Edgar Filing: MICRON TECHNOLOGY INC

2015 Q1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 4, 2014



o	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	75-1618004
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

8000 S. Federal Way, Boise, Idaho	83716-9632
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code	(208) 368-4000

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer x	Accelerated Filer o
Non-Accelerated Filer o (Do not check if a smaller reporting company)	Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of outstanding shares of the registrant's common stock as of January 2, 2015, was 1,077,313,410.

Definitions of Commonly Used Terms

As used herein, "we," "our," "us" and similar terms include Micron Technology, Inc. and its subsidiaries, unless the context indicates otherwise. Abbreviations, terms or acronyms are commonly used or found in multiple locations throughout this report and include the following:



Term	Definition	Term	Definition
2027 Notes	1.875% Convertible Senior Notes	MLC	Multi-Level Cell
2031A Notes	1.500% Convertible Senior Notes due 2031	MMJ	Micron Memory Japan, Inc.
2031B Notes	1.875% Convertible Senior Notes due 2031	MMJ Companies	MMJ and MAI
2032 Notes	The 2032C and 2032D Notes	MMJ Group	MMJ and its subsidiaries
2032C Notes	2.375% Convertible Senior Notes due 2032	MMT	Micron Memory Taiwan Co., Ltd.
2032D Notes	3.125% Convertible Senior Notes due 2032	MP Mask	MP Mask Technology Center, LLC
2033 Notes	The 2033E and 2033F Notes	MTI	Micron Technology, Inc.
2033E Notes	1.625% Convertible Senior Notes due 2033	Nanya	Nanya Technology Corporation
2033F Notes	2.125% Convertible Senior Notes due 2033	Photronics	Photronics, Inc.
2043G Notes	3.00% Convertible Senior Notes due 2043	PSRAM	Pseudo-static DRAM
Aptina	Aptina Imaging Corporation	Qimonda	Qimonda AG
DRAM	Dynamic Random Access Memory	Rambus	Rambus, Inc.
Elpida	Elpida Memory, Inc.	R&D	Research and Development
IMFT	IM Flash Technologies, LLC	RLDRAM	Reduced Latency DRAM
Inotera	Inotera Memories, Inc.	SEC	Securities and Exchange Commission
Intel	Intel Corporation	SG&A	Selling, General and Administration
Japan Court	Tokyo District Court	SSD	Solid-State Drive
LIBOR	London Interbank Offered Rate	Tera Probe	Tera Probe, Inc.
LPDRAM	Low Power DRAM	TLC	Triple-Level Cell
MAI	Micron Akita, Inc.	VIE	Variable Interest Entity

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions except per share amounts)

(Unaudited)



Quarter ended	December 4, 2014			November 28, 2013
Net sales	$	4,573		$	4,042
Cost of goods sold	2,935			2,761
Gross margin	1,638			1,281

Selling, general and administrative	193			176
Research and development	376			320
Other operating (income) expense, net	(16		)	234
Operating income	1,085			551

Interest income	7			5
Interest expense	(90		)	(101		)
Other non-operating income (expense), net	(49		)	(80		)
	953			375

Income tax (provision) benefit	(75		)	(80		)
Equity in net income of equity method investees	124			86
Net income	1,002			381

Net (income) loss attributable to noncontrolling interests	1			(23		)
Net income attributable to Micron	$	1,003		$	358

Earnings per share:
Basic	$	0.94		$	0.34
Diluted	0.84			0.30

Number of shares used in per share calculations:
Basic	1,070			1,046
Diluted	1,195			1,196

See accompanying notes to consolidated financial statements.

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)



Quarter ended	December 4, 2014			November 28, 2013
Net income	$	1,002		$	381

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(24		)	6
Gain (loss) on derivatives, net	(16		)	(2		)
Pension liability adjustments	19			—
Gain (loss) on investments, net	—			1
Other comprehensive income (loss)	(21		)	5
Total comprehensive income	981			386
Comprehensive (income) loss attributable to noncontrolling interests	1			(23		)
Comprehensive income attributable to Micron	$	982		$	363

See accompanying notes to consolidated financial statements.

MICRON TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(in millions except par value amounts)

(Unaudited)



As of	December 4, 2014		August 28, 2014
Assets
Cash and equivalents	$	3,764	$	4,150
Short-term investments	466		384
Receivables	2,663		2,906
Inventories	2,448		2,455
Other current assets	331		350
Total current assets	9,672		10,245
Long-term marketable investments	1,077		819
Property, plant and equipment, net	9,132		8,682
Equity method investments	1,080		971
Intangible assets, net	450		468
Deferred tax assets	685		816
Other noncurrent assets	446		497
Total assets	$	22,542	$	22,498

Liabilities and equity
Accounts payable and accrued expenses	$	2,965	$	2,864
Deferred income	286		309
Current debt	1,168		1,638
Total current liabilities	4,419		4,811
Long-term debt	4,608		4,955
Other noncurrent liabilities	969		1,102
Total liabilities	9,996		10,868

Commitments and contingencies

Redeemable convertible notes	53		57

Micron shareholders' equity:
Common stock, $0.10 par value, 3,000 shares authorized, 1,075 shares issued and outstanding (1,073 as of August 28, 2014)	108		107
Additional capital	7,822		7,879
Retained earnings	3,713		2,729
Accumulated other comprehensive income	35		56
Total Micron shareholders' equity	11,678		10,771
Noncontrolling interests in subsidiaries	815		802
Total equity	12,493		11,573
Total liabilities and equity	$	22,542	$	22,498

See accompanying notes to consolidated financial statements.

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)



Quarter ended	December 4, 2014			November 28, 2013
Cash flows from operating activities
Net income	$	1,002		$	381
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense and amortization of intangible assets	643			491
Amortization of debt discount and other costs	38			50
Stock-based compensation	35			22
Loss on restructure of debt	30			86
Equity in net income of equity method investees	(124		)	(86		)
Change in operating assets and liabilities:
Receivables	252			(494		)
Inventories	7			190
Accounts payable and accrued expenses	(321		)	620
Other noncurrent liabilities	(12		)	186
Deferred income taxes, net	126			59
Other	(84		)	2
Net cash provided by operating activities	1,592			1,507

Cash flows from investing activities
Expenditures for property, plant and equipment	(669		)	(669		)
Purchases of available-for-sale securities	(668		)	(196		)
Payments to settle hedging activities	(66		)	(4		)
Proceeds from sales and maturities of available-for-sale securities	330			162
Decrease in restricted cash	—			556
Other	(3		)	29
Net cash provided by (used for) investing activities	(1,076		)	(122		)

Cash flows from financing activities
Repayments of debt	(786		)	(737		)
Cash paid to purchase stock under equity plans	(26		)	(42		)
Contributions from noncontrolling interests	20			49
Proceeds from issuance of stock under equity plans	18			144
Other	(32		)	(6		)
Net cash provided by (used for) financing activities	(806		)	(592		)

Effect of changes in currency exchange rates on cash and equivalents	(96		)	(19		)

Net increase (decrease) in cash and equivalents	(386		)	774
Cash and equivalents at beginning of period	4,150			2,880
Cash and equivalents at end of period	$	3,764		$	3,654

Noncash investing and financing activities:
Exchange of convertible notes	—			756

See accompanying notes to consolidated financial statements.

