operations,
• managing larger operations and facilities and employees in separate geographic areas, and
•
hiring and retaining key employees.
Mergers and acquisitions of high-technology companies are inherently risky, and future acquisitions may not be successful
and may materially adversely affect our business, results of operations or financial condition.
26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Substantially all of the Company’s investments are at fixed interest rates; therefore, the fair value of these instruments is
affected by changes in market interest rates. The Company believes that the market risk arising from its holdings of
investments is minimal as the Company’s investments generally mature within one year.
Substantially all of the Company’s debt is at fixed interest rates; therefore, the fair value of the debt fluctuates based on
changes in market interest rates. The estimated fair market value of the Company’s debt approximated $1.2 billion as of
September 2, 2004 and $1.3 billion as of August 28, 2003. The Company entered into an interest rate swap agreement (the
“Swap”) that effectively converted, beginning August 29, 2003, the 2.5% fixed interest rate on the Company’s $632.5 million
Convertible Subordinated Notes (the “Notes”) to a variable interest rate based on the 3-month London Interbank Offering Rate
(“LIBOR”) less 65 basis points. The Swap qualifies as a fair-value hedge under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” The gain or loss from changes in the fair value of the Swap is expected to be highly
effective at offsetting the gain or loss from changes in the fair value of the Notes attributable to changes in interest rates.
Foreign Currency Exchange Rate Risk
The functional currency for substantially all of the Company’s operations is the U.S. dollar. The Company held aggregate
cash and other assets in foreign currency valued at U.S. $118.9 million as of September 2, 2004, and U.S. $203.1 million as of
August 28, 2003 (including deferred income tax assets denominated in Japanese yen valued at U.S. $52.4 million as of
September 2, 2004, and U.S. $105.4 million as of August 28, 2003). The Company also held aggregate foreign currency
liabilities valued at U.S. $403.6 million as of September 2, 2004, and U.S. $513.2 million as of August 28, 2003 (including
debt denominated in Japanese yen valued at U.S. $113.1 million as of September 2, 2004, and U.S. $170.5 million as of August
28, 2003). Foreign currency receivables and payables as of September 2, 2004, were comprised primarily of Japanese yen,
euros, Singapore dollars and British pounds. The Company estimates that, based on its assets and liabilities denominated in
currencies other than U.S. dollar as of September 2, 2004, a 1% change in the exchange rate versus the U.S. dollar would result
in foreign currency gains or losses of approximately $2 million for the Japanese yen and $1 million for the euro.
27
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Consolidated Financial Statements as of September 2, 2004, and August 28, 2003, and for the fiscal years
ended September 2, 2004, August 28, 2003 and August 29, 2002:
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts
Page
29
30
31
32
33
48
53
28
MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions except per share amounts)
For the year ended
Net sales
Cost of goods sold
Gross margin
Selling, general and administrative
Research and development
Restructure
Other operating expense, net
Operating income (loss)
Interest income
Interest expense
Other non-operating income (expense), net
Income (loss) before taxes
Income tax (provision) benefit
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
September 2,
2004
August 28,
2003
August 29,
2002
$ 4,404.2
3,089.5
1,314.7
332.0
754.9
(22.5)
0.6
249.7
15.2
(36.0)
3.1
232.0
(74.8)
$ 157.2
$ 3,091.3
3,112.0
(20.7)
358.2
656.4
109.2
42.0
(1,186.5)
18.1
(36.5)
4.7
(1,200.2)
(73.0)
$ (1,273.2)
$ 2,589.0
2,699.6
(110.6)
332.3
561.3
--
21.1
(1,025.3)
51.6
(17.1)
(7.7)
(998.5)
91.5
$ (907.0)
$
0.24
0.24
$
(2.11)
(2.11)
$
(1.51)
(1.51)
Number of shares used in per share calculations:
Basic
Diluted
641.5
645.7
607.5
607.5
601.5
601.5
See accompanying notes to consolidated financial statements.
29
MICRON TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in millions except par value amounts)
As of
Assets
Cash and equivalents
Short-term investments
Receivables
Inventories
Prepaid expenses
Deferred income taxes
Total current assets
Intangible assets, net
Property, plant and equipment, net
Deferred income taxes
Restricted cash
Other assets
Total assets
Liabilities and shareholders’ equity
Accounts payable and accrued expenses
Deferred income
Equipment purchase contracts
Current portion of long-term debt
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies
Redeemable common stock
Common stock, $0.10 par value, authorized 3.0 billion shares,
issued and outstanding 611.5 million and 609.9 million shares
Additional capital
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
September 2,
2004
August 28,
2003
$ 486.1
744.9
773.7
578.1
37.4
18.5
2,638.7
276.2
4,712.7
41.4
27.6
63.4
$ 7,760.0
$ 796.2
35.2
70.1
70.6
972.1
1,027.9
42.0
103.2
2,145.2
$ 570.3
351.5
642.5
417.4
27.7
27.6
2,037.0
289.6
4,510.5
83.7
125.2
112.2
$ 7,158.2
$ 714.7
22.7
166.7
88.9
993.0
997.1
41.3
89.3
2,120.7
--
66.5
61.2
4,663.9
890.1
(0.4)
5,614.8
$ 7,760.0
60.8
4,176.3
733.8
0.1
4,971.0
$ 7,158.2
See accompanying notes to consolidated financial statements.
30
MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in millions)
Common Stock
Number
of Shares Amount
Accumulated
Other
Total
Additional Retained Comprehensive Shareholders’
Capital Earnings Income (Loss)
Equity
Balance at August 30, 2001
598.4
$ 59.8
$ 4,153.7 $ 2,924.6
$
(3.3)
$ 7,134.8
Comprehensive income (loss):
Net loss
Other comprehensive income (loss):
Net change in unrealized gain (loss)
on investments, net of tax
Total comprehensive income (loss)
Stock issued under stock plans
Stock issued in connection with purchase
of DRAM assets from Toshiba
Corporation
Redeemable common stock accretion
Balance at August 29, 2002
Comprehensive income (loss):
Net loss
Other comprehensive income (loss):
Net change in unrealized gain (loss)
on investments, net of tax
Total comprehensive income (loss)
Stock issued under stock plans
Purchase of call spread options
Repurchase and retirement of
common stock
Redeemable common stock accretion
Balance at August 28, 2003
Comprehensive income:
Net income
Other comprehensive income (loss):
Net change in unrealized gain (loss)
on investments, net of tax
Total comprehensive income
Stock issued under stock plans
Issuance of stock rights
Redemption of common stock
Redeemable common stock accretion and
fair value adjustment
Balance at September 2, 2004
(907.0)
4.3
(907.0)
4.3
(902.7)
76.4
4.5
0.5
75.9
1.5
604.4
$ 60.3
(2.1)
$ 4,229.6 $ 2,015.5
$
1.0
(2.1)
$ 6,306.4
(1,273.2)
(1,273.2)
(0.9)
5.7
0.5
56.9
(109.1)
(0.2)
609.9
$ 60.8
(1.1)
(2.2)
(6.3)
$ 4,176.3 $ 733.8
$
0.1
157.2
(0.5)
3.1
0.4
(1.5)
37.6
450.0
(0.9)
(1,274.1)
57.4
(109.1)
(3.3)
(6.3)
$ 4,971.0
157.2
(0.5)
156.7
38.0
450.0
611.5
$ 61.2
(0.9)
$ 4,663.9 $ 890.1
$
(0.4)
(0.9)
$ 5,614.8
See accompanying notes to consolidated financial statements.
