2015 Q3


 
 
 
 
 
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 June 4, 2015

OR
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 July 6, 2015, was 1,083,435,628.

 
 
 
 
 



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
2014 Notes
 
1.875% Senior Notes due 2014
 
LPDRAM
 
Low Power DRAM
2023 Notes
 
5.250% Senior Notes due 2023
 
MAI
 
Micron Akita, Inc.
2024 Notes
 
5.250% Senior Notes due 2024
 
MMJ
 
Micron Memory Japan, Inc.
2026 Notes
 
5.625% Senior Notes due 2026
 
MMJ Companies
 
MMJ and MAI
2027 Notes
 
1.875% Convertible Senior Notes due 2027
 
MMJ Group
 
MMJ and its Subsidiaries
2031A Notes
 
1.500% Convertible Senior Notes due 2031
 
MMT
 
Micron Memory Taiwan Co., Ltd.
2031B Notes
 
1.875% Convertible Senior Notes due 2031
 
MP Mask
 
MP Mask Technology Center, LLC
2032 Notes
 
The 2032C Notes and 2032D Notes
 
MTI
 
Micron Technology, Inc.
2032C Notes
 
2.375% Convertible Senior Notes due 2032
 
Nanya
 
Nanya Technology Corporation
2032D Notes
 
3.125% Convertible Senior Notes due 2032
 
PSRAM
 
Pseudo-Static DRAM
2033 Notes
 
The 2033E Notes and 2033F Notes
 
Photronics
 
Photronics, Inc.
2033E Notes
 
1.625% Convertible Senior Notes due 2033
 
Qimonda
 
Qimonda AG
2033F Notes
 
2.125% Convertible Senior Notes due 2033
 
Rambus
 
Rambus, Inc.
2043G Notes
 
3.00% Convertible Senior Notes due 2043
 
R&D
 
Research and Development
DRAM
 
Dynamic Random Access Memory
 
RLDRAM
 
Reduced Latency DRAM
Elpida
 
Elpida Memory, Inc.
 
SG&A
 
Selling, General and Administration
IMFT
 
IM Flash Technologies, LLC
 
SSD
 
Solid-State Drive
Inotera
 
Inotera Memories, Inc.
 
Tera Probe
 
Tera Probe, Inc.
Intel
 
Intel Corporation
 
VIE
 
Variable Interest Entity
Japan Court
 
Tokyo District Court
 
 
 
 

1


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
(Unaudited)

 
 
Quarter Ended
 
Nine Months Ended
 
 
June 4,
2015
 
May 29,
2014
 
June 4,
2015
 
May 29,
2014
Net sales
 
$
3,853

 
$
3,982

 
$
12,592

 
$
12,131

Cost of goods sold
 
2,651

 
2,614

 
8,347

 
8,079

Gross margin
 
1,202

 
1,368

 
4,245

 
4,052

 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
169

 
174

 
549

 
527

Research and development
 
406

 
349

 
1,161

 
1,013

Other operating (income) expense, net
 
(4
)
 
6

 
(36
)
 
253

Operating income
 
631

 
839

 
2,571

 
2,259

 
 
 
 


 
 
 
 
Interest income
 
9

 
5

 
24

 
16

Interest expense
 
(97
)
 
(80
)
 
(270
)
 
(264
)
Other non-operating income (expense), net
 
(16
)
 
(21
)
 
(71
)
 
(223
)
 
 
527

 
743

 
2,254

 
1,788

 
 
 
 
 
 
 
 
 
Income tax (provision) benefit
 
(104
)
 
(72
)
 
(226
)
 
(215
)
Equity in net income of equity method investees
 
68

 
135

 
400

 
355

Net income
 
491

 
806

 
2,428

 
1,928

 
 
 
 
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests
 
—

 
—

 
—

 
(33
)
Net income attributable to Micron
 
$
491

 
$
806

 
$
2,428

 
$
1,895

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.46

 
$
0.76

 
$
2.26

 
$
1.79

Diluted
 
0.42

 
0.68

 
2.05

 
1.58

 
 
 
 
 
 
 
 
 
Number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
1,073

 
1,067

 
1,072

 
1,058

Diluted
 
1,170

 
1,190

 
1,185

 
1,196











See accompanying notes to consolidated financial statements.

2


MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)

 
 
Quarter Ended
 
Nine Months Ended
 
 
June 4,
2015
 
May 29,
2014
 
June 4,
2015
 
May 29,
2014
Net income
 
$
491

 
$
806

 
$
2,428

 
$
1,928

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
17

 
(13
)
 
(57
)
 
(17
)
Pension liability adjustments
 
1

 
—

 
19

 
2

Gain (loss) on investments, net
 
(2
)
 
—

 
(3
)
 
2

Gain (loss) on derivatives, net
 
(1
)
 
(2
)
 
(19
)
 
(6
)
Other comprehensive income (loss)
 
15

 
(15
)
 
(60
)
 
(19
)
Total comprehensive income
 
506

 
791

 
2,368

 
1,909

Comprehensive (income) loss attributable to noncontrolling interests
 
—

 
—

 
1

 
(33
)
Comprehensive income attributable to Micron
 
$
506

 
$
791

 
$
2,369

 
$
1,876



































See accompanying notes to consolidated financial statements.