MICRON TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All tabular amounts in millions except per share amounts)

(Unaudited)

Business and Basis of Presentation

Micron Technology, Inc., including its consolidated subsidiaries (hereinafter referred to collectively as "we," "our," "us" and similar terms unless the context indicates otherwise), is a global leader in advanced semiconductor systems. Our broad portfolio of high-performance memory technologies, including DRAM, NAND Flash and NOR Flash, is the basis for solid state drives, modules, multichip packages and other system solutions. Our memory solutions enable the world's most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications. The accompanying financial statements include the accounts of Micron Technology, Inc. and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended August 28, 2014. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, consisting of a normal recurring nature, to fairly state the financial information set forth herein.

Certain reclassifications have been made to prior period amounts to conform to current period presentation. In addition, amounts for certain equipment purchases were reclassified from financing to investing within the statement of cash flows to better reflect the current nature of these transactions and to improve comparability with our industry peers.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Fiscal year 2015 contains 53 weeks and the first quarter of fiscal 2015, which ended on December 4, 2014, contained 14 weeks. Fiscal year 2014 contained 52 weeks and the first quarter of fiscal 2014, which ended on November 28, 2013, contained 13 weeks. All period references are to our fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended August 28, 2014.

Variable Interest Entities

We have interests in entities that are VIEs. If we are the primary beneficiary of a VIE, we are required to consolidate it. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of our VIEs require significant assumptions and judgments.

Unconsolidated Variable Interest Entities

Inotera: Inotera is a VIE because its equity is not sufficient to permit it to finance its activities without additional support from its shareholders. We have determined that we do not have the power to direct the activities of Inotera that most significantly impact its economic performance, primarily due to (1) limitations on our governance rights that require the consent of other parties for key operating decisions and (2) Inotera's dependence on Nanya for financing and the ability of Inotera to operate in Taiwan. Therefore, we do not consolidate Inotera and we account for our interest under the equity method. (See "Equity Method Investments – Inotera" note.)

EQUVO: EQUVO HK Limited ("EQUVO") is a special purpose entity created to facilitate an equipment sale-leaseback financing transaction between us and a consortium of financial institutions. Neither we nor the financing entities have an equity interest in EQUVO. EQUVO is a VIE because its equity is not sufficient to permit it to finance its activities without additional support from the financing entities and because the third-party equity holder lacks characteristics of a controlling financial interest. By design, the arrangement with EQUVO is merely a financing vehicle and we do not bear any significant risks from variable interests with EQUVO. Therefore, we have determined that we do not have the power to direct the activities of EQUVO that most significantly impact its economic performance and we do not consolidate EQUVO.

SC Hiroshima Energy Corporation: SC Hiroshima Energy Corporation ("SCHE") is an entity created to construct and operate a cogeneration, electrical power plant to support our wafer manufacturing facility in Hiroshima, Japan. SCHE is a VIE due to the nature of its tolling agreements with us and our purchase and call options for SCHE's assets. We do not have an equity ownership interest in SCHE. We do not control the operation and maintenance of the plant, which we have determined are the activities of SCHE that most significantly impact its economic performance. Therefore, we do not consolidate SCHE.

Consolidated Variable Interest Entities

IMFT: IMFT is a VIE because all of its costs are passed to us and its other member, Intel, through product purchase agreements and IMFT is dependent upon us or Intel for any additional cash requirements. The primary activities of IMFT are driven by the constant introduction of product and process technology. Because we perform a significant majority of the technology development, we have the power to direct its key activities. In addition, IMFT manufactures certain products exclusively for us using our technology. We consolidate IMFT because we (1) have the power to direct the activities of IMFT that most significantly impact its economic performance and (2) have the obligation to absorb losses and the right to receive benefits from IMFT that could potentially be significant to it.

MP Mask: MP Mask is a VIE because substantially all of its costs are passed to us and its other member, Photronics, through product purchase agreements and MP Mask is dependent upon us or Photronics for any additional cash requirements. We have tie-breaking voting rights over key operating decisions and nearly all key MP Mask activities are driven by our supply needs. We consolidate MP Mask because we (1) have the power to direct the activities of MP Mask that most significantly impact its economic performance and (2) have the obligation to absorb losses and the right to receive benefits from MP Mask that could potentially be significant to it.

(See "Equity – Noncontrolling Interests in Subsidiaries" note.)

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09 – Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for us in our first quarter of 2018. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the effects of the adoption of this ASU on our financial statements.

Investments

The fair values of available-for-sale investments, which approximated amortized costs, were as follows:



	December 4, 2014		August 28, 2014
Money market funds	$	866	$	1,281
Corporate bonds	799		561
Certificates of deposit	581		437
Government securities	440		420
Asset-backed securities	220		128
Commercial paper	93		107
Marketable equity securities	1		1
	$	3,000	$	2,935

The table below presents the fair value of available-for-sale debt securities by contractual maturity:



	December 4, 2014
Money market funds	$	866
Due in 1 year or less	1,057
Due in 1 - 2 years	562
Due in 2 - 4 years	467
Due after 4 years	47
	$	2,999

Proceeds from the sales of available-for-sale securities for the first quarters of 2015 and 2014 were $233 million and $113 million, respectively. Gross realized gains and losses for the first quarters of 2015 and 2014 were not significant. As of December 4, 2014, none of our available-for-sale securities had been in a loss position for longer than 12 months.

Receivables



	December 4, 2014		August 28, 2014
Trade receivables, net	$	2,301	$	2,524
Income and other taxes	61		104
Other	301		278
	$	2,663	$	2,906

As of December 4, 2014 and August 28, 2014, other receivables included $95 million and $70 million, respectively, due from Intel for amounts related to product design and process development activities under cost-sharing agreements for NAND Flash and certain emerging memory technologies. (See "Equity – Noncontrolling Interests in Subsidiaries – IMFT" note.)

Inventories



	December 4, 2014		August 28, 2014
Finished goods	$	916	$	898
Work in process	1,325		1,372
Raw materials and supplies	207		185
	$	2,448	$	2,455

Property, Plant and Equipment



	December 4, 2014			August 28, 2014
Land	$	86		$	86
Buildings	5,165			5,093
Equipment	18,608			17,781
Construction in progress	146			114
Software	344			358
	24,349			23,432
Accumulated depreciation	(15,217		)	(14,750		)
	$	9,132		$	8,682

Depreciation expense was $613 million and $468 million for the first quarters of 2015 and 2014, respectively.