31
MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
For the year ended
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization
Noncash restructure and other charges (benefits)
Provision to write down inventories to estimated market values
Loss (gain) from write-down or disposition of equipment
Loss (gain) from write-down or disposition of investments
Change in operating assets and liabilities:
(Increase) decrease in receivables
Increase in inventories
Increase in accounts payable and accrued expenses
Deferred income taxes
Other
Net cash provided by operating activities
Cash flows from investing activities
Purchases of available-for-sale securities
Expenditures for property, plant and equipment
Proceeds from maturities of available-for-sale securities
Proceeds from sales of available-for-sale securities
(Increase) decrease in restricted cash
Proceeds from sales of property, plant and equipment
Purchase of DRAM assets from Toshiba Corporation
Other
Net cash used for investing activities
Cash flows from financing activities
Proceeds from issuance of stock rights
Proceeds from issuance of debt
Proceeds from equipment sale-leaseback transactions
Proceeds from issuance of common stock
Payments on equipment purchase contracts
Repayments of debt
Redemption of common stock
Debt issuance costs
Purchase of call spread options
Net cash provided by (used for) financing activities
Net increase (decrease) in cash and equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year
Supplemental disclosures
Income taxes refunded, net
Interest paid, net of amounts capitalized
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and capital leases
September 2,
2004
August 28,
2003
August 29,
2002
$
157.2
$ (1,273.2)
$
(907.0)
1,217.5
(37.0)
--
(3.9)
0.6
(130.9)
(160.5)
30.1
57.8
27.9
1,158.8
(1,799.4)
(1,080.7)
1,179.0
225.7
101.6
92.7
--
(31.6)
(1,312.7)
450.0
63.5
37.6
37.0
(343.7)
(106.9)
(67.5)
(0.3)
--
69.7
(84.2)
570.3
486.1
9.8
(27.4)
280.0
$
$
1,209.9
85.2
307.0
48.4
(0.6)
(103.8)
(196.2)
98.8
70.5
38.2
284.2
(758.0)
(821.5)
832.0
319.1
(75.1)
20.0
--
(34.6)
(518.1)
--
667.5
60.6
53.5
(143.2)
(106.0)
--
(17.3)
(109.1)
406.0
172.1
398.2
570.3
104.9
(27.1)
292.1
$
$
1,177.4
--
376.1
28.4
11.5
239.0
(378.9)
39.9
11.4
(19.7)
578.1
(1,867.9)
(759.9)
1,842.0
596.6
(0.8)
4.5
(252.4)
(76.0)
(513.9)
--
--
--
71.8
(122.3)
(84.6)
--
--
--
(135.1)
(70.9)
469.1
398.2
540.0
(11.5)
138.7
$
$
See accompanying notes to consolidated financial statements.
32
MICRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tabular dollar amounts in millions except per share amounts)
Significant Accounting Policies
Basis of presentation: Micron Technology, Inc. and its subsidiaries (hereinafter referred to collectively as the
“Company”) manufacture and market DRAMs, Flash memory, CMOS image sensors and other semiconductor components.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting
principles and include the accounts of the Company and its consolidated subsidiaries. All significant intercompany
transactions and balances have been eliminated.
The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. The Company’s
fiscal year 2004, which ended on September 2, 2004, contained 53 weeks and its first quarter of fiscal 2004 contained 14
weeks. Fiscal years 2003 and 2002 each contained 52 weeks and ended on August 28, 2003, and August 29, 2002,
respectively. All period references are to the Company’s fiscal periods unless otherwise indicated.
Reclassifications: Certain reclassifications have been made, none of which affected results of operations, to present the
financial statements on a consistent basis.
Use of estimates: The preparation of financial statements and related disclosures in conformity with U.S. generally
accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. Estimates and judgments are based on historical experience,
forecasted future events and various other assumptions that the Company believes to be reasonable under the circumstances.
Estimates and judgments may differ under different assumptions or conditions. The Company evaluates its estimates and
judgments on an ongoing basis. Actual results could differ from estimates.
Certain concentrations: Approximately 75% of the Company’s net sales for 2004 were to the computing market. Sales
to one customer were 14.1 %, 14.9% and 16.5% of the Company’s net sales in 2004, 2003 and 2002, respectively. Sales to
another customer were 13.2%, 13.2% and 12.0% of the Company’s net sales in 2004, 2003 and 2002, respectively. Certain
components used by the Company in manufacturing semiconductor products are available from a limited number of suppliers.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash,
investment securities and trade accounts receivable. The Company invests through high-credit-quality financial institutions
and, by policy, limits the concentration of credit exposure by restricting investments with any single obligor. A concentration
of credit risk may exist with respect to trade receivables as a substantial portion of the Company’s customers are affiliated with
the computing industry. The Company performs ongoing credit evaluations of customers worldwide and generally does not
require collateral from its customers. Historically, the Company has not experienced significant losses on receivables.
Product warranty: The Company generally provides a limited warranty that its products are in compliance with
Company specifications existing at the time of delivery. Under the Company’s general terms and conditions of sale, liability
for certain failures of product during a stated warranty period is usually limited to repair or replacement of defective items or
return of, or a credit with respect to, amounts paid for such items. Under certain circumstances, the Company may provide
more extensive limited warranty coverage and general legal principles may impose upon the Company more extensive liability
than that provided under the Company’s general terms and conditions. The Company’s warranty obligations are not material.
Revenue recognition: The Company recognizes revenue when persuasive evidence of a sales arrangement exists, delivery
has occurred, the price is fixed or determinable and collectibility is reasonably assured. Because of frequent changes in market
prices for the Company’s products, sales made under agreements allowing pricing protection or rights of return (other than for
product warranty) are deferred until customers have sold the product.
Advertising: Advertising costs are charged to operations as incurred. The Company incurred $5.2 million, $11.1 million
and $13.6 million of advertising costs in 2004, 2003 and 2002, respectively.
Research and development: Costs related to the conceptual formulation and design of products and processes are
expensed as research and development as incurred. Determining when product development is complete requires judgment by
the Company. The Company deems development of a product complete once the product has been thoroughly reviewed and
tested for performance and reliability. Subsequent to product qualification, product costs are valued in inventory.
33
Segment information: The Company has determined, based on the nature of its operations and products offered to
customers, that its only reportable segment is Semiconductor Operations. The Semiconductor Operations segment’s primary
product is DRAM.
Stock-based compensation: Employee stock plans are accounted for using the intrinsic value method prescribed by APB
No. 25, “Accounting for Stock Issued to Employees.” The Company utilizes the Black-Scholes option valuation model to
value stock options for pro forma presentation of income and per share data as if the fair value-based accounting method in
Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” had been used
to account for stock-based compensation. The following presents the Black-Scholes based pro forma loss and per share data:
Net income (loss), as reported
Redeemable common stock accretion
Redeemable common stock fair value adjustment
Net income (loss) available to common shareholders
Stock-based employee compensation expense
included in reported net income (loss)
Less total stock-based employee compensation
expense determined under a fair value-based
method for all awards
Pro forma net income (loss) available to common shareholders
Earnings (loss) per share:
Basic, as reported
Basic, pro forma
Diluted, as reported
Diluted, pro forma
2004
2003
2002
$ 157.2
(0.5)
(0.4)
156.3
$ (1,273.2)
(6.3)
--
(1,279.5)
$ (907.0)
(2.1)
--
(909.1)
--
0.4
1.4
(203.9)
(47.6)
$
(295.2)
$ (1,574.3)
(378.3)
$ (1,286.0)
$
$
0.24
(0.07)
0.24
(0.07)
$
(2.11)
(2.59)
$
$
(2.11)
(2.59)
$
(1.51)
(2.14)
(1.51)
(2.14)
Stock-based employee compensation expense in the above presentation does not reflect a benefit for income taxes, which
is consistent with the Company’s treatment of income or loss from its U.S. operations. (See “Income Taxes” note.)