3


MICRON TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)
(Unaudited)

As of
 
June 4,
2015
 
August 28,
2014
Assets
 
 
 
 
Cash and equivalents
 
$
3,694

 
$
4,150

Short-term investments
 
1,166

 
384

Receivables
 
2,530

 
2,906

Inventories
 
2,381

 
2,455

Other current assets
 
237

 
350

Total current assets
 
10,008

 
10,245

Long-term marketable investments
 
2,470

 
819

Property, plant and equipment, net
 
9,857

 
8,682

Equity method investments
 
1,324

 
971

Intangible assets, net
 
431

 
468

Deferred tax assets
 
553

 
816

Other noncurrent assets
 
493

 
497

Total assets
 
$
25,136

 
$
22,498

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
3,204

 
$
2,864

Deferred income
 
214

 
309

Current debt
 
1,148

 
1,638

Total current liabilities
 
4,566

 
4,811

Long-term debt
 
6,403

 
4,955

Other noncurrent liabilities
 
764

 
1,102

Total liabilities
 
11,733

 
10,868

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable convertible notes
 
48

 
57

 
 
 
 
 
Micron shareholders' equity:
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 1,083 shares issued and outstanding (1,073 as of August 28, 2014)
 
108

 
107

Additional capital
 
7,428

 
7,879

Retained earnings
 
5,117

 
2,729

Treasury stock
 
(192
)
 
—

Accumulated other comprehensive income (loss)
 
(3
)
 
56

Total Micron shareholders' equity
 
12,458

 
10,771

Noncontrolling interests in subsidiaries
 
897

 
802

Total equity
 
13,355

 
11,573

Total liabilities and equity
 
$
25,136

 
$
22,498





See accompanying notes to consolidated financial statements.

4


MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Nine Months Ended
 
June 4,
2015
 
May 29,
2014
Cash flows from operating activities
 
 
 
 
Net income
 
$
2,428

 
$
1,928

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense and amortization of intangible assets
 
1,957

 
1,550

Amortization of debt discount and other costs
 
105

 
130

Stock-based compensation
 
127

 
81

Loss on restructure of debt
 
48

 
182

Equity in net income of equity method investees
 
(400
)
 
(355
)
Change in operating assets and liabilities:
 
 
 
 
Receivables
 
337

 
(330
)
Inventories
 
75

 
117

Accounts payable and accrued expenses
 
(533
)
 
646

Other noncurrent liabilities
 
(8
)
 
185

Deferred income taxes, net
 
248

 
184

Other
 
(206
)
 
34

Net cash provided by operating activities
 
4,178

 
4,352

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Purchases of available-for-sale securities
 
(3,809
)
 
(475
)
Expenditures for property, plant and equipment
 
(2,256
)
 
(1,800
)
Payments to settle hedging activities
 
(94
)
 
(25
)
Proceeds from sales and maturities of available-for-sale securities
 
1,386

 
442

Decrease in restricted cash
 
—

 
559

Other
 
51

 
95

Net cash provided by (used for) investing activities
 
(4,722
)
 
(1,204
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Proceeds from issuance of debt
 
2,172

 
1,062

Proceeds from sale-leaseback transactions
 
291

 
14

Proceeds from issuance of stock under equity plans
 
64

 
247

Repayments of debt
 
(2,051
)
 
(3,134
)
Cash paid to acquire treasury stock
 
(245
)
 
(75
)
Other
 
(16
)
 
(67
)
Net cash provided by (used for) financing activities
 
215

 
(1,953
)
 
 
 
 
 
Effect of changes in currency exchange rates on cash and equivalents
 
(127
)
 
(13
)
 
 
 
 
 
Net increase (decrease) in cash and equivalents
 
(456
)
 
1,182

Cash and equivalents at beginning of period
 
4,150

 
2,880

Cash and equivalents at end of period
 
$
3,694

 
$
4,062

 
 
 
 
 
Noncash investing and financing activities
 
 
 
 
Exchange of convertible notes
 
$
—

 
$
756

Acquisition of noncontrolling interest
 
—

 
127


See accompanying notes to consolidated financial statements.

5


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, 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 MTI 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 third quarter and first nine months of 2015, which ended on June 4, 2015, contained 13 weeks and 40 weeks, respectively. Fiscal year 2014 contained 52 weeks and the third quarter and first nine months of 2014, which ended on May 29, 2014, contained 13 weeks and 39 weeks, respectively. 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 VIEs

Inotera: Inotera is a VIE because its equity is not sufficient to permit it to finance its activities without additional support from its shareholders and because of the terms of its supply agreement with us. 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 limitations on our governance rights that require the consent of other parties for key operating decisions and due to 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.


6


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 VIEs

IMFT: IMFT is a VIE because all of its costs are passed to us and its other member, Intel, through product purchase agreements and because IMFT is dependent upon us or Intel for 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 have the power to direct the activities of IMFT that most significantly impact its economic performance and because we 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 have the power to direct the activities of MP Mask that most significantly impact its economic performance and because we 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 April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-05 – Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provides additional guidance to customers about whether a cloud computing arrangement includes a software license. Under ASU 2015-05, if a software cloud computing arrangement contains a software license, customers should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, customers should account for the arrangement as a service contract. ASU 2015-05 also removes the requirement to analogize to ASC 840-10 – Leases to determine the asset acquired in a software licensing arrangement. This ASU will be effective for us beginning in our first quarter of 2017 and early adoption is permitted.  We are evaluating the effects of the adoption of this ASU on our financial statements.