Equity Method Investments



	December 4, 2014				August 28, 2014
	Investment Balance		Ownership Percentage		Investment Balance		Ownership Percentage
Inotera⁽¹⁾	$	1,028	33	%	$	914	33	%
Tera Probe	36		40	%	48		40	%
Other	16		Various		9		Various
	$	1,080			$	971

⁽¹⁾ Entity is a variable interest entity.

As of December 4, 2014, substantially all of our maximum exposure to loss from our VIEs that were not consolidated was the $1,028 million carrying value of our investment in Inotera. We may also incur losses in connection with our rights and obligations to purchase substantially all of Inotera's wafer production capacity under a supply agreement with Inotera.

We recognize our share of earnings or losses from our equity method investees generally on a two-month lag. Equity in net income of equity method investees, net of tax, included the following:



Quarter ended	December 4, 2014			November 28, 2013
Inotera	$	129		$	84
Tera Probe	(7		)	2
Other	2			—
	$	124		$	86

Inotera

We have partnered with Nanya in Inotera, a Taiwan DRAM memory company, since 2009. As of December 4, 2014, we held a 33% ownership interest in Inotera, Nanya and certain of its affiliates held a 33% ownership interest and the remaining ownership interest in Inotera was publicly held.

As of December 4, 2014, the market value of our equity interest in Inotera was $3.37 billion based on the closing trading price of 48.90 New Taiwan dollars per share in an active market. As of December 4, 2014 and August 28, 2014, there were gains of $25 million and $44 million, respectively, in accumulated other comprehensive income for cumulative translation adjustments from our equity investment in Inotera.

We purchase all of Inotera's DRAM output at a discount from market prices for our comparable components under a supply agreement (the "Inotera Supply Agreement"). The Inotera Supply Agreement has a three-year term (currently through December 2016) that contemplates annual negotiations with respect to potential successive one-year extensions. If the parties do not agree to an extension, the agreement will terminate following the end of the then-existing term plus a subsequent three-year wind-down period. In the event of a wind-down, our share of Inotera's capacity would decline over the wind-down period. In the first quarters of 2015 and 2014, our cost of products purchased from Inotera was significantly higher than our cost of similar products manufactured in our wholly-owned facilities. We currently are in negotiations regarding the extension of the Inotera Supply Agreement. There can be no assurance that we will be able to reach an agreement. Under the Inotera supply agreements, we purchased $729 million and $587 million of DRAM products in the first quarters of 2015 and 2014, respectively.

Tera Probe

In 2013, we acquired a 40% interest in Tera Probe, which provides semiconductor wafer testing and probe services to us and others. During the first quarter of 2015, we recorded an impairment charge of $10 million within equity in net income of equity method investees to write down the carrying value of our investment in Tera Probe to its fair value, based on its trading price (Level 1 fair value measurement). As of December 4, 2014, the difference between our investment balance and our proportionate share of underlying equity in Tera Probe was $34 million and is expected to be accreted as income to our earnings through equity in net income of equity method investees over a weighted-average period of 7 years. We incurred manufacturing costs for the first quarters of 2015 and 2014 of $25 million and $33 million, respectively, for services performed by Tera Probe.

Intangible Assets



	December 4, 2014					August 28, 2014
	Gross Amount		Accumulated Amortization			Gross Amount		Accumulated Amortization
Product and process technology	$	814	$	(364	)	$	809	$	(341	)
Customer relationships	1		(1		)	1		(1		)
	$	815	$	(365	)	$	810	$	(342	)

During the first quarters of 2015 and 2014, we capitalized $12 million and $6 million, respectively, for product and process technology with weighted-average useful lives of 8 years and 9 years, respectively. Amortization expense was $30 million and $23 million for the first quarters of 2015 and 2014, respectively. Annual amortization expense is estimated to be $115 million for 2015, $101 million for 2016, $90 million for 2017, $79 million for 2018 and $31 million for 2019.

Accounts Payable and Accrued Expenses



	December 4, 2014		August 28, 2014
Accounts payable	$	961	$	996
Property, plant and equipment payables	664		289
Related party payables	489		673
Salaries, wages and benefits	364		456
Customer advances	110		98
Income and other taxes	89		71
Other	288		281
	$	2,965	$	2,864

As of December 4, 2014 and August 28, 2014, related party payables included $479 million and $660 million, respectively, due to Inotera primarily for the purchase of DRAM products under the Inotera Supply Agreement. As of December 4, 2014 and August 28, 2014, related party payables also included $10 million and $13 million, respectively, due to Tera Probe for testing and probe services performed. (See "Equity Method Investments" note.)

As of December 4, 2014 and August 28, 2014, customer advances included $90 million and $90 million, respectively, for amounts received from a customer in 2014 under a DRAM supply agreement to be applied to purchases at market pricing through September 2016. As of December 4, 2014 and August 28, 2014, other noncurrent liabilities included $68 million and $90 million, respectively, from this DRAM supply agreement.

Debt



					December 4, 2014						August 28, 2014
Instrument⁽¹⁾	Stated Rate		Effective Rate		Current		Long-Term		Total		Current		Long-Term		Total
MMJ creditor installment payments	N/A		6.25	%	$	169	$	828	$	997	$	192	$	939	$	1,131
Capital lease obligations⁽²⁾	N/A		N/A		315		472		787		323		588		911
2019 senior notes	1.258	%	1.97	%	92		324		416		92		324		416
2022 senior notes	5.875	%	6.14	%	—		600		600		—		600		600
2025 senior notes	5.500	%	5.56	%	—		1,150		1,150		—		1,150		1,150
2031B convertible senior notes	1.875	%	6.98	%	—		—		—		362		—		362
2032C convertible senior notes⁽³⁾	2.375	%	5.95	%	—		312		312		—		314		314
2032D convertible senior notes⁽³⁾	3.125	%	6.33	%	—		264		264		—		288		288
2033E convertible senior notes⁽³⁾⁽⁴⁾	1.625	%	4.50	%	273		—		273		278		—		278
2033F convertible senior notes⁽³⁾⁽⁴⁾	2.125	%	4.93	%	267		—		267		265		—		265
2043G convertible senior notes	3.000	%	6.76	%	—		639		639		—		636		636
Other notes payable	2.157	%	2.45	%	52		19		71		126		116		242
					$	1,168	$	4,608	$	5,776	$	1,638	$	4,955	$	6,593


⁽¹⁾	We have either the obligation or the option to pay cash for the aggregate amount due upon conversion for all of our convertible notes. Since it is our current intent to settle in cash the principal amount of all of our convertible notes upon conversion, the dilutive effect of such notes on earnings per share is computed under the treasury stock method.


⁽²⁾	Weighted-average imputed rate of 4.3% and 4.3% as of December 4, 2014 and August 28, 2014, respectively.

⁽³⁾

Since the closing price of our common stock for at least 20 trading days in the 30 trading day period ending on September 30, 2014 exceeded 130% of the conversion price per share, holders have the right to convert their notes at any time during the calendar quarter ended December 31, 2014. The closing price of our common stock also exceeded the thresholds for the calendar quarter ended December 31, 2014; therefore, these notes are convertible by the holders through March 31, 2015.