Functional currency: The U.S. dollar is the Company’s functional currency for substantially all of its operations.
Earnings per share: Basic earnings per share is computed based on the weighted average number of common shares and
stock rights outstanding. Diluted earnings per share is computed based on the weighted average number of common shares
outstanding plus the dilutive effects of stock options, warrants and convertible notes. Potential common shares that would
increase earnings per share amounts or decrease loss per share amounts are antidilutive and are, therefore, excluded from
earnings per share calculations. Basic and diluted earnings per share computations reflect the effect of accretion of, and fair
value adjustment to, redeemable common stock.
Financial instruments: Cash equivalents include highly liquid short-term investments with original maturities of three
months or less, readily convertible to known amounts of cash. Investments with original maturities greater than three months
and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities
greater than one year are classified as other noncurrent assets. Securities classified as available-for-sale are stated at market
value. The carrying value of investment securities sold is determined using the specific identification method.
The amounts reported as cash and equivalents, short-term investments, receivables, other assets, accounts payable and
accrued expenses and equipment purchase contracts approximate their fair values. The estimated fair value of the Company’s
debt as of September 2, 2004, and August 28, 2003, was $1.2 billion and $1.3 billion, respectively. The fair value estimates
presented herein were based on market interest rates and other market information available to management as of each balance
sheet date presented. The use of different market assumptions and/or estimation methodologies could have a material effect on
the estimated fair value amounts. The approximate fair values do not take into consideration expenses that could be incurred in
an actual settlement.
34
Inventories: Inventories are stated at the lower of average cost or market value. Cost includes labor, material and
overhead costs, including product and process technology costs. Determining market value of inventories involves numerous
judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in
work in process inventories. As a result of these analyses, when market values are below the Company’s costs, the Company
records a charge to cost of goods sold in advance of when the inventory is actually sold.
Product and process technology: Costs incurred to acquire product and process technology or to patent technology
developed by the Company are capitalized and amortized on a straight-line basis over periods currently ranging up to 10 years.
The Company capitalizes a portion of costs incurred based on its analysis of historical and projected patents issued as a percent
of patents filed. Capitalized product and process technology costs are amortized over the shorter of (i) the estimated useful life
of the technology, (ii) the patent term or (iii) the term of the technology agreement. Fully-amortized costs are removed from
product and process technology and accumulated amortization.
Property, plant and equipment: Property, plant and equipment are stated at cost and depreciated using the straight-line
method over the estimated useful lives of 5 to 30 years for buildings, 2 to 20 years for equipment and 2 to 5 years for software.
Assets held for sale are carried at the lower of cost or estimated fair value and are included in other noncurrent assets. When
property or equipment is retired or otherwise disposed of, the net book value of the asset is removed from the Company’s
accounts and any net gain or loss is included in the Company’s results of operations.
The Company capitalizes interest on borrowings during the active construction period of major capital projects.
Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. The
Company capitalized interest costs of $1.1 million, $3.4 million and $10.2 million in 2004, 2003 and 2002, respectively, in
connection with various capital projects.
Recently issued accounting standards: In December 2003, the Financial Accounting Standards Board (“FASB”) issued
a revised Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” which
provides guidance on the identification of and reporting for variable interest entities. The Company adopted Interpretation No.
46 in the third quarter of 2004. Adoption of Interpretation No. 46 did not have a significant impact on the Company’s results
of operations or financial condition.
35
Supplemental Balance Sheet Information
Investment Securities
Available-for-sale securities:
U.S. government and agencies
Commercial paper
Certificates of deposit
Repurchase agreements
Other
Less cash equivalents
Less noncurrent investments
Short-term investments
2004
2003
$ 664.2
286.2
118.9
86.9
22.4
1,178.6
(431.0)
(2.7)
$ 744.9
$ 391.1
222.1
33.6
83.8
41.2
771.8
(418.0)
(2.3)
$ 351.5
Gross unrealized gains and losses as of the end of the periods shown above were de minimis as were gross realized gains
and losses in 2004, 2003 and 2002. Debt securities of $1,056.9 million held by the Company as of September 2, 2004, have
contractual maturities within one year.
Receivables
Trade receivables
Joint venture
Taxes other than income
Income taxes
Other
Allowance for doubtful accounts
Inventories
Finished goods
Work in process
Raw materials and supplies
Allowance for obsolescence
2004
2003
$ 710.4
23.8
14.8
9.6
17.0
(1.9)
$ 773.7
$ 552.5
53.1
21.8
11.3
8.6
(4.8)
$ 642.5
2004
2003
$ 151.0
337.9
115.6
(26.4)
$ 578.1
$ 124.6
211.3
102.9
(21.4)
$ 417.4
The Company recognized write-downs aggregating $307.0 million and $376.1 million in 2003 and 2002, respectively, to
record work in process and finished goods inventories at their estimated market values.
Intangible Assets
Product and process technology
Joint venture supply arrangement
Other
September 2, 2004
Gross
Amount
Accumulated
Amortization
August 28, 2003
Gross
Amount
Accumulated
Amortization
$ 364.2
105.0
5.3
$ 474.5
$(153.6)
(43.0)
(1.7)
$(198.3)
$ 328.1
105.0
14.7
$ 447.8
$(118.2)
(31.2)
(8.8)
$(158.2)
During 2004, the Company capitalized $37.0 million for product and process technology with a weighted average useful
life of ten years. During 2003, the Company capitalized $32.8 million for product and process technology and $2.5 million for
other intangible assets with weighted average useful lives of ten and three years, respectively. As part of a restructure plan
announced in the second quarter of 2003, the Company wrote off net carrying values of $16.1 million of product and process
technology and $2.5 million of other intangible assets associated with discontinued products, including SRAM and TCAM
products. (See “Restructure and Other Charges” note.)
36
Amortization expense for intangible assets was $50.3 million, $51.1 million and $47.1 million in 2004, 2003 and 2002,
respectively. Annual amortization expense is estimated to be $49.3 million for 2005, $47.6 million for 2006, $45.8 million for
2007, $45.0 million for 2008 and $34.0 million for 2009.
Property, Plant and Equipment
Land
Buildings
Equipment
Construction in progress
Software
Accumulated depreciation
2004
2003
$ 108.9
2,311.0
7,339.4
250.0
213.8
10,223.1
(5,510.4)
$ 4,712.7
$ 106.4
2,305.9
6,488.2
240.8
205.1
9,346.4
(4,835.9)
$ 4,510.5
Depreciation expense was $1,166.3 million, $1,157.8 million and $1,127.5 million for 2004, 2003 and 2002, respectively.