In April 2015, the FASB issued ASU 2015-03 – Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and will be effective for us beginning in our first quarter of 2017. Early adoption is permitted. We do not expect this adoption to have a material impact on our financial statements.

In February 2015, the FASB issued ASU 2015-02 – Amendments to the Consolidation Analysis, which amends the consolidation requirements in Accounting Standards Codification 810 – Consolidation.  ASU 2015-02 makes targeted amendments to the current consolidation guidance for VIEs, which could change consolidation conclusions.  This ASU will be effective for us beginning in our first quarter of 2017 and early adoption is permitted.  We are evaluating the effects of the adoption of this ASU on our financial statements.


7


In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under generally accepted accounting principles in the U.S.  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. This ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method we will elect and the effects of the adoption of this ASU on our financial statements.


Cash and Investments

Cash and the fair values of our available-for-sale investments, which approximated amortized costs, were as follows:

 
June 4, 2015
 
August 28, 2014
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments(3)
 
Total Fair Value
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments(3)
 
Total Fair Value
Cash
$
1,727

 
$
—

 
$
—

 
$
1,727

 
$
2,445

 
$
—

 
$
—

 
$
2,445

Level 1(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1,371

 
—

 
—

 
1,371

 
1,281

 
—

 
—

 
1,281

Marketable equity securities
—

 
—

 
—

 
—

 
—

 
—

 
1

 
1

 
1,371

 
—

 
—

 
1,371

 
1,281

 
—

 
1

 
1,282

Level 2(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
9

 
558

 
1,350

 
1,917

 
—

 
154

 
407

 
561

Government securities
192

 
160

 
435

 
787

 
—

 
136

 
284

 
420

Asset-backed securities
—

 
5

 
651

 
656

 
—

 
1

 
127

 
128

Commercial paper
184

 
397

 
—

 
581

 
22

 
85

 
—

 
107

Certificates of deposit
211

 
46

 
34

 
291

 
402

 
8

 
—

 
410

 
596

 
1,166

 
2,470

 
4,232

 
424

 
384

 
818

 
1,626

 
$
3,694

 
$
1,166

 
$
2,470

 
$
7,330

 
$
4,150

 
$
384

 
$
819

 
$
5,353

(1) 
The fair value of Level 1 securities is measured based on quoted prices in active markets for identical assets.
(2) 
The fair value of Level 2 securities is measured 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 June 4, 2015, no adjustments were made to such pricing information.
(3) 
The maturities of our long-term marketable securities generally range from one to four years.

Proceeds from the sales of available-for-sale securities were $562 million and $938 million for the third quarter and first nine months of 2015, respectively, and $78 million and $301 million for the third quarter and first nine months of 2014, respectively. Gross realized gains and losses for the third quarter and first nine months of 2015 and 2014 were not significant. As of June 4, 2015, none of our available-for-sale securities had been in a loss position for longer than 12 months.




8


Receivables

 
 
June 4,
2015
 
August 28,
2014
Trade receivables, net
 
$
2,261

 
$
2,524

Income and other taxes
 
81

 
104

Other
 
188

 
278

 
 
$
2,530

 
$
2,906


As of June 4, 2015 and August 28, 2014, other receivables included $64 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

 
 
June 4,
2015
 
August 28,
2014
Finished goods
 
$
774

 
$
898

Work in process
 
1,364

 
1,372

Raw materials and supplies
 
243

 
185

 
 
$
2,381

 
$
2,455



Property, Plant and Equipment

 
August 28, 2014
 
Additions
 
Retirements and Other
 
June 4,
2015
Land
$
86

 
$
2

 
$
—

 
$
88

Buildings
5,093

 
174

 
(2
)
 
5,265

Equipment(1)
17,781

 
2,718

 
(445
)
 
20,054

Construction in progress(2)
114

 
136

 
(1
)
 
249

Software
358

 
23

 
(23
)
 
358

 
23,432

 
3,053

 
(471
)
 
26,014

Accumulated depreciation
(14,750
)
 
(1,868
)
 
461

 
(16,157
)
 
$
8,682

 
$
1,185

 
$
(10
)
 
$
9,857

(1) 
Included costs related to equipment not placed into service of $1.07 billion and $826 million, as of June 4, 2015 and August 28, 2014, respectively.
(2) 
Included building-related construction and tool installation costs on assets not placed into service.

Depreciation expense was $644 million and $1.87 billion for the third quarter and first nine months of 2015, respectively, and $508 million and $1.46 billion for the third quarter and first nine months of 2014, respectively.




9


Equity Method Investments

 
 
June 4, 2015
 
August 28, 2014
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera(1)
 
$
1,273

 
33
%
 
$
914

 
33
%
Tera Probe
 
35

 
40
%
 
48

 
40
%
Other
 
16

 
Various

 
9

 
Various

 
 
$
1,324

 
 

 
$
971

 
 

(1) Entity is a variable interest entity.

As of June 4, 2015, substantially all of our maximum exposure to loss from our VIEs that were not consolidated was the $1.27 billion carrying value of our investment in Inotera.  We may also incur losses in connection with our rights and obligations to purchase all of Inotera's wafer production capacity under our supply agreements with Inotera.