⁽⁴⁾	As a result of these notes being convertible at the option of the holder through December 31, 2014, and because the terms of these notes would require us to pay cash for the principal amount of any converted notes, amounts are classified as current.

2015 Debt Restructure

In the first quarter of 2015, we continued to restructure our debt, including conversions and settlements, repurchases and early repayment of an other note payable. The following table presents the effect of each of the actions:



	Decrease in Principal			Decrease in Carrying Value			Decrease in Cash			Decrease in Equity			(Loss) Gain⁽¹⁾
Conversions and settlements:
2031B Notes	$	(114	)	$	(362	)	$	(389	)	$	—		$	(24	)
2033E Notes	(6		)	(6		)	(18		)	(14		)	2
	(120		)	(368		)	(407		)	(14		)	(22		)

Repurchases:
2032C Notes	(5		)	(4		)	(18		)	(13		)	(1		)
2032D Notes	(31		)	(26		)	(107		)	(79		)	(2		)
	(36		)	(30		)	(125		)	(92		)	(3		)

Early repayment of note	(121		)	(120		)	(122		)	—			(5		)

	$	(277	)	$	(518	)	$	(654	)	$	(106	)	$	(30	)


⁽¹⁾	Included in other non-operating expense.

Conversions and Settlements: During the first quarter of 2015, we had the following debt conversions and settlements:

2031B Notes – On July 23, 2014, we called for the redemption of our remaining 2031B Notes effective on August 22, 2014. Prior to such effective date, substantially all of the holders of our 2031B Notes exercised their option to convert their notes and, in each case, we elected to settle the amount due upon conversion entirely in cash.

2033E Notes – On September 30, 2014, a holder converted a portion of our 2033E Notes and we elected to settle the amount due upon conversion entirely in cash.

As a result of our elections to settle the amounts due upon conversion in cash, each of the settlement obligations became derivative debt liabilities subject to mark-to-market accounting treatment. Under the terms of the indentures for the above notes, cash settlement amounts for these derivative debt liabilities were determined based on the shares underlying the converted notes multiplied by the volume-weighted-average price of our common stock over a period of 20 consecutive trading days, beginning three days after the holder's election to convert their notes. Therefore, at the dates of our election to settle the conversion in cash, we reclassified the fair values of the equity components of each of the converted notes from additional capital to derivative debt liabilities within current debt in our consolidated balance sheet.

Repurchases: During the first quarter of 2015, we repurchased a portion of our 2032C Notes and 2032D Notes in privately-negotiated transactions. The liability and equity components of the repurchased notes had previously been stated separately within debt and additional capital in our consolidated balance sheet. As a result, our accounting for the repurchased notes affected debt and equity.

Early Repayment: On October 17, 2014, we repaid a note payable prior to its scheduled maturity.

2014 Debt Restructure

Throughout 2014, we reduced the dilutive effects of our convertible notes by exchanging portions of these notes with less-dilutive convertible notes, or by converting or repurchasing portions of these notes using cash generated from operations and proceeds from issuing non-convertible debt with near investment-grade covenants. In the first quarter of 2014, we incurred losses related to these activities as follows:


•	$49 million (which included $38 million in non-operating expense and $11 million of interest expense from the payment of a "make-whole") from the exchange of an aggregate principal amount of $440 million of 2027 Notes, 2031A Notes and 2031B Notes into 2043G Notes; and


•	$43 million (which included $37 million in non-operating expense and $6 million of interest expense from the payment of a "make-whole") from the conversion of $95 million of principal amount of 2027 Notes and $112 million of aggregate principal amount of 2031A Notes.

Convertible Notes With Debt and Equity Components

As of December 4, 2014, the trading price of our common stock was higher than the conversion prices of all of our outstanding convertible notes. As a result, the conversion values were in excess of principal amounts for such notes. The following table summarizes certain features of our convertible notes outstanding as of December 4, 2014:



	Holder Put Date⁽¹⁾	Outstanding Principal		Underlying Shares	Conversion Price Per Share		Conversion Price Per Share Threshold⁽²⁾		Conversion Value in Excess of Principal⁽³⁾
2032C Notes	May 2019	$	357	37	$	9.63	$	12.52	$	982
2032D Notes	May 2021	313		31	9.98		12.97		816
2033E Notes	February 2018	294		27	10.93		14.21		674
2033F Notes	February 2020	300		27	10.93		14.21		690
2043G Notes⁽⁴⁾	November 2028	1,025		35	29.16		37.91		243
		$	2,289	157					$	3,405


⁽¹⁾	The terms of our convertible notes give holders the right to require us to repurchase all or a portion of their notes at a date or dates earlier than the contractual maturities of the notes or upon the occurrence of certain events or circumstances.

⁽²⁾

Holders have the right to convert all or a portion of their notes at a date or dates earlier than the contractual maturity if, during any calendar quarter, the closing price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the conversion price. As a result, as of December 4, 2014, holders of our 2032 Notes and 2033 Notes had the right to convert their notes.


⁽³⁾	Based on our closing share price of $36.07 as of December 4, 2014.


⁽⁴⁾	The original principal amount of $820 million accretes up to $917 million in November 2028 and $1.03 billion at maturity in 2043.

We amortize any initial debt discount or imputed interest over the period from issuance of the notes through the earliest date that holders can require us to repurchase all or a portion of their notes (see "Holder Put Date" in the table above). As a result, the period of amortization can be significantly shorter than the contractual maturity.

Revolving Credit Facilities

On December 2, 2014, we terminated our unused $153 million senior secured three-year revolving credit facility and entered into a senior secured five-year revolving credit facility, collateralized by a security interest in trade receivables and inventory. The credit facility has an aggregate revolving commitment which is subject to certain adjustments, including an availability block that effectively limits the maximum amount we could draw to $540 million. Additionally, the maximum amount we could draw may decrease further if the value, as defined of our trade receivables and inventory collateralizing the credit facility decrease below a specified threshold. The revolving credit facility contains customary covenants and conditions, including as a funding condition the absence of any event or circumstance that has a material adverse effect on our business or financial condition. Generally, interest is payable on any outstanding principal balance at a variable rate not to exceed LIBOR plus an applicable margin ranging between 1.25% to 1.75%, based on the monthly average undrawn availability under the credit facility. As of December 4, 2014, the amount available to us was $500 million and we had not drawn any amounts under this facility.

Contractual Maturities

As of December 4, 2014, maturities of notes payable (including the MMJ creditor installment payments) and future minimum lease payments under capital lease obligations were as follows:



	Notes Payable			Capital Lease Obligations
Remainder of 2015	$	304		$	247
2016	290			295
2017	260			98
2018	552			56
2019	642			52
2020 and thereafter	3,556			110
Unamortized discounts and interest, respectively	(615		)	(71		)
	$	4,989		$	787

Contingencies

We have 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, including those described below. We are currently a party to other legal actions arising from the normal course of business, none of which is expected to have a material adverse effect on our business, results of operations or financial condition.