The Company has manufacturing facilities in Virginia and Utah that are only partially utilized. As of September 2, 2004,
the Virginia and Utah facilities had net book values of $663.3 million and $743.4 million, respectively. A portion of the
Virginia facility is being used for 300mm wafer fabrication and a portion of the Utah facility is being used for component test
operations. The Company is depreciating substantially all assets at the Virginia and Utah facilities other than $195.3 million of
construction in progress in Utah as of September 2, 2004. Increased utilization of these facilities is dependent upon market
conditions, including, but not limited to, worldwide market supply of, and demand for, semiconductor products and the
Company’s operations, cash flows and alternative capacity utilization opportunities.
As part of a restructure plan announced in the second quarter of 2003, the Company recorded impairment charges of $42.6
million in 2003 to writedown the carrying value of certain assets used in the Company’s 200mm production line in Virginia,
which was shut down as part of the restructure plan. (See “Restructure and Other Charges” note.)
Accounts Payable and Accrued Expenses
Accounts payable
Salaries, wages and benefits
Joint venture
Taxes other than income
Other
Debt
Convertible subordinated notes payable, interest rate of 2.5%, due
February 2010
Subordinated notes payable, face amount of $210.0 million and
stated interest rate of 6.5%, due September 2005, with an
effective yield to maturity of 10.7%, net of unamortized discount
of $8.5 million and $15.8 million
Notes payable in periodic installments through July 2015, weighted
average interest rate of 3.0% and 2.3%
Capital lease obligations payable in monthly installments
through May 2008, weighted average imputed interest rate
of 6.6% and 6.0%
Less current portion
2004
2003
$ 419.7
171.4
56.8
20.7
127.6
$ 796.2
$ 340.8
116.9
102.5
23.8
130.7
$ 714.7
2004
2003
$ 632.1
$ 632.5
201.5
194.2
187.1
192.9
77.8
1,098.5
(70.6)
$ 1,027.9
66.4
1,086.0
(88.9)
$ 997.1
As of September 2, 2004, notes payable and capital lease obligations of $111.7 million and $1.4 million, respectively,
denominated in Japanese yen, were at weighted average interest rates of 1.3% and 1.8%, respectively.
37
In February 2003, the Company issued $632.5 million of 2.5% Convertible Subordinated Notes due February 1, 2010 (the
“Notes”). The issuance costs associated with the Notes totaled $16.6 million and the net proceeds to the Company from the
offering of the Notes were $615.9 million. Holders of the Notes may convert all or some of their Notes at any time prior to
maturity, unless previously redeemed or repurchased, into the Company’s common stock at a conversion rate of 84.8320 shares
for each $1,000 principal amount of Notes. This conversion rate is equivalent to a conversion price of approximately $11.79
per share. The Company may redeem the notes at any time after February 6, 2006, at declining premiums to par.
Certain notes payable are collateralized by property, plant and equipment with a carrying value of $150.5 million as of
September 2, 2004. Equipment under capital leases and accumulated amortization thereon were $108.1 million and $38.0
million, respectively, as of September 2, 2004, and $72.5 million and $19.2 million, respectively, as of August 28, 2003.
As of September 2, 2004, maturities of notes payable and future minimum lease payments under capital lease obligations
were as follows:
Fiscal year
2005
2006
2007
2008
2009
2010 and thereafter
Discount and interest
Call Spread Options
Notes
Payable
Capital
Lease
Obligations
$ 51.2
261.2
44.4
24.5
5.8
642.5
(8.5)
$1,021.1
$ 23.9
30.7
16.2
16.4
--
--
(9.4)
$ 77.8
Concurrent with the issuance of the Notes, the Company purchased call spread options (the “Call Spread Options”)
covering 53.7 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the
Notes in full. The Call Spread Options have a lower strike price of $11.79, a higher strike price of $18.19, may be settled at the
Company’s option either in cash or net shares and expire on January 29, 2008. Settlement of the Call Spread Options in cash
on January 29, 2008, the expiration date, would result in the Company receiving an amount ranging from zero if the market
price per share of the Company’s common stock is at or below $11.79 to a maximum of $343.4 million if the market price per
share of the Company’s common stock is at or above $18.19. Settlement of the Call Spread Options in net shares on the
expiration date would result in the Company receiving a number of shares of the Company’s common stock, not to exceed 18.9
million shares, with a value equal to the amount otherwise receivable on cash settlement. Should there be an early unwind of
the Call Spread Options, the amount of cash or net shares potentially received by the Company will be dependent upon then
existing overall market conditions, and on the Company’s stock price, the volatility of the Company’s stock and the amount of
time remaining on the Call Spread Options. The Call Spread Options therefore have the potential of limiting the dilution
associated with the conversion of the Notes from 53.7 million shares to as few as 34.8 million shares. The Call Spread Option
transactions, including fees and costs of $109.1 million, are accounted for as capital transactions.
Interest Rate Swap
The Company entered into an interest rate swap agreement (the “Swap”) that effectively converted, beginning August 29,
2003, the fixed interest rate on the Notes to a variable interest rate based on the 3-month London Interbank Offering Rate
(“LIBOR”) less 65 basis points (average rate of 0.56% for 2004). The Swap qualifies as a fair-value hedge under SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities.” The gain or loss from changes in the fair value of the
Swap is expected to be highly effective at offsetting the gain or loss from changes in the fair value of the Notes attributable to
changes in interest rates. The Company measures the effectiveness of the Swap using regression analysis. The Company
recognizes changes in the fair value of the Swap and changes in the fair value of the Notes since inception of the Swap in the
consolidated balance sheets. In 2004, the Company recognized a net gain of $0.2 million, which is included in other non-
operating income, representing the difference between the change in the fair value of the Notes and the change in the fair value
of the Swap. As of September 2, 2004, the Company had pledged $25.8 million as collateral for the Swap, which is included in
restricted cash in the accompanying consolidated balance sheet. The amount of collateral fluctuates based on the fair value of
the Swap. The Swap will terminate if the closing price of the Company’s common stock is at or exceeds $14.15 after February
6, 2006.
38
Commitments
As of September 2, 2004, the Company had commitments of approximately $360.0 million for the acquisition of property,
plant and equipment. The Company leases certain facilities, equipment and software under operating leases. Total rental
expense on all operating leases was $21.1 million, $24.6 million and $16.2 million for 2004, 2003 and 2002, respectively.
Minimum future rental commitments under operating leases aggregated $62.5 million as of September 2, 2004, and are payable
as follows: $16.3 million in 2005, $12.7 million in 2006; $3.7 million in 2007; $3.3 million in 2008; $2.7 million in 2009; and
$23.8 million in 2010 and thereafter.
Contingencies
As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may
in the future assert, that the Company’s products or manufacturing processes infringe their intellectual property rights. The
Company is engaged in litigation with Rambus, Inc. (“Rambus”) relating to certain of Rambus’ patents and certain of the
Company’s claims and defenses. Lawsuits between Rambus and the Company are pending in the United States, Germany,
France, the United Kingdom and Italy. The Company also is engaged in litigation with Motorola, Inc. (“Motorola”) and
Freescale Semiconductor, Inc., a subsidiary of Motorola (“Freescale”), relating to certain of the Company’s patents and certain
of Freescale’s patents. A lawsuit between Motorola and Freescale and the Company is pending in the U.S. District Courts for
the Western District of Texas (Austin). The above lawsuits pertain to certain of the Company’s SDRAM and DDR DRAM
products, which account for a significant portion of net sales. The Company is unable to predict the outcome of these suits or
of other assertions of infringement made against the Company. A court determination that the Company’s products or
manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require the
Company to make material changes to its products and/or manufacturing processes. Any of the foregoing results could have a
material adverse effect on the Company’s business, results of operations or financial condition.