We recognize our share of earnings or losses from our equity method investees generally on a two-month lag.  Included in our share of earnings for the first nine months of 2015 was $65 million related to Inotera's full release of its valuation allowance against net deferred tax assets related to its net operating loss carryforward. Equity in net income of equity method investees, net of tax, included the following:
 
 
Quarter Ended
 
Nine Months Ended
 
 
June 4,
2015
 
May 29,
2014
 
June 4,
2015
 
May 29,
2014
Inotera
 
$
67

 
$
134

 
$
402

 
$
349

Tera Probe
 
3

 
2

 
(3
)
 
8

Other
 
(2
)
 
(1
)
 
1

 
(2
)
 
 
$
68

 
$
135

 
$
400

 
$
355


Inotera

We have partnered with Nanya in Inotera, a Taiwan DRAM memory company, since 2009. As of June 4, 2015, 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 June 4, 2015, the market value of our equity interest in Inotera was $2.26 billion based on the closing trading price in an active market of 32.40 New Taiwan dollars per share. As of June 4, 2015 and August 28, 2014, there were losses of $2 million and gains of $44 million, respectively, in accumulated other comprehensive income for cumulative translation adjustments from our equity investment in Inotera.

Since January 2013, we have purchased all of Inotera's DRAM output at prices reflecting discounts from market prices for our comparable components under a supply agreement (the "2013 Supply Agreement"). In the second quarter of 2015, we executed a supply agreement, to be effective beginning on January 1, 2016 (the "2016 Supply Agreement"), which will replace the 2013 Supply Agreement. Under the 2016 Supply Agreement, the price for DRAM products sold to us will be based on a formula that equally shares margin between Inotera and us.  The 2016 Supply Agreement has an initial two-year term, followed by a three-year wind-down period, and contemplates negotiations in late 2016 with respect to a two-year extension, and annual negotiations thereafter with respect to successive one-year extensions.  Upon termination of the initial two-year term of the 2016 Supply Agreement, or any extensions, we would purchase DRAM from Inotera during the wind-down period. Our share of Inotera's capacity would decline over the wind-down period. In the first nine months of 2015 and in 2014, our cost of products purchased from Inotera was significantly higher than our cost of similar products manufactured in our wholly-owned facilities. We purchased $533 million and $1.89 billion of DRAM products from Inotera in the third quarter and first nine months of 2015, respectively, and $700 million and $2.00 billion in the third quarter and first nine months of 2014, respectively.


10


Tera Probe

In 2013, we acquired a 40% interest in Tera Probe, which provides semiconductor wafer testing and probe services to us and others. As of June 4, 2015, the market value of our equity interest in Tera Probe was $45 million based on the closing trading price in an active market of 1,528 yen per share. 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 June 4, 2015, the difference between our investment balance and our proportionate share of underlying equity in Tera Probe was $29 million and is accreted as income to our earnings through equity in net income of equity method investees over a weighted-average period of seven years. We incurred manufacturing costs for services performed by Tera Probe of $19 million and $66 million for the third quarter and first nine months of 2015, respectively, and $24 million and $88 million for the third quarter and first nine months of 2014, respectively.


Intangible Assets

 
 
June 4, 2015
 
August 28, 2014
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Product and process technology
 
$
834

 
$
(404
)
 
$
809

 
$
(341
)
Other
 
2

 
(1
)
 
1

 
(1
)
 
 
$
836

 
$
(405
)
 
$
810

 
$
(342
)

During the first nine months of 2015 and 2014, we capitalized $51 million and $29 million, respectively, for product and process technology with weighted-average useful lives of seven years and ten years, respectively. Amortization expense was $29 million and $89 million for the third quarter and first nine months of 2015, respectively, and $34 million and $88 million for the third quarter and first nine months of 2014, respectively.  Annual amortization expense is estimated to be $117 million for 2015, $107 million for 2016, $95 million for 2017, $83 million for 2018 and $35 million for 2019.


Accounts Payable and Accrued Expenses

 
 
June 4,
2015
 
August 28,
2014
Accounts payable
 
$
1,000

 
$
996

Property, plant and equipment payables
 
1,018

 
289

Related party payables
 
387

 
673

Salaries, wages and benefits
 
340

 
456

Income and other taxes
 
82

 
71

Customer advances
 
79

 
98

Other
 
298

 
281

 
 
$
3,204

 
$
2,864


As of June 4, 2015 and August 28, 2014, related party payables included $378 million and $660 million, respectively, due to Inotera primarily for the purchase of DRAM products. As of June 4, 2015 and August 28, 2014, related party payables also included $9 million and $13 million, respectively, due to Tera Probe for testing and probe services performed. (See "Equity Method Investments" note.)

As of June 4, 2015 and August 28, 2014, customer advances included $60 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 August 28, 2014, other noncurrent liabilities included $90 million from this DRAM supply agreement.