Patent Matters

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.

On September 1, 2011, HSM Portfolio LLC and Technology Properties Limited LLC filed a patent infringement action in the U.S. District Court for the District of Delaware against us and seventeen other defendants, including MMJ and Elpida Memory (USA) Inc. On August 22, 2013, the plaintiffs filed a third amended complaint. The third amended complaint alleges that certain of our DRAM and image sensor products infringe four U.S. patents and that certain MMJ and Elpida Memory (USA) Inc. DRAM products infringe two U.S. patents and seeks damages, attorneys' fees, and costs. Trial currently is scheduled for February 22, 2016. On March 23, 2012, MMJ and Elpida Memory (USA) Inc. filed a Notice of Filing and Hearing on Petition Under Chapter 15 of the U.S. Bankruptcy Code and Issuance of Provisional Relief that included an order of the U.S. Bankruptcy Court for the District of Delaware staying judicial proceedings against MMJ and Elpida Memory (USA) Inc. Accordingly, the plaintiffs' case against MMJ and Elpida Memory (USA) was stayed. On June 25, 2013, the U.S. Bankruptcy Court for the District of Delaware entered its Order (1) Granting Recognition of the Japanese Reorganization Plan of MMJ and the Tokyo District Court's Confirmation Orders, (2) Entrusting MMJ's U.S. Assets to Foreign Representatives and Approving Certain Plan Transactions, (3) Granting Permanent Injunction, and (4) Granting Related Relief (the "Recognition Order"). Pursuant to the Recognition Order, the plaintiffs are permanently enjoined from continuing their case against MMJ and Elpida Memory (USA) Inc. in respect of any claim or claims arising prior to the commencement of the Japan Proceeding (as defined in the Recognition Order).

On December 5, 2011, the Board of Trustees for the University of Illinois (the "University") filed a patent infringement action against us in the U.S. District Court for the Central District of Illinois. The complaint alleges that unspecified semiconductor products of ours infringe three U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs. We have filed three petitions for inter-partes review by the Patent and Trademark Office, challenging the validity of each of the patents in suit. The Patent Trial and Appeal Board ("PTAB") held a hearing on December 9, 2013 in connection with the three petitions. On March 10, 2014, the PTAB issued written decisions finding that each and every claim in the three patents in suit is invalid, and cancelled all claims. The University has appealed the PTAB rulings to the U.S. Court of Appeals for the Federal Circuit.

On April 27, 2012, Semcon Tech, LLC filed a patent infringement action against us in the U.S. District Court for the District of Delaware. The complaint alleges that our use of various chemical mechanical planarization systems purchased from Applied Materials, Inc. infringes a single U.S. patent and seeks injunctive relief, damages, attorneys' fees, and costs. Trial currently is scheduled for August 21, 2015.

On December 15, 2014, Innovative Memory Solutions, Inc. filed a patent infringement action against us in the U.S. District Court for the District of Delaware. The complaint alleges that a variety of our NAND Flash products infringe eight U.S. patents and seeks damages, attorneys' fees, and costs.

Among other things, the above lawsuits pertain to certain of our DDR, DDR2, DDR3, SDR SDRAM, PSRAM, RLDRAM, LPDRAM, NAND Flash, image sensor products and certain other memory products we manufacture, which account for a significant portion of our net sales.

We are unable to predict the outcome of assertions of infringement made against us and therefore cannot estimate the range of possible loss. A determination that our products or manufacturing processes infringe the intellectual property rights of others or entering into a license agreement covering such intellectual property could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes. Any of the foregoing could have a material adverse effect on our business, results of operations or financial condition.

Antitrust Matters

At least sixty-eight purported class action price-fixing lawsuits have been filed against us and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging a conspiracy to increase DRAM prices in violation of federal and state antitrust laws and state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002. The complaints seek joint and several damages, trebled, in addition to restitution, costs and attorneys' fees. A number of these cases were removed to federal court and transferred to the U.S. District Court for the Northern District of California for consolidated pre-trial proceedings. In July 2006, the Attorneys General for approximately forty U.S. states and territories filed suit in the U.S. District Court for the Northern District of California. The complaints allege, among other things, violations of the Sherman Act, Cartwright Act, and certain other states' consumer protection and antitrust laws and seek joint and several damages, trebled, as well as injunctive and other relief. On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law. On June 23, 2010, we executed a settlement agreement resolving these purported class-action indirect purchaser cases and the pending cases of the Attorneys General relating to alleged DRAM price-fixing in the United States. Subject to certain conditions, including final court approval of the class settlements, we agreed to pay approximately $67 million in aggregate in three equal installments over a two-year period. We paid the full amount into an escrow account by the end of the first quarter of 2013 in accordance with the settlement agreement.

On June 21, 2010, the Brazil Secretariat of Economic Law of the Ministry of Justice ("SDE") announced that it had initiated an investigation relating to alleged anticompetitive activities within the DRAM industry. The SDE's Notice of Investigation names various DRAM manufacturers and certain executives, including us, and focuses on the period from July 1998 to June 2002.

We are unable to predict the outcome of these matters and therefore cannot estimate the range of possible loss, except as noted in the above discussion of the U.S. indirect purchaser cases. The final resolution of these alleged violations of antitrust laws could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

Securities Matters

On July 12, 2013, seven former shareholders of Elpida (now known as MMJ) filed a complaint against Messrs. Sakamoto, Adachi, Gomi, Shirai, Tsay-Jiu, Wataki, Kinoshita, and Takahasi in their capacity as members of the board of directors of MMJ as of February 2013. The complaint alleges that the defendants engaged in various acts and misrepresentations to hide the financial condition of MMJ and deceive shareholders prior to MMJ filing a petition for corporate reorganization on February 27, 2013. The plaintiffs seek joint and several damages equal to the market value of shares owned by each of the plaintiffs on February 23, 2013, along with attorneys' fees and interest. At a hearing on September 25, 2013, the plaintiffs withdrew the complaint against Mr. Tsay-Jiu.

We are unable to predict the outcome of this matter and therefore cannot estimate the range of possible loss. The final resolution of this matter could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

Qimonda

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda insolvency proceedings, filed suit against MTI and Micron Semiconductor B.V., our Netherlands subsidiary ("Micron B.V."), in the District Court of Munich, Civil Chamber. The complaint seeks to void under Section 133 of the German Insolvency Act a share purchase agreement between Micron B.V. and Qimonda signed in fall 2008 pursuant to which Micron B.V. purchased substantially all of Qimonda's shares of Inotera Memories, Inc. (the "Inotera Shares"), representing approximately 55% of our total shares in Inotera, and seeks an order requiring us to retransfer those shares to the Qimonda estate. The complaint also seeks, among other things, to recover damages for the alleged value of the joint venture relationship with Inotera and to terminate under Sections 103 or 133 of the German Insolvency Code a patent cross-license between us and Qimonda entered into at the same time as the share purchase agreement.