On June 17, 2002, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of
California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”)
into possible antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry. The Company is
cooperating fully and actively with the DOJ in its investigation. Subsequent to the commencement of the DOJ investigation,
thirty-one purported class action lawsuits were filed against the Company and other DRAM suppliers in various federal and
state courts alleging violations of the Sherman Act, violations of state unfair competition law and consumer protection law, and
unjust enrichment relating to the sale and pricing of DRAM products. The complaints seek treble damages for the alleged
damages sustained by purported class members, in addition to restitution, costs and attorneys’ fees, as well as an injunction
against the allegedly unlawful conduct. The Company is unable to predict the outcome of these suits. Based upon the
Company’s analysis of the claims made and the nature of the DRAM industry, the Company believes that class treatment of
these cases is not appropriate and that any purported injury alleged by plaintiffs would be more appropriately resolved on a
customer-by-customer basis. The final resolution of these alleged violations of federal or state antitrust laws could result in
significant liability and could have a material adverse effect on the Company’s business, results of operations or financial
condition.
On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against
the Company and other DRAM suppliers. The complaint alleges certain causes of action under California state law including
conspiracy to restrict output and fix prices on Rambus DRAM (“RDRAM”), conspiracy to monopolize various relevant
markets, intentional interference with prospective economic advantage relating to RDRAM, and unfair competition to
disadvantage RDRAM. The complaint seeks treble damages, punitive damages, attorneys’ fees, costs, and a permanent
injunction enjoining the defendants from the conduct alleged in the complaint. The Company is unable to predict the outcome
of the suit. A court determination against the Company could result in significant liability and could have a material adverse
effect on the Company’s business, results of operations or financial condition.
The Company has accrued a liability and charged operations for the estimated costs of adjudication or settlement of
various asserted and unasserted claims existing as of the balance sheet date. The Company is currently a party to other legal
actions arising out of the normal course of business, none of which is expected to have a material adverse effect on the
Company’s business, results of operations or financial condition.
In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated
to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types
of agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in
39
each particular agreement. Historically, payments made by the Company under these types of agreements have not had a
material effect on the Company’s business, results of operations or financial condition.
Redeemable Common Stock
In connection with the Company’s acquisition on April 22, 2002, of substantially all of the assets of Toshiba Corporation’s
(“Toshiba”) DRAM business as conducted by Dominion Semiconductor L.L.C., the Company issued Toshiba 1.5 million
shares of common stock and granted Toshiba an option to require the Company to repurchase the shares for $67.5 million in
cash. During the first quarter of 2004, Toshiba exercised its option and the Company redeemed the 1.5 million shares.
Shareholders’ Equity
Stock Rights
On September 24, 2003, the Company received $450.0 million, which is included in additional capital in the
accompanying consolidated balance sheet, from Intel Corporation (“Intel”) in exchange for the issuance of stock rights
exchangeable into approximately 33.9 million shares of the Company’s common stock. In conjunction with the issuance of the
stock rights, the Company agreed to achieve operational objectives through May 2005, including certain levels of DDR2
production and 300mm wafer processing capacity. In the event the Company fails to achieve certain 2005 milestones and the
Company’s common stock price is then below Intel’s purchase price of $13.29, the Company could be obligated to pay Intel
amounts not to exceed $135 million, a substantial portion of which is payable, at the Company’s election, in the Company’s
common stock. The shares issuable pursuant to the stock rights are considered outstanding common shares in the computations
of basic and diluted earnings per share.
Common Stock Warrants
During the fourth quarter of 2001, the Company received $480.2 million from the issuance of warrants to purchase 29.1
million shares of the Company’s common stock. The warrants entitle the holders to exercise their warrants and purchase
shares of Common Stock for $56.00 per share (the “Exercise Price”) at any time through May 15, 2008 (the “Expiration
Date”). Warrants exercised prior to the Expiration Date will be settled on a “net share” basis, wherein investors receive
common stock equal to the difference between $56.00 and the average closing sale price for the common shares over the 30
trading days immediately preceding the Exercise Date. At expiration, the Company may elect to settle the warrants on a net
share basis or for cash, provided certain conditions are satisfied. As of September 2, 2004, there have been no exercises of
warrants and all warrants issued remain outstanding.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss), net of tax, consists of the following as of the end of the periods shown
below:
Foreign currency translation adjustment
Unrealized gain (loss) on investments
Accumulated other comprehensive income (loss)
2004
2003
$ (0.1)
(0.3)
$ (0.4)
$ (0.1)
0.2
$ 0.1
40
Employee Stock Plans
Stock Option Plans
As of September 2, 2004, the Company had an aggregate of 148.4 million shares of its common stock reserved for
issuance under its various stock option plans, of which 106.4 million shares are subject to outstanding options and 42.0 million
shares are available for future grants. Options are subject to terms and conditions as determined by the Company’s Board of
Directors. Stock options granted after June 16, 1999, are generally exercisable in increments of 25% during each year of
employment beginning one year from the date of grant. Stock options granted prior to June 16, 1999, are generally exercisable
in increments of 20% during each year of employment beginning one year from the date of grant. Stock options issued prior to
January 19, 1998, expire six years from the date of grant and stock options granted through September 2, 2004, expire ten years
from the date of grant.
Option activity under the Company’s stock option plans is summarized as follows:
2004
2003
2002
Weighted
average
exercise
price
$ 24.17
12.98
12.44
26.02
21.88
Number
of shares
88.9
21.9
(0.7)
(3.7)
106.4
Number
of shares
80.4
23.5
(1.8)
(13.2)
88.9
Weighted
average
exercise
price
$ 26.96
13.23
14.39
23.02
24.17
Weighted
average
exercise
price
$ 28.39
22.20
15.54
30.97
26.96
Number
of shares
61.4
24.5
(3.3)
(2.2)
80.4
Outstanding at beginning of year
Granted
Exercised
Cancelled or expired
Outstanding at end of year
Exercisable at end of year
55.2
$ 27.21
35.6
$ 28.32
28.6
$ 26.43
The following table summarizes information about options outstanding as of September 2, 2004:
Outstanding options
Exercisable options
Weighted
average
remaining
contractual life
(in years)
Weighted
average
exercise
price
7.7
7.3
5.9
5.4
6.1
7.0
$ 12.59
19.37
29.94
36.81
65.91
21.88
Number
of shares
43.4
29.5
21.6
7.5
4.4
106.4
Weighted
average
exercise
price
$ 13.09
20.00
30.28
36.78
67.78
27.21
Number
of shares
13.6
12.9
17.7
7.1
3.9
55.2
Range of exercise prices
$0.28 - $14.00
$14.02 - $22.83
$23.25 - $34.06
$34.09 - $40.06
$40.38 - $96.56
Stock Purchase Plan
The Company’s 1989 Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of the
Company’s common stock through payroll deductions. The shares can be purchased for 85% of the lower of the beginning or
ending closing stock prices of each offering period and can be resold when purchased. Purchases are limited to 20% of an
employee’s eligible compensation. As of September 2, 2004, 22.0 million shares of the Company’s common stock had been
issued under the ESPP and 3.5 million shares were available for future issuance under the plan.