11


Debt

 
 
 
 
 
 
June 4, 2015
 
August 28, 2014
Instrument(1)
 
Stated Rate
 
Effective Rate
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
Capital lease obligations(2)
 
N/A

 
N/A

 
$
325

 
$
530

 
$
855

 
$
323

 
$
588

 
$
911

MMJ creditor installment payments
 
N/A

 
6.25
%
 
154

 
669

 
823

 
192

 
939

 
1,131

1.258% senior notes
 
1.258
%
 
1.97
%
 
92

 
278

 
370

 
92

 
324

 
416

2022 senior notes
 
5.875
%
 
6.14
%
 
—

 
600

 
600

 
—

 
600

 
600

2023 senior notes
 
5.250
%
 
5.43
%
 
—

 
1,000

 
1,000

 
—

 
—

 
—

2024 senior notes
 
5.250
%
 
5.38
%
 
—

 
550

 
550

 
—

 
—

 
—

2025 senior notes
 
5.500
%
 
5.56
%
 
—

 
1,150

 
1,150

 
—

 
1,150

 
1,150

2026 senior notes
 
5.625
%
 
5.73
%
 
—

 
450

 
450

 
—

 
—

 
—

2031B convertible senior notes
 
1.875
%
 
6.98
%
 
—

 
—

 
—

 
362

 
—

 
362

2032C convertible senior notes(3)
 
2.375
%
 
5.95
%
 
—

 
198

 
198

 
—

 
314

 
314

2032D convertible senior notes(3)
 
3.125
%
 
6.33
%
 
—

 
151

 
151

 
—

 
288

 
288

2033E convertible senior notes(3)
 
1.625
%
 
4.50
%
 
276

 
—

 
276

 
278

 
—

 
278

2033F convertible senior notes(3)
 
2.125
%
 
4.93
%
 
270

 
—

 
270

 
265

 
—

 
265

2043G convertible senior notes
 
3.000
%
 
6.76
%
 
—

 
646

 
646

 
—

 
636

 
636

Other notes payable
 
2.241
%
 
2.40
%
 
31

 
181

 
212

 
126

 
116

 
242

 
 
 
 
 
 
$
1,148

 
$
6,403

 
$
7,551

 
$
1,638

 
$
4,955

 
$
6,593

(1) 
We have either the obligation or the option to pay cash for the principal 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 3.8% and 4.3% as of June 4, 2015 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 March 31, 2015 exceeded 130% of the conversion price per share, holders had the right to convert their notes at any time during the calendar quarter ended June 30, 2015. The closing price of our common stock also exceeded the thresholds for the calendar quarter ended June 30, 2015; therefore, these notes are convertible by the holders through September 30, 2015. The 2033 Notes are classified as current because the terms of these notes require us to pay cash for the principal amount of any converted notes.


12


2015 Debt Activity

In the first nine months of 2015, we consummated a number of transactions with respect to our debt, including conversions and settlements, repurchases, the issuances of non-convertible senior notes, and the early repayment of a note. As a result, we recognized losses of $18 million and $48 million in the third quarter and first nine months of 2015, respectively. The following table presents the effect of each of the actions in the first nine months of 2015:

 
 
Increase (Decrease) in Principal
 
Increase (Decrease) in Carrying Value
 
Increase (Decrease) in Cash
 
(Decrease) in Equity
 
(Loss) Gain(1)
Conversions and settlements:
 
 
 
 
 
 
 
 
 
 
2031B Notes
 
$
(114
)
 
$
(362
)
 
$
(389
)
 
$
—

 
$
(24
)
2033E Notes
 
(7
)
 
(7
)
 
(19
)
 
(15
)
 
2

 
 
(121
)
 
(369
)
 
(408
)
 
(15
)
 
(22
)
 
 
 
 
 
 
 
 
 
 
 
Repurchases:
 
 
 
 
 
 
 
 
 
 
2032C Notes
 
(139
)
 
(122
)
 
(415
)
 
(283
)
 
(10
)
2032D Notes
 
(166
)
 
(141
)
 
(492
)
 
(341
)
 
(11
)
 
 
(305
)
 
(263
)
 
(907
)
 
(624
)
 
(21
)
 
 
 
 
 
 
 
 
 
 
 
Issuances:
 
 
 
 
 
 
 
 
 
 
2023 Notes
 
1,000

 
1,000

 
988

 
—

 
—

2024 Notes
 
550

 
550

 
545

 
—

 
—

2026 Notes
 
450

 
450

 
446

 
—

 
—

 
 
2,000

 
2,000

 
1,979

 
—

 
—

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

 
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,453

 
$
1,248


$
542

 
$
(639
)
 
$
(48
)
(1) 
Included in other non-operating expense.

Conversions and Settlements: During the first nine months 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 – During the first nine months of 2015, holders converted a portion of our 2033E Notes, and we elected to settle the amounts 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. 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 nine months of 2015, we repurchased portions of our 2032C Notes and 2032D Notes. 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.


13


Issuance: On April 30, 2015, we issued $550 million in principal amount of 2024 Notes due January 2024 and $450 million in principal amount of 2026 Notes due January 2026. On February 3, 2015, we issued $1.00 billion in principal amount of 2023 Notes due August 2023. Issuance costs for these notes totaled $21 million.

These notes contain covenants that, among other things, limit, in certain circumstances, our ability and/or the ability of our domestic restricted subsidiaries (which are generally subsidiaries in the U.S. in which we own at least 80% of the voting stock) to (1) create or incur certain liens and enter into sale and lease-back transactions, (2) create, assume, incur, or guarantee certain additional secured indebtedness and unsecured indebtedness of certain of our domestic restricted subsidiaries, and (3) consolidate with or merge with or into, or convey, transfer or lease all or substantially all of our assets, to another entity. These covenants are subject to a number of limitations, exceptions, and qualifications.