Following a series of hearings with pleadings, arguments and witnesses on behalf of the Qimonda estate, on March 13, 2014, the Court issued judgments: (1) ordering Micron B.V. to pay approximately $1 million in respect of certain Inotera shares sold in connection with the original share purchase; (2) ordering Micron B.V. to disclose certain information with respect to any Inotera Shares sold by it to third parties; (3) ordering Micron B.V. to disclose the benefits derived by it from ownership of the Inotera Shares, including in particular, any profits distributed on such shares and all other benefits; (4) denying Qimonda’s claims against MTI for any damages relating to the joint venture relationship with Inotera; and (5) determining that Qimonda's obligations under the patent cross-license agreement are cancelled. In addition, the Court issued interlocutory judgments ordering, among other things: (1) that Micron B.V. transfer to the Qimonda estate the Inotera Shares still owned by it and pay to the Qimonda estate compensation in an amount to be specified for any Inotera Shares sold to third parties; and (2) that Micron B.V. pay the Qimonda estate as compensation an amount to be specified for benefits derived by it from ownership of the Inotera Shares. The interlocutory judgments have no immediate, enforceable effect on us, and, accordingly, we expect to be able to continue to operate with full control of the Inotera Shares subject to further developments in the case. We have filed a notice of appeal, and the parties have submitted briefs to the appeals court. A hearing on the matter is scheduled for April 24, 2015.

We are unable to predict the outcome of the matter and therefore cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera Shares or equivalent monetary damages, unspecified damages based on the benefits derived by Micron B.V. from the ownership of the Inotera Shares, and/or the termination of the patent cross-license, which could have a material adverse effect on our business, results of operation or financial condition. As of December 4, 2014, the Inotera Shares had a carrying value in equity method investments for purposes of our financial reporting of $568 million and a market value of $1.86 billion.

Other

In the normal course of business, we are a party to a variety of agreements pursuant to which we 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 our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these types of agreements have not had a material adverse effect on our business, results of operations or financial condition.

Redeemable Convertible Notes

Under the terms of the indentures of the 2033 Notes, upon conversion, we would be required to pay cash equal to the lesser amount of (1) the aggregate principal amount or (2) the conversion value of the notes being converted (we could pay cash, shares of common stock or a combination thereof, at our option, for the remainder, if any, of our conversion obligation). Additionally, the 2033 Notes were convertible at the option of the holders as of December 4, 2014 and August 28, 2014. Therefore, the 2033 Notes were classified as current debt and the aggregate difference of $53 million and $57 million between the principal amount and the carrying value was classified as redeemable convertible notes in the mezzanine section of the accompanying consolidated balance sheet as of December 4, 2014 and August 28, 2014, respectively. (See "Debt" note.)

Equity

Changes in the components of equity were as follows:



	Quarter Ended December 4, 2014									Quarter Ended November 28, 2013
	Attributable to Micron			Noncontrolling Interests			Total Equity			Attributable to Micron			Noncontrolling Interests			Total Equity
Beginning balance	$	10,771		$	802		$	11,573		$	9,142		$	864		$	10,006

Net income (loss)	1,003			(1		)	1,002			358			23			381
Other comprehensive income (loss)	(21		)	—			(21		)	5			—			5
Comprehensive income (loss)	982			(1		)	981			363			23			386

Contribution from noncontrolling interests	—			20			20			—			49			49
Distributions to noncontrolling interests	—			(6		)	(6		)	—			(9		)	(9		)
Capital and other transactions attributable to Micron	(75		)	—			(75		)	(286		)	—			(286		)
Ending balance	$	11,678		$	815		$	12,493		$	9,219		$	927		$	10,146

Micron Shareholders' Equity

Issued and Outstanding Capped Calls

We have capped calls with strike prices that range from $9.50 to $10.93 which are intended to reduce the effect of potential dilution from our convertible notes. These capped calls provide for the receipt of cash or shares, at our election, from counterparties if the trading price of our stock is above the specified initial strike prices at the capped call expiration dates. Amounts received would be based on the trading price of our stock and would range from $0 (if the trading price of our stock is below the initial strike prices for all of the capped calls) to $864 million (if the trading price of our stock is at or above the cap prices for all of the capped calls).

Restrictions on Net Assets

As a result of the reorganization proceedings of the MMJ Companies being initiated on March 23, 2012, and for so long as such proceedings are continuing, the MMJ Group is subject to certain restrictions on dividends, loans and advances. In addition, our ability to access IMFT's cash and other assets through dividends, loans or advances, including to finance our other operations, is subject to agreement by Intel. As a result, our total restricted net assets (net assets less intercompany balances and noncontrolling interests) as of December 4, 2014 were $3.17 billion for the MMJ Group, which included cash and equivalents of $1.53 billion, and $789 million for IMFT.

Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component for the quarter ended December 4, 2014, were as follows:



	Cumulative Foreign Currency Translation Adjustments			Gains (Losses) on Derivative Instruments, Net			Gains (Losses) on Investments, Net		Pension Liability Adjustments			Total
Balance as of August 28, 2014	$	42		$	12		$	1	$	1		$	56
Other comprehensive income before reclassifications	(24		)	(15		)	—		31			(8		)
Amount reclassified out of accumulated other comprehensive income	—			(2		)	—		(1		)	(3		)
Tax effects	—			1			—		(11		)	(10		)
Other comprehensive income (loss)	(24		)	(16		)	—		19			(21		)
Balance as of December 4, 2014	$	18		$	(4	)	$	1	$	20		$	35

Noncontrolling Interests in Subsidiaries



	December 4, 2014				August 28, 2014
	Noncontrolling Interest Balance		Noncontrolling Interest Percentage		Noncontrolling Interest Balance		Noncontrolling Interest Percentage
IMFT⁽¹⁾	$	707	49	%	$	693	49	%
MP Mask⁽¹⁾	93		50	%	93		50	%
Other	15		Various		16		Various
	$	815			$	802


⁽¹⁾	Entity is a variable interest entity.

IMFT

Since its inception in 2006, we have owned 51% of IMFT, a venture between us and Intel to manufacture NAND Flash memory products and certain emerging memory technologies for the exclusive use of the members. IMFT is governed by a Board of Managers, for which the number of managers appointed by each member varies based on the members' respective ownership interests. The IMFT joint venture agreement extends through 2024 and includes certain buy-sell rights. Commencing in January 2015, Intel can put to us, and commencing in January 2018, we can call from Intel, Intel's interest in IMFT for an amount equal to the noncontrolling interest balance for Intel. If Intel elects to sell to us, we can elect to set the closing date of the transaction to be any time within two years following such election by Intel and can elect to receive financing of the purchase price from Intel for one to two years from the closing date.

IMFT manufactures NAND Flash memory products using designs and technology we develop with Intel. We generally share with Intel the costs of product design, other NAND Flash R&D costs and R&D costs of certain emerging memory technologies. Our R&D expenses were reduced by reimbursements from Intel of $54 million and $29 million for the first quarters of 2015 and 2014, respectively.