Non-Employee Director Stock Incentive Plan
As of September 2, 2004, 18,568 shares of the Company’s common stock had been issued under the 1998 Non-Employee
Director Stock Incentive Plan (“DSIP Plan”) and 481,432 shares were reserved for future issuance under the plan. Shares are
issued under the DSIP plan as compensation to non-employee directors of the Company.
41
Stock-Based Compensation
Assumptions used in the Black-Scholes option valuation model to estimate the value of the Company’s options included in
pro forma amounts are presented below:
Stock option
plan shares
2003
2004
2002
Employee stock
purchase plan shares
2002
2003
2004
Average expected life in years
Expected volatility
Risk-free interest rate (zero coupon U.S. Treasury note)
5.50 5.50 7.50
72% 78% 78%
3.5% 3.0% 4.7%
0.25
40%
1.1%
0.25 0.25
78% 78%
1.2% 1.9%
Weighted average fair value per share at grant:
Exercise price equal to market price
Exercise price less than market price
Exercise price greater than market price
Weighted average exercise price per share:
Exercise price equal to market price
Exercise price less than market price
Exercise price greater than market price
$ 8.54 $ 9.94 $16.92
--
8.09 9.21 15.61
--
--
$12.97 $13.22 $22.25
--
13.70 13.65 20.78
--
--
--
--
--
$ 3.47 $ 3.22 $ 6.51
--
--
--
--
--
--
$12.97 $ 7.92 $16.97
--
--
--
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of subjective
assumptions, including the expected stock price volatility and estimated option life. Because the Company’s stock options
granted to employees have characteristics significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in management’s opinion, existing models do not
provide a reliable measure of the fair value of the Company’s stock options granted to employees. For purposes of this
valuation model, no dividends have been assumed.
Employee Savings Plan
The Company has a 401(k) retirement plan (“RAM Plan”) under which U.S. employees may contribute up to 45% of their
eligible pay to various savings alternatives, none of which include direct investment in the Company’s common stock. The
Company’s contribution provides for an annual match of the first $1,500 of eligible employee contributions, in addition to
contributions based on the Company’s financial performance. Contribution expense for the Company’s RAM Plan was $13.7
million, $12.5 million and $12.8 million in 2004, 2003 and 2002, respectively.
Restructure and Other Charges
In the second quarter of 2003, the Company announced a plan to restructure its operations. The restructure plan
included the shutdown of the Company’s 200mm production line in Virginia, the discontinuance of certain memory products,
including SRAM and TCAM products, and an approximate 10% reduction of the Company’s worldwide workforce. In
connection with the plan, the Company recorded $109.2 million of restructure charges and additional restructure related
charges of $7.1 million, which are included in cost of goods sold, in 2003. The credit to restructure in 2004 primarily reflects
gains on sales of equipment associated with operations shut down in the restructure. The generally higher equipment sales
prices were reflective of improved market conditions across the semiconductor industry. The Company has substantially
completed the restructure plan. As of August 28, 2003, the Company’s accounts payable and accrued expenses included $3.1
million for remaining costs accrued in connection with the restructure plan. Through September 2, 2004, the Company had
paid essentially all of the severance and other termination benefits and other costs incurred in connection with the restructure
plan. The components of the restructure charge and additional restructure related charges in 2004 and 2003 were as follows:
42
Restructure charge:
Write-down of equipment
Severance and other termination benefits
Write-down of intangible assets
Other
Total restructure charge
2004
2003
$ (21.6)
(0.4)
--
(0.5)
(22.5)
$ 50.7
26.3
18.6
13.6
109.2
Other charges to write down raw materials and work in process inventories
Total restructure and other charges
--
$ (22.5)
7.1
$ 116.3
Other Operating Expense, Net
Other operating expense for 2004 includes losses of $17.2 million from changes in currency exchange rates. Other
operating income for 2004 includes $7.2 million from the Commonwealth of Virginia for meeting investment commitments at
the Virginia wafer fabrication facility and net gains of $3.9 million on write-downs and disposals of semiconductor equipment.
Other operating expense for 2003 includes net losses on write-downs and disposals of semiconductor equipment of $41.5
million and losses of $10.7 million from changes in currency exchange rates. Other operating expense for 2003 is net of $14.4
million in receipts from the U.S. government in connection with anti-dumping tariffs. Other operating expense for 2002
includes net losses on write-downs and disposals of semiconductor equipment of $27.3 million.
Income Taxes
Income tax (provision) benefit consists of:
Current:
U.S. federal
State
Foreign
Deferred:
U.S. federal
State
Foreign
Income tax (provision) benefit
2004
2003
2002
$
--
(0.3)
(11.9)
(12.2)
$
--
(0.8)
(4.4)
(5.2)
$ 121.8
(2.3)
(10.1)
109.4
--
--
(62.6)
(62.6)
$ (74.8)
--
--
(67.8)
(67.8)
$ (73.0)
79.2
(63.3)
(33.8)
(17.9)
$ 91.5
A reconciliation between income tax (provision) benefit computed using the U.S. federal statutory rate and the Company’s
income tax (provision) benefit is as follows:
U.S. federal income tax at statutory rate
State taxes, net of federal benefit
Foreign operations
Change in valuation allowance
Resolution of tax matters
Export sales benefit
Tax credits
Other
Income tax (provision) benefit
2004
2003
2002
$ (81.2)
(8.7)
(43.9)
(10.6)
37.4
15.9
7.4
8.9
$ (74.8)
$ 420.1
37.3
(21.2)
(558.8)
18.9
2.2
16.1
12.4
$ (73.0)
$ 349.5
38.7
3.2
(330.1)
--
4.6
13.0
12.6
$ 91.5
43
State taxes reflect investment tax credits of $9.1 million, $16.8 million and $23.6 million for 2004, 2003 and 2002,
respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the basis of assets and liabilities for
financial reporting and income tax purposes. The Company’s deferred tax assets and liabilities consist of the following as of
the end of the periods shown below:
Deferred tax assets:
Net operating loss and credit carryforwards
Accrued compensation
Inventories
Accrued product and process technology
Other
Gross deferred tax assets
Less valuation allowance
Deferred tax assets
Deferred tax liabilities:
Excess tax over book depreciation
Product and process technology
Other
Deferred tax liabilities
Net deferred tax assets
2004
2003
$ 1,237.7
33.9
46.3
11.2
122.7
1,451.8
(1,004.3)
447.5
$ 1,263.9
31.2
25.2
14.6
116.0
1,450.9
(993.1)
457.8
(331.2)
(31.6)
(66.8)
(429.6)
17.9
$
(305.1)
(21.1)
(61.6)
(387.8)
70.0
$
The Company currently records a valuation allowance against substantially all of its U.S. net deferred tax assets. As of
September 2, 2004, the Company had aggregate U.S. tax net operating loss carryforwards of $2.8 billion and unused U.S. tax
credit carryforwards of $106.7 million which expire through 2024. The Company also has unused state tax net operating loss
carryforwards of $1.7 billion for tax purposes which expire through 2024 and unused state tax credits of $123.9 million for tax
and financial reporting purposes which expire through 2018.
The changes in valuation allowance of $11.2 million and $561.6 million in 2004 and 2003, respectively, are primarily due
to uncertainties of realizing certain U.S. net operating losses and certain tax credit carryforwards. The change in the valuation
allowance in 2004 and 2003 includes $2.3 million and $2.2 million, respectively, for stock plan deductions, which will be
credited to additional capital if realized.
Provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries to the extent that dividend
payments from such companies are expected to result in additional tax liability. Remaining undistributed earnings of $614.1
million have been indefinitely reinvested; therefore, no provision has been made for taxes due upon remittance of these
earnings. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable.
Earnings (Loss) Per Share
Net income (loss)
Redeemable common stock accretion
Redeemable common stock fair value adjustment
Net income (loss) available to common shareholders
2004
2003
2002
$
157.2
$ (1,273.2) $
(6.3)
--
(0.5)
(0.4)
$
156.3
$ (1,279.5) $
(907.0)
(2.1)
--
(909.1)
601.5
--
601.5
Weighted average common shares outstanding – Basic
Net effect of dilutive stock options
Weighted average common shares outstanding – Diluted
641.5
4.2
645.7
607.5
--
607.5
Earnings (loss) per share:
Basic
Diluted
$
$
0.24
0.24
$
(2.11)
(2.11)
(1.51)
(1.51)
44
On September 24, 2003, the Company issued stock rights to Intel which are exchangeable into approximately 33.9 million
shares of the Company’s common stock. The shares issuable pursuant to the stock rights are considered outstanding common
shares in the computations of basic and diluted earnings per share. (See “Shareholders’ Equity – Stock Rights” note.)
Listed below are the potential common shares, as of the end of the periods shown below, that could dilute basic earnings
per share in the future that were not included in the computation of diluted earnings per share because to do so would have
been antidilutive:
Employee stock plans
Convertible subordinated notes payable
Common stock warrants
Joint Venture
2004
2003
2002
62.8
53.7
29.1
88.9
53.7
29.1
80.4
--
29.1
Since 1998, the Company has participated in TECH Semiconductor Singapore Pte. Ltd. (“TECH”), a semiconductor
memory manufacturing joint venture in Singapore among the Company, the Singapore Economic Development Board, Canon
Inc. and Hewlett-Packard Company. As of September 2, 2004, the Company had a 39.12% ownership interest in TECH.
Significant financing, investment and operating decisions for TECH typically require approval from TECH’s Board of
Directors. The shareholders’ agreement for the TECH joint venture expires in 2011. The Company adopted Interpretation No.
46 in the third quarter of 2004. Under the provisions of Interpretation No. 46, TECH is a variable interest entity for which
consolidation in the Company’s financial statements is not required.
TECH’s semiconductor manufacturing facilities use the Company’s product and process technology. Subject to specific
terms and conditions, the Company has agreed to purchase all of the products manufactured by TECH. The Company
generally purchases semiconductor memory products from TECH at prices determined quarterly, based on a discount from
average selling prices realized by the Company for the immediately preceding quarter. The Company performs assembly and
test services on product manufactured by TECH. The Company also provides certain technology, engineering and training to
support TECH. All of these transactions with TECH are recognized as part of the net cost of products purchased from TECH.
The net cost of products purchased from TECH amounted to $453.8 million, $318.2 million and $182.3 million for 2004, 2003
and 2002, respectively. Amortization expense resulting from the TECH supply arrangement, included in the cost of products
purchased from TECH, was $11.8 million, $9.6 million and $10.1 million for 2004, 2003 and 2002, respectively. Receivables
from TECH were $23.8 million and payables to TECH were $56.8 million as of September 2, 2004. Receivables from TECH
were $53.1 million and payables to TECH were $102.5 million as of August 28, 2003. TECH supplied approximately 30% of
the total megabits of memory produced by the Company in 2004. As of September 2, 2004, the Company had intangible assets
with a net book value of $62.0 million relating to the supply arrangement to purchase product from TECH. During 2004 and
2002, the Company sold semiconductor equipment to TECH for $0.1 million and $1.0 million, respectively.
On August 30, 2004, TECH refinanced its existing credit facility. In connection therewith, the $100.0 million previously
pledged by the Company as cash collateral was no longer restricted as to withdrawal or use. As of August 28, 2003, the
unamortized portion of the fair value of the Company’s guarantee of TECH’s then existing credit facility was $6.0 million.
Geographic Information
Geographic net sales based on customer location were as follows:
2004
2003
2002
United States
Europe
Asia Pacific
China
Japan
Other
45
$ 1,789.2 $ 1,342.8 $ 1,221.7
460.9
397.9
146.5
264.1
97.9
$ 4,404.2 $ 3,091.3 $ 2,589.0
863.7
632.9
559.8
354.8
203.8
612.4
390.5
346.4
260.1
139.1
Net property, plant and equipment by geographic area was as follows:
United States
Japan
Italy
Singapore
Other
2004
2003
$ 3,514.2 $ 3,430.1
308.4
460.1
452.3
457.7
308.1
272.0
8.7
11.6
$ 4,712.7 $ 4,510.5
46
Quarterly Financial Information (Unaudited)
(Amounts in millions except per share amounts)
2004
Net sales
Gross margin
Operating income (loss)
Net income (loss)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 1,107.2
286.0
21.7
1.1
$ 991.0
248.2
(7.1)
(28.3)
$ 1,116.8
387.9
109.7
90.9
$ 1,189.2
392.6
125.4
93.5
Diluted earnings (loss) per share
$
0.00
$
(0.04)
$
0.13
$
0.14
2003
Net sales
Gross margin
Operating loss
Net loss
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 685.1
(37.3)
(296.6)
(315.9)
$ 785.0
(223.9)
(600.6)
(619.2)
$ 732.7
71.0
(183.7)
(214.9)
$ 888.5
169.5
(105.6)
(123.2)
Diluted loss per share
$
(0.52)
$
(1.02)
$
(0.36)
$
(0.20)
47
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Micron Technology, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index on page 28 present fairly, in all material
respects, the financial position of Micron Technology, Inc. and its subsidiaries at September 2, 2004 and August 28, 2003, and
the results of their operations and their cash flows for each of the three years in the period ended September 2, 2004 in
conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index on page 28 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
October 11, 2004
48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934) as of the
end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that those disclosure controls and procedures were effective to ensure that material information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission’s rules and forms.
During the period covered by this report, there were no significant changes in the Company’s internal controls over
financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls
over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
Certain information concerning the registrant’s executive officers is included under the caption, “Directors and Executive
Officers of the Registrant,” in Part I, Item 1 of this report. Other information required by Items 10, 11, 12, 13 and 14 will be
contained in the registrant’s Proxy Statement which will be filed with the Securities and Exchange Commission within 120
days after September 2, 2004, and is incorporated herein by reference.
49
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
PART IV
Consolidated financial statements and the financial statement schedule. (See “Item 8. Financial Statements and
Supplementary Data.”)