Cash Redemption at Our Option: We have the option to redeem these notes; however, the applicable redemption price will be determined as follows:
 
Redemption Period Requiring Payment of:
 
Redemption Up To 35% Using Cash Proceeds From An Equity Offering(3):
 
Make-Whole(1)
 
Premium(2)
 
Date
 
Specified Price
2023 Notes
Prior to Feb. 1, 2018
 
On or after Feb. 1, 2018
 
 Prior to Feb. 1, 2018
 
105.250
%
2024 Notes
Prior to May 1, 2018
 
On or after May 1, 2018
 
Prior to May 1, 2018
 
105.250
%
2026 Notes
Prior to May 1, 2020
 
On or after May 1, 2020
 
Prior to May 1, 2018
 
105.625
%

(1) 
If we redeem prior to the applicable date, the price is principal plus a make-whole premium equal to the present value of the remaining scheduled interest payments as described in the applicable indenture, together with accrued and unpaid interest.
(2) 
If we redeem on or after the applicable date, the price is principal plus a premium which declines over time as specified in the applicable indenture, together with accrued and unpaid interest.
(3) 
If we redeem prior to the applicable date with net cash proceeds of one or more equity offerings, the price is equal to the amount specified above, together with accrued and unpaid interest, subject to a maximum redemption of 35% of the aggregate principal amount of the respective note being redeemed.

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

2014 Debt Activity

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. In the first nine months 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 premium) from the exchange of an aggregate principal amount of $440 million of 2027 Notes, 2031A Notes, and 2031B Notes into 2043G Notes;
•
$121 million (which included $115 million in non-operating expense and $6 million of interest expense from the payment of a make-whole premium) from the conversion of $770 million of aggregate principal amount of 2014 Notes, 2027 Notes, and 2031A Notes; and
•
$18 million in non-operating expense from the cash repurchase of $263 million of aggregate principal amount of 2031B Notes, 2032C Notes, and 2032D Notes.


14


Convertible Notes With Debt and Equity Components

As of June 4, 2015, the trading price of our common stock was higher than the conversion prices of our 2032 Notes and our 2033 Notes. As a result, the conversion values were in excess of principal amounts for such notes. The following table summarizes our convertible notes outstanding as of June 4, 2015:

 
 
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
 
$
224

 
23

 
$
9.63

 
$
12.52

 
$
403

2032D Notes
 
May 2021
 
177

 
18

 
9.98

 
12.97

 
302

2033E Notes
 
February 2018
 
293

 
27

 
10.93

 
14.21

 
430

2033F Notes
 
February 2020
 
300

 
27

 
10.93

 
14.21

 
441

2043G Notes(4)
 
November 2028
 
1,025

 
35

 
29.16

 
37.91

 
—

 
 
 
 
$
2,019

 
130

 
 
 
 
 
$
1,576

(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 prior to the contractual maturities of the notes.
(2) 
Holders have the right to convert all or a portion of their notes at a date prior to 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. The closing price of our common stock exceeded the thresholds for the calendar quarter ended June 30, 2015 for our 2032 Notes and 2033 Notes; therefore, those notes are convertible by the holders through September 30, 2015.
(3) 
Based on our closing share price of $26.99 as of June 4, 2015.
(4) 
The original principal amount of $820 million accretes up to $917 million at the holder put date 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.

Capital Lease Obligations

In the third quarter of 2015, we recorded a capital lease obligation of $37 million, which related to an equipment sale-leaseback transaction, at a weighted-average effective interest rate of 2.8%, payable in periodic installments through May 2019. In the first nine months of 2015, we recorded capital lease obligations aggregating $324 million, including $291 million related to equipment sale-leaseback transactions, at a weighted-average effective interest rate of 3.2%, payable in periodic installments through May 2019.

Other Notes Payable

On March 13, 2015, we borrowed $47 million under a two-year note, collateralized by certain property, plant, and equipment. The note is payable in equal quarterly installments, plus interest at a variable rate equal to the 90-day Taipei Interbank Offered Rate ("TAIBOR") plus 1.65% per annum.


15


Available Facilities

Revolving Credit Facilities: On February 12, 2015, we terminated our unused $255 million senior secured three-year revolving credit facility and entered into a senior secured five-year revolving credit facility.  Under this credit facility, we can draw up to the lesser of $750 million or 80% of the net outstanding balance of certain trade receivables, as defined in the facility agreement. Any amounts drawn are collateralized by a security interest in such trade receivables.  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 certain of our operations, assets, prospects, business, or condition, and including negative covenants that limit or restrict our ability to create liens on, or dispose of, the collateral securing the obligations under this facility.  Interest is payable on any outstanding principal balance at a variable rate equal to the London Interbank Offered Rate ("LIBOR") plus an applicable margin ranging between 1.75% to 2.25%, depending upon the utilized portion of the facility.  On April 16, 2015, we drew $75 million under this facility at an interest rate equal to 2.15% per annum. As of June 4, 2015, $75 million of principal was outstanding under this facility and $518 million was available to us to be drawn.

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 certain 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 decreases 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%, depending upon the utilized portion of the facility. On April 16, 2015, we drew $50 million under this facility at an interest rate equal to 1.65% per annum. As of June 4, 2015, $50 million of principal was outstanding under this facility and $343 million was available to us to be drawn.