We sell a portion of our products to Intel through IMFT at long-term negotiated prices approximating cost. Sales of NAND Flash products to Intel under this arrangement were $108 million and $101 million for the first quarters of 2015 and 2014, respectively. Receivables from Intel as of December 4, 2014 and August 28, 2014, were $66 million and $66 million, respectively for these sales.

The following table presents the assets and liabilities of IMFT included in our consolidated balance sheets:



	December 4, 2014		August 28, 2014
Assets
Cash and equivalents	$	79	$	84
Receivables	77		73
Inventories	50		48
Other current assets	5		5
Total current assets	211		210
Property, plant and equipment, net	1,538		1,545
Other noncurrent assets	49		47
Total assets	$	1,798	$	1,802

Liabilities
Accounts payable and accrued expenses	$	101	$	106
Deferred income	8		8
Current portion of long-term debt	21		21
Total current liabilities	130		135
Long-term debt	65		71
Other noncurrent liabilities	107		110
Total liabilities	$	302	$	316

Amounts exclude intercompany balances that were eliminated in our consolidated balance sheets.

Creditors of IMFT have recourse only to IMFT's assets and do not have recourse to any other of our assets.

The following table presents IMFT's distributions to and contributions from its shareholders:



Quarter ended	December 4, 2014		November 28, 2013
IMFT distributions to Micron	$	6	$	—
IMFT distributions to Intel	6		—
Micron contributions to IMFT	21		51
Intel contributions to IMFT	20		49

MP Mask

In 2006, we formed a joint venture with Photronics to produce photomasks for leading-edge and advanced next generation semiconductors. The MP Mask joint venture agreement allows either party to terminate the joint venture in either May 2016, provided notice is given prior to May 2015, or in each successive five-year period following May 2016, provided such notice is given at least twelve months prior to the end of the successive five-year period. Since its inception, we have owned approximately 50% and Photronics has owned approximately 50% of MP Mask. We purchase a substantial majority of the photomasks produced by MP Mask pursuant to a supply arrangement.

The following table presents the assets and liabilities of MP Mask included in our consolidated balance sheets:



	December 4, 2014		August 28, 2014
Current assets	$	23	$	24
Noncurrent assets (primarily property, plant and equipment)	202		203
Current liabilities	36		28
Noncurrent liabilities	6		14

Amounts exclude intercompany balances that were eliminated in our consolidated balance sheets.

Creditors of MP Mask have recourse only to MP Mask's assets and do not have recourse to any other of our assets.

Derivative Instruments

We use derivative instruments to manage a portion of our exposure to changes in currency exchange rates from our monetary assets and liabilities denominated in currencies other than the U.S. dollar. We have also had convertible note settlement obligations which were accounted for as derivative instruments as a result of our elections to settle conversions in cash. We do not use derivative instruments for speculative purpose.

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives: We use derivative instruments to manage a portion of our exposure to changes in currency exchange rates from our monetary assets and liabilities. Our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on our earnings.

To hedge our exposures to monetary assets and liabilities, we generally utilize a rolling hedge strategy with currency forward contracts that mature within 35 days. At the end of each reporting period, monetary assets and liabilities denominated in currencies other than the U.S. dollar are remeasured in U.S. dollars and the associated outstanding forward contracts are marked-to-market. Currency forward contracts are valued at fair values based on the middle of bid and ask prices of dealers or exchange quotations (Level 2 fair value measurements). To mitigate the risk of the yen strengthening against the U.S. dollar on the MMJ creditor installment payments due in December 2014 and December 2015, we entered into forward contracts to purchase 20 billion yen on November 28, 2014 and 10 billion yen on November 27, 2015. In the first quarter of 2015, we paid $33 million to settle the 20 billion yen forward contracts.

Realized and unrealized gains and losses on currency derivatives without hedge accounting designation as well as the change in the underlying monetary assets and liabilities due to changes in currency exchange rates are included in other non-operating income (expense).

Convertible Notes Settlement Obligations: In connection with our debt restructure activities in the fourth quarter of 2014 and the first quarter of 2015, holders elected to convert the remaining outstanding 2031B Notes and a portion of the 2033E Notes. In the first quarter of 2014, holders elected to convert substantially all of the outstanding 2027 Notes and a portion of the 2031A Notes. As a result of our elections to settle the amounts due upon conversion in cash, each of the settlement obligations became derivative debt liabilities subject to mark-to-market accounting treatment for a period of approximately 30 days, beginning on the date we notified the holder of our intention to settle the obligation in cash through the settlement date. The fair values of the underlying derivative settlement obligations were initially determined using the Black-Scholes option valuation model (Level 2 fair value measurements). The Black-Scholes model requires the input of assumptions, including the stock price, expected stock-price volatility, estimated option life, risk-free interest rate and dividend rate. The subsequent measurements and final settlement amounts of our convertible notes settlement obligations were based on the volume-weighted average stock price (Level 1 fair value measurements). Changes in fair values of the derivative settlement obligations were included in other non-operating income (expense), net.

Total gross notional amounts and fair values for derivative instruments without hedge accounting designation were as follows:



	Notional Amount⁽¹⁾		Fair Value of
	Notional Amount⁽¹⁾		Current Liabilities⁽²⁾			Noncurrent Liabilities⁽³⁾
As of December 4, 2014
Currency forward contracts:
Yen	$	111	$	(19	)	$	—
Euro	72		(5		)	—
	$	183	$	(24	)	$	—
As of August 28, 2014
Currency forward contracts:
Yen	$	554	$	(12	)	$	(6	)
Euro	245		(1		)	—
Singapore dollar	330		—			—
Shekel	62		(1		)	—
	$	1,191

Convertible notes settlement obligations	12		(389		)	—
			$	(403	)	$	(6	)


⁽¹⁾	Notional amounts of forward contracts in U.S. dollars and convertible notes settlement obligations in shares.


⁽²⁾	Included in accounts payable and accrued expenses for forward contracts and in current debt for convertible notes settlement obligations.


⁽³⁾	Included in other noncurrent liabilities.

Net gains (losses) for derivative instruments without hedge accounting designation were as follows:



Quarter Ended	December 4, 2014			November 28, 2013			Location
Foreign exchange contracts	$	(58	)	$	(14	)	Other non-operating income (expense)
Convertible notes settlement obligations	6			(37		)	Other non-operating income (expense)

Derivative Instruments with Cash Flow Hedge Accounting Designation

Currency Derivatives: We utilize currency forward contracts that generally mature within 12 months to hedge our exposure to changes in cash flows from changes in currency exchange rates for certain capital expenditures. Currency forward contracts are measured at fair value based on market-based observable inputs including currency exchange spot and forward rates, interest rate and credit risk spread (Level 2 fair value measurements).