Exhibit
Description
3.1
3.7
4.9
4.12
4.13
4.14
10.82
10.91
Restated Certificate of Incorporation of the Registrant (1)
Bylaws of the Registrant, as amended (2)
Form of Global Warrant representing Warrants to purchase Common Stock expiring May 15, 2008 (the
“Warrants”) (3)
Indenture dated February 4, 2003, between the Registrant and Wells Fargo Bank for 2.5% Convertible
Subordinated Notes Due February 1, 2010 (4)
Securities Purchase Agreement, dated September 24, 2003, between the Registrant and Intel Capital
Corporation (5)
Stock Rights Agreement, dated September 24, 2003, between the Registrant and Intel Capital Corporation (5)
Form of Indemnification Agreement between the Registrant and its officers and directors (6)
Board Resolution regarding stock and bonus plan vesting schedules in the event of change in control of the
Registrant (7)
10.110
1994 Stock Option Plan (8)
10.111
Executive Bonus Plan (9)
10.112
Form of Severance Agreement between the Company and its officers (10)
10.120
Form of Agreement and Amendment to Severance Agreement between the Company and its officers (11)
10.126
Subordinated Promissory Note dated September 30, 1998, issued by the Registrant in the name of Texas
Instruments Incorporated in the amount of $210,000,000 due September 30, 2005 (12)
10.128
Nonstatutory Stock Option Plan (13)
10.129
1997 Nonstatutory Stock Option Plan (14)
10.130 Micron Quantum Devices, Inc. 1996 Stock Option Plan (8)
10.131
Sample Stock Option Assumption Letter for Micron Quantum Devices, Inc. 1996 Stock Option Plan (8)
10.132
1998 Nonstatutory Stock Option Plan (14)
10.133
Rendition, Inc. 1994 Equity Incentive Plan (15)
10.134
Sample Stock Option Assumption Letter for Rendition, Inc. 1994 Equity Incentive Plan (15)
10.139
1989 Employee Stock Purchase Plan (16)
10.140
1998 Non-Employee Director Stock Incentive Plan (17)
10.141
10.142
10.144
10.145
Registration Rights Agreement dated February 4, 2003, among the Registrant, Goldman, Sachs & Co. and
Lehman Brothers Inc. (4)
Purchase Agreement dated October 1, 1998, between the Registrant and TECH Semiconductor Singapore Pte.
Ltd. (18)
Purchase Agreement dated as of July 12, 2001, between the Registrant and Lehman Brothers, Inc. relating to
the Warrants (3)
Registration Rights Agreement dated as of July 18, 2001, between the Registrant and Lehman Brothers, Inc.,
relating to the Warrants (3)
50
Exhibit
Description
10.146 Warrant Agreement dated as of July 18, 2001, between the Registrant and Wells Fargo Bank Minnesota, N.A.,
relating to the Warrants (3)
10.151
2001 Stock Option Plan (16)
10.152
2002 Employment Inducement Stock Option Plan (16)
10.153
Business Agreement, dated September 24, 2003, between the Registrant and Intel Corporation * (5)
10.154
Securities Rights and Restrictions Agreement, dated September 24, 2003, between the Registrant and Intel
Capital (5)
21.1
23.1
31.1
31.2
32.1
32.2
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Subsidiaries of the Registrant
Consent of Registered Public Accounting Firm
Rule 13a-14(a) Certification of Chief Executive Officer
Rule 13a-14(a) Certification of Chief Financial Officer
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350
Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2001
Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended May 29, 2003
Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended August 30, 2001
Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended February 27, 2003
Incorporated by reference to Current Report on Form 8-K filed September 24, 2003
Incorporated by reference to Proxy Statement for the 1986 Annual Meeting of Shareholders
Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended August 31, 1989
Incorporated by reference to Registration Statement on Form S-8 (Reg. No. 333-50353)
Incorporated by reference to Proxy Statement for the 1999 Annual Meeting of Shareholders
(10)
Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended August 28, 2003
(11)
Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended February 27, 1997
(12)
Incorporated by reference to Current Report on Form 8-K filed on October 14, 1998, as amended on October 16,
1998
(13)
Incorporated by reference to Registration Statement on Form S-8 (Reg. No. 333-103341)
(14)
Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended November 28, 2002
(15)
Incorporated by reference to Registration Statement on Form S-8 (Reg. No. 333-65449)
(16)
Incorporated by reference to Registration Statement on Form S-8 (Reg. No. 333-102545)
(17)
Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended June 3, 1999
(18)
Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended December 3, 1998
* Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission.
51
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Boise, State of
Idaho, on the 14th day of October 2004.
SIGNATURES
Micron Technology, Inc.
By:
/s/ W. G. STOVER, JR.
W. G. Stover, Jr.,
Vice President of Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ STEVEN R. APPLETON
(Steven R. Appleton)
/s/ W. G. STOVER, JR.
(W. G. Stover, Jr.)
/s/ JAMES W. BAGLEY
(James W. Bagley)
/s/ RONALD C. FOSTER
(Ronald C. Foster)
Chairman of the Board,
Chief Executive Officer
and President (Principal
Executive Officer)
Vice President of Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
October 14, 2004
October 14, 2004
Director
October 14, 2004
Director
October 14, 2004
/s/ ROBERT A. LOTHROP
(Robert A. Lothrop)
Director
October 14, 2004
/s/ THOMAS T. NICHOLSON
(Thomas T. Nicholson)
Director
October 14, 2004
/s/ GORDON C. SMITH
(Gordon C. Smith)
/s/ WILLIAM P. WEBER
(William P. Weber)
Director
October 14, 2004
Director
October 14, 2004
52
Schedule II
MICRON TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in millions)
Allowance for Doubtful Accounts
Year ended September 2, 2004
Year ended August 28, 2003
Year ended August 29, 2002
Allowance for Obsolete Inventory
Year ended September 2, 2004
Year ended August 28, 2003
Year ended August 29, 2002
Balance at
Beginning of
Period
Charged
(Credited) to
Costs and
Expenses
Deductions/
Write-Offs
Balance
at End of
Period
$
$
4.8
6.2
3.8
21.4
27.1
4.4
$
0.9
(0.5)
2.9
$
(3.8)
(0.9)
(0.5)
$
27.6
31.3
41.6
$
(22.6)
(37.0)
(18.9)
$
$
1.9
4.8
6.2
26.4
21.4
27.1
Deferred Tax Asset Valuation Allowance
Year ended September 2, 2004
Year ended August 28, 2003
Year ended August 29, 2002
$ 993.1
431.5
87.4
$
10.6
558.8
330.1
$
0.6
2.8
14.0
$ 1,004.3
993.1
431.5
The allowance for obsolete inventory excludes any charges for write-downs of work in process and finished
goods inventories to their estimated market values. See “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data – Notes
to Consolidated Financial Statements.”
53
MICRON TECHNOLOGY, INC.
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
Name
Micron Europe Limited
Also does business as Crucial Technology Europe
Micron Japan, Ltd.
Micron Semiconductor Asia Pte. Ltd.
Also does business as Crucial Technology Asia
Micron Semiconductor (Deutschland) GmbH
Micron Semiconductor France, SAS
Micron Semiconductor India, Inc.
Micron Semiconductor International, Ltd.
Micron Semiconductor Korea Co., Ltd.
Micron Semiconductor (Shanghai) Co., Ltd.
Micron Semiconductor Products, Inc.
Also does business as Crucial Technology
Micron Semiconductor (Xiamen) Co., Ltd.
Micron Semiconductor Technology (Shanghai) Co., Ltd.
Micron Technology Asia Pacific, Inc.
Micron Technology Italia S.r.l.
Micron Technology Puerto Rico, Inc.
Micron Technology Services, Inc.
Micron Technology Texas, LLC
State (or jurisdiction)
in which Organized
United Kingdom
Japan
Singapore
Germany
France
Idaho
Cayman Islands, B.W.I.
South Korea
China
Idaho
China
China
Idaho
Italy
Puerto Rico
Idaho
Idaho