Other Facilities: On April 14, 2015, our IMFT venture entered into a commitment letter and progress payment agreement to obtain financing collateralized by semiconductor production equipment. Subject to customary conditions, IMFT can draw up to $275 million under these agreements prior to March 31, 2016. Amounts drawn will be made subject to a five-year loan, with equal quarterly payments beginning three months after such amounts are made subject to the loan, which payments reflect an implicit interest rate equal to the three-year swap rate plus 1.64% per annum. As of June 4, 2015, IMFT had not utilized any amounts under this facility.

On May 28, 2015, we entered into a term loan agreement to obtain financing collateralized by certain property, plant, and equipment. Subject to customary conditions, we can draw up to 6.90 billion New Taiwan dollars or an equivalent amount in U.S. dollars (approximately $225 million as of June 4, 2015). As of June 4, 2015, we had not drawn any amounts under this facility and subsequent to the third quarter of 2015, on June 18, 2015, we drew $40 million under this arrangement. Subsequent draws must occur by December 18, 2015. Amounts drawn will be made subject to a three-year loan, with equal quarterly principal payments beginning six months after the initial draw. Amounts drawn in New Taiwan dollars will accrue interest at a variable rate equal to the three-month TAIBOR plus a margin not to exceed 2.0%. Amounts drawn in U.S. dollars will accrue interest at a variable rate equal to the three-month LIBOR plus a margin not to exceed 2.2%.


16


Contractual Maturities

As of June 4, 2015, debt maturities and future minimum lease payments under capital lease obligations were as follows:

 
 
Notes Payable
 
Capital Lease Obligations
Remainder of 2015
 
$
62

 
$
83

2016
 
305

 
346

2017
 
270

 
170

2018
 
545

 
129

2019
 
501

 
90

2020 and thereafter
 
5,541

 
107

Unamortized discounts and interest, respectively
 
(528
)
 
(70
)
 
 
$
6,696

 
$
855



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 applicable balance sheet dates, 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 Japan 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 appealed the PTAB rulings to the U.S. Court of Appeals for the Federal Circuit, and a hearing was held on March 4, 2015. On March 12, 2015, the appeals court issued orders that summarily affirm the PTAB ruling that all claims of each patent are invalid.


17


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 31, 2015.

On November 21, 2014, Elm 3DS Innovations, LLC ("Elm") filed a patent infringement action against MTI, Micron Semiconductor Products, Inc., and Micron Consumer Products Group, Inc. in the U.S. District Court for the District of Delaware. On March 27, 2015, Elm filed an amended complaint against the same entities. The amended complaint alleges that unspecified semiconductor products of ours that incorporate multiple stacked die infringe thirteen U.S. patents and seeks damages, attorneys’ fees, and costs.

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 DRAM, DDR2 DRAM, DDR3 DRAM, DDR4 DRAM, 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.


18


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 2012. 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, 2012. The plaintiffs seek joint and several damages equal to the market value of shares owned by each of the plaintiffs on February 23, 2012, 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 as of June 4, 2015, and seeks an order requiring us to re-transfer 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 was held on July 9, 2015 during which an additional hearing was scheduled for September 29, 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 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 June 4, 2015, the Inotera Shares had a carrying value in equity method investments for purposes of our financial reporting of $703 million and a market value of $1.25 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.




19


Redeemable Convertible Notes

Under the terms of the indentures governing 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. To the extent the conversion value exceeds the principal amount, we could pay cash, shares of common stock, or a combination thereof, at our option, for the amount of such excess. The 2033 Notes were convertible at the option of the holders as of June 4, 2015 and August 28, 2014. Therefore, the 2033 Notes were classified as current debt and the aggregate difference between the principal amount and the carrying value of $48 million as of June 4, 2015 and $57 million as of August 28, 2014, was classified as redeemable convertible notes in the mezzanine section of the accompanying consolidated balance sheets. (See "Debt" note.)


Equity

Changes in the components of equity were as follows:

 
 
Nine Months Ended June 4, 2015
 
Nine Months Ended May 29, 2014
 
 
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
 
2,428

 
—

 
2,428

 
1,895

 
33

 
1,928

Other comprehensive income (loss)
 
(59
)
 
(1
)
 
(60
)
 
(19
)
 
—

 
(19
)
Comprehensive income (loss)
 
2,369

 
(1
)
 
2,368

 
1,876

 
33

 
1,909

 
 
 
 
 
 
 
 
 
 
 
 
 
Contributions from noncontrolling interests
 
—

 
102

 
102

 
—

 
59

 
59

Distributions to noncontrolling interests
 
—

 
(6
)
 
(6
)
 
—

 
(19
)
 
(19
)
Acquisition of noncontrolling interests in MMT
 
—

 
—

 
—

 
34

 
(180
)
 
(146
)
Capital and other transactions attributable to Micron
 
(682
)
 
—

 
(682
)
 
(1,112
)
 
—

 
(1,112
)
Ending balance
 
$
12,458

 
$
897

 
$
13,355

 
$
9,940

 
$
757

 
$
10,697


Micron Shareholders' Equity

Common Stock Repurchases: Our Board of Directors has authorized the repurchase of up to $1.00 billion of our outstanding common stock. Any repurchases under the authorization may be made in open market purchases, block trades, privately-negotiated transactions, and/or derivative transactions. Repurchases are subject to market conditions and our ongoing determination of the best use of available cash. During the second quarter of 2015, we repurchased 7 million shares for $192 million through open market transactions. As of June 4, 2015, the repurchased shares were held as treasury stock and $808 million of the authorization remained available for future stock repurchases.