For derivative instruments designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives is included as a component of accumulated other comprehensive income (loss). Amounts in accumulated other comprehensive income (loss) are reclassified into earnings in the same line items of the consolidated statements of operation and in the same periods in which the underlying transactions affect earnings. The ineffective or excluded portion of the realized and unrealized gain or loss is included in other non-operating income (expense). Total gross notional amounts and fair values for derivative instruments with cash flow hedge accounting designation were as follows:



	Notional Amount (in U.S. Dollars)		Fair Value of Current Liabilities⁽¹⁾
As of December 4, 2014
Euro	$	74	$	(5	)
Yen	8		—
	$	82	$	(5	)
As of August 28, 2014
Euro	$	24	$	—
Yen	94		(2		)
	$	118	$	(2	)


⁽¹⁾	Included in accounts payable and accrued expenses.

For the first quarters of 2015 and 2014, we recognized losses of $15 million and $2 million, respectively, in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges. The ineffective and excluded portions of cash flow hedges are recognized in other non-operating income (expense) and were not significant in the first quarters of 2015 or 2014. For the first quarter of 2015, we reclassified gains of $2 million from accumulated other comprehensive income (loss) to earnings. As of December 4, 2014, $5 million of gains from cash flow hedges included in accumulated other comprehensive income (loss) is expected to be reclassified into earnings in the next 12 months.

Derivative Counterparty Credit Risk and Master Netting Arrangements

Our derivative instruments expose us to credit risk to the extent counterparties may be unable to meet the terms of the contracts. As of December 4, 2014, our maximum exposure to loss due to credit risk if counterparties fail completely to perform according to the terms of the contracts was generally equal to the fair value of our assets for these contracts as listed in the tables above. We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading risk across multiple financial institutions.

We also seek to enter into master netting arrangements with our counterparties to mitigate credit risk in derivative hedge transactions. These master netting arrangements allow us and our counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled with each counterparty under these arrangements have been presented in our consolidated balance sheet on a net basis. As of December 4, 2014 and August 28, 2014, amounts netted were not significant.

Fair Value Measurements

Accounting standards establish three levels of inputs that may be used to measure fair value: quoted prices in active markets for identical assets or liabilities (referred to as Level 1), inputs other than Level 1 that are observable for the asset or liability either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities (referred to as Level 3).

Fair Value Measurements on a Recurring Basis

All of our marketable debt and equity investments were classified as available-for-sale and carried at fair value. Assets measured at fair value on a recurring basis were as follows:



	December 4, 2014						August 28, 2014
	Level 1		Level 2		Total		Level 1		Level 2		Total
Cash equivalents:
Money market funds	$	866	$	—	$	866	$	1,281	$	—	$	1,281
Certificates of deposit	—		528		528		—		402		402
Government securities	—		31		31		—		—		—
Commercial paper	—		7		7		—		22		22
Corporate bonds	—		1		1		—		—		—
	866		567		1,433		1,281		424		1,705
Short-term investments:
Corporate bonds	—		217		217		—		154		154
Government securities	—		136		136		—		136		136
Commercial paper	—		86		86		—		85		85
Certificates of deposit	—		24		24		—		8		8
Asset-backed securities	—		3		3		—		1		1
	—		466		466		—		384		384
Long-term marketable investments:
Corporate bonds	—		581		581		—		407		407
Government securities	—		273		273		—		284		284
Asset-backed securities	—		217		217		—		127		127
Certificates of deposit	—		5		5		—		—		—
Marketable equity securities	1		—		1		1		—		1
	1		1,076		1,077		1		818		819
Restricted cash:
Certificates of deposit	—		24		24		—		27		27
	—		24		24		—		27		27

	$	867	$	2,133	$	3,000	$	1,282	$	1,653	$	2,935

Government securities consist of securities issued directly by or deemed to be guaranteed by government entities such as U.S. and non U.S. agency securities, government bonds and treasury securities. Level 2 securities are valued using information obtained from pricing services, which obtain quoted market prices for similar instruments, non-binding market consensus prices that are corroborated by observable market data, or various other methodologies, to determine the appropriate value at the measurement date. We perform supplemental analysis to validate information obtained from these pricing services. As of December 4, 2014, no adjustments were made to such pricing information.

Fair Value Measurements on a Nonrecurring Basis

In connection with our repurchases of debt in the first quarter of 2015, we determined the fair value of the debt components of our convertible notes as if they were stand-alone instruments, using interest rates for similar nonconvertible debt issued by entities with credit ratings comparable to ours (Level 2).

Fair Value of Financial Instruments

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value. The estimated fair value and carrying value of debt instruments (carrying value excludes the equity and mezzanine components of our convertible notes) were as follows:



	December 4, 2014				August 28, 2014
	Fair Value		Carrying Value		Fair Value		Carrying Value
Convertible notes	$	5,799	$	1,755	$	5,886	$	2,143
MMJ creditor installment payments and other notes	3,290		3,234		3,634		3,539

The fair values of our convertible notes were determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes, when available, our stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2). The fair value of our other debt instruments was estimated based on discounted cash flows using inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).

Equity Plans

As of December 4, 2014, our equity plans permit us to issue an aggregate of up to 154 million shares of common stock, of which 95 million shares were available for future awards. Awards are subject to terms and conditions as determined by our Board of Directors.

Stock Options

Stock options granted and assumptions used in the Black-Scholes option valuation model are presented below:



Quarter Ended	December 4, 2014		November 28, 2013
Stock options granted	1		2
Weighted-average grant-date fair value per share	$13.20		$7.58
Average expected life in years	5.7		4.8
Weighted-average expected volatility	47	%	50	%
Weighted-average risk-free interest rate	1.6	%	1.3	%

The expected volatilities utilized were based on implied volatilities from traded options on our stock and on our historical volatility. The expected lives of options granted were based, in part, on historical experience and on the terms and conditions of the options. The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at each grant date. No dividends were assumed in estimated option values.

Restricted Stock and Restricted Stock Units ("Restricted Stock Awards")

As of December 4, 2014, there were 13 million shares of Restricted Stock Awards outstanding, of which 1 million were performance-based or market-based Restricted Stock Awards. For service-based Restricted Stock Awards, restrictions generally lapse in one-fourth increments during each year of employment after the grant date. Vesting for performance-based awards is contingent upon meeting a specified return on assets ("ROA"), as defined, over a three-year performance period and vesting for market-based Restricted Stock Awards is contingent upon total shareholder return ("TSR") relative to the companies included in the S&P 500 over a three-year performance period. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts, depending upon the achievement level of the specified ROA or TSR. Restricted Stock Awards activity for the first quarters of 2015 and 2014 are summarized as follows:



Quarter Ended	December 4, 2014		November 28, 2013
Restricted stock awards granted	2		2
Weighted-average grant-date fair values per share	$	30.17	$	17.31

Stock-based Compensation Expense



Quarter Ended	December 4, 2014		November 28, 2013
Stock-based compensation expense by caption:
Cost of goods sold	$	12	$	7
Selling, general and administrative	15		11
Research and development	8		4
	$	35	$	22

Stock-based compensation expense by type of award:
Stock options	$	18	$	14
Restricted stock awards