Employees can elect to have shares withheld for taxes or exercise prices upon the release of restricted awards or exercise of stock options. We repurchased and retired 2 million and 7 million shares of our common stock that our employees elected to withhold in the first nine months of 2015 and 2014, respectively, and paid $53 million and $75 million, respectively, for taxes and exercise prices.


20


Issued and Outstanding Capped Calls: We have capped calls (with strike prices that range from $9.50 to $10.93 and cap prices that range from $12.67 to $16.04), 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 on various dates ranging from July 2015 to February 2020, the expiration dates of the capped calls. The cash value 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 on each expiration date) to $864 million (if the trading price of our stock is at or above the cap prices for all of the capped calls on each expiration date).

Restrictions on Net Assets: As a result of the reorganization proceedings of the MMJ Companies 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 June 4, 2015 were $3.07 billion for the MMJ Group and $874 million for IMFT, which included cash and equivalents of $1.26 billion for the MMJ Group and $238 million for IMFT.

Accumulated Other Comprehensive Income (Loss): Changes in accumulated other comprehensive income (loss) by component for the first nine months of 2015 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
 
(57
)
 
(13
)
 
(1
)
 
32

 
(39
)
Amount reclassified out of accumulated other comprehensive income
 
—

 
(5
)
 
(2
)
 
(2
)
 
(9
)
Tax effects
 
—

 
—

 
—

 
(11
)
 
(11
)
Other comprehensive income (loss)
 
(57
)
 
(18
)
 
(3
)
 
19

 
(59
)
Balance as of June 4, 2015
 
$
(15
)
 
$
(6
)
 
$
(2
)
 
$
20

 
$
(3
)

Noncontrolling Interests in Subsidiaries

 
 
June 4, 2015
 
August 28, 2014
 
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
IMFT(1)
 
$
790

 
49
%
 
$
693

 
49
%
MP Mask(1)
 
93

 
50
%
 
93

 
50
%
Other
 
14

 
Various

 
16

 
Various

 
 
$
897

 
 
 
$
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 exclusively for 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, in either case, for an amount equal to the noncontrolling interest balance for Intel at that time. 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.


21


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 $58 million and $158 million for the third quarter and first nine months of 2015, respectively, and $36 million and $100 million for the third quarter and first nine months of 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 $101 million and $309 million for the third quarter and first nine months of 2015, respectively, and $107 million and $312 million for the third quarter and first nine months of 2014, respectively. Receivables from Intel as of June 4, 2015 and August 28, 2014, were $62 million and $66 million, respectively for these sales.

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

 
 
June 4,
2015
 
August 28,
2014
Assets
 
 
 
 
Cash and equivalents
 
$
238

 
$
84

Receivables
 
72

 
73

Inventories
 
56

 
48

Other current assets
 
4

 
5

Total current assets
 
370

 
210

Property, plant and equipment, net
 
1,686

 
1,545

Other noncurrent assets
 
48

 
47

Total assets
 
$
2,104

 
$
1,802

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
253

 
$
106

Deferred income
 
9

 
8

Current debt
 
21

 
21

Total current liabilities
 
283

 
135

Long-term debt
 
54

 
71

Other noncurrent liabilities
 
103

 
110

Total liabilities
 
$
440

 
$
316

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

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

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

 
 
Quarter Ended
 
Nine Months Ended
 
 
June 4,
2015
 
May 29,
2014
 
June 4,
2015
 
May 29,
2014
IMFT distributions to Micron
 
$
—

 
$
—

 
$
6

 
$
10

IMFT distributions to Intel
 
—

 
—

 
6

 
10

Micron contributions to IMFT
 
85

 
10

 
106

 
61

Intel contributions to IMFT
 
82

 
10

 
102

 
59


MP Mask: In 2006, we formed a joint venture with Photronics to produce photomasks for leading-edge and advanced next-generation semiconductors.  On March 24, 2015, we notified Photronics of our election to terminate MP Mask effective in May 2016. Upon termination, we have the right to acquire Photronics' interest in MP Mask for an amount equal to the noncontrolling interest balance. 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.

22



The assets and liabilities of MP Mask included in our consolidated balance sheets were as follows:

 
 
June 4,
2015
 
August 28,
2014
Current assets
 
$
21

 
$
24

Noncurrent assets (primarily property, plant and equipment)
 
185

 
203

Current liabilities
 
24

 
28

Noncurrent liabilities
 
—

 
14

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

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


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).

All of our marketable debt and equity investments were classified as available-for-sale and carried at fair value. In addition to the fair value measurements disclosed in the cash and investments note, as of June 4, 2015 and August 28, 2014, we had certificates of deposit classified as restricted cash (included in other noncurrent assets) of $28 million and $27 million, respectively, valued using Level 2 fair value measurements.

In connection with our repurchases of debt in the first nine months 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).

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:

 
 
June 4, 2015
 
August 28, 2014
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes and MMJ creditor installment payments
 
$
5,166

 
$
5,155

 
$
3,634

 
$
3,539

Convertible notes
3,747

 
1,541

 
5,886

 
2,143


The fair values of our convertible notes were determined based on inputs that were 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 were observable in the market or that coul