Document


 
 
 
 
 
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 1, 2016

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 January 3, 2017, was 1,102,751,846.

 
 
 
 
 



Definitions of Commonly Used Terms
As used herein, "we," "our," "us," and similar terms include Micron Technology, Inc. and our consolidated 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
2022 Term Loan B
 
Senior Secured Term Loan B due 2022
 
Micron
 
Micron Technology, Inc. (Parent Company)
2032 Notes
 
2032C and 2032D Notes
 
MSTW
 
Micron Semiconductor Taiwan Co., Ltd.
2032C Notes
 
2.375% Convertible Senior Notes due 2032
 
MMJ
 
Micron Memory Japan, Inc.
2032D Notes
 
3.125% Convertible Senior Notes due 2032
 
MMJ Companies
 
MAI and MMJ
2033 Notes
 
2033E and 2033F Notes
 
MMJ Group
 
MMJ and its subsidiaries
2033E Notes
 
1.625% Convertible Senior Notes due 2033
 
MMT
 
Micron Memory Taiwan Co., Ltd.
2033F Notes
 
2.125% Convertible Senior Notes due 2033
 
Nanya
 
Nanya Technology Corporation
2043G Notes
 
3.00% Convertible Senior Notes due 2043
 
Qimonda
 
Qimonda AG
Elpida
 
Elpida Memory, Inc.
 
R&D
 
Research and Development
IMFT
 
IM Flash Technologies, LLC
 
SG&A
 
Selling, General, and Administration
Inotera
 
Inotera Memories, Inc.
 
SSD
 
Solid-State Drive
Intel
 
Intel Corporation
 
TAIBOR
 
Taipei Interbank Offered Rate
Japan Court
 
Tokyo District Court
 
Tera Probe
 
Tera Probe, Inc.
MAI
 
Micron Akita, Inc.
 
VIE
 
Variable Interest Entity
MCP
 
Multi-Chip Package
 
 
 
 


Additional Information

Micron, Lexar, Crucial, SpecTek, Elpida, JumpDrive, any associated logos, and all other Micron trademarks are the property of Micron. 3D XPoint is a trademark of Intel in the U.S. and/or other countries. Other product names or trademarks that are not owned by Micron are for identification purposes only and may be the registered or unregistered trademarks of their respective owners.




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 1,
2016
 
December 3,
2015
Net sales
 
$
3,970

 
$
3,350

Cost of goods sold
 
2,959

 
2,501

Gross margin
 
1,011

 
849

 
 
 
 
 
Selling, general, and administrative
 
159

 
179

Research and development
 
470

 
421

Restructure and asset impairments
 
29

 
15

Other operating (income) expense, net
 
(6
)
 
2

Operating income
 
359

 
232

 
 
 
 
 
Interest income
 
7

 
11

Interest expense
 
(139
)
 
(96
)
Other non-operating income (expense), net
 
(14
)
 
(4
)
 
 
213

 
143

 
 
 
 
 
Income tax (provision) benefit
 
(31
)
 
4

Equity in net income (loss) of equity method investees
 
(2
)
 
59

Net income
 
180

 
206

Net income attributable to noncontrolling interests
 
—

 
—

Net income attributable to Micron
 
$
180

 
$
206

 
 
 
 
 
Earnings per share
 
 

 
 

Basic
 
$
0.17

 
$
0.20

Diluted
 
0.16

 
0.19

 
 
 
 
 
Number of shares used in per share calculations
 
 
 
 
Basic
 
1,040

 
1,035

Diluted
 
1,091

 
1,085












See accompanying notes to consolidated financial statements.

1


MICRON TECHNOLOGY, INC.

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

Quarter ended
 
December 1,
2016
 
December 3,
2015
Net income
 
$
180

 
$
206

 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
Foreign currency translation adjustments
 
37

 
(90
)
Gain (loss) on derivatives, net
 
(7
)
 
(4
)
Pension liability adjustments
 
(1
)
 
(6
)
Gain (loss) on investments, net
 
(1
)
 
(3
)
Other comprehensive income (loss)
 
28

 
(103
)
 
 
 
 
 
Total comprehensive income
 
208

 
103

Comprehensive (income) attributable to noncontrolling interests
 
—

 
—

Comprehensive income attributable to Micron
 
$
208

 
$
103




































See accompanying notes to consolidated financial statements.

2


MICRON TECHNOLOGY, INC.

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

As of
 
December 1,
2016
 
September 1,
2016
Assets
 
 
 
 
Cash and equivalents
 
$
4,139

 
$
4,140

Short-term investments
 
30

 
258

Receivables
 
2,453

 
2,068

Inventories
 
2,750

 
2,889

Other current assets
 
132

 
140

Total current assets
 
9,504

 
9,495

Long-term marketable investments
 
155

 
414

Property, plant, and equipment, net
 
15,321

 
14,686

Equity method investments
 
1,401

 
1,364

Intangible assets, net
 
445

 
464

Deferred tax assets
 
599

 
657

Other noncurrent assets
 
411

 
460

Total assets
 
$
27,836

 
$
27,540

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
4,155

 
$
3,879

Deferred income
 
236

 
200

Current debt
 
1,155

 
756

Total current liabilities
 
5,546

 
4,835

Long-term debt
 
8,490

 
9,154

Other noncurrent liabilities
 
601

 
623

Total liabilities
 
14,637

 
14,612

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable convertible notes
 
31

 
—

 
 
 
 
 
Micron shareholders' equity
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 1,098 shares issued and outstanding (1,094 as of September 1, 2016)
 
110

 
109

Additional capital
 
7,777

 
7,736

Retained earnings
 
5,469

 
5,299

Treasury stock, 54 shares held (54 as of September 1, 2016)
 
(1,029
)
 
(1,029
)
Accumulated other comprehensive (loss)
 
(7
)
 
(35
)
Total Micron shareholders' equity
 
12,320

 
12,080

Noncontrolling interests in subsidiaries
 
848

 
848

Total equity
 
13,168

 
12,928

Total liabilities and equity
 
$
27,836

 
$
27,540





See accompanying notes to consolidated financial statements.

3


MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Quarter ended
 
December 1,
2016
 
December 3,
2015
Cash flows from operating activities
 
 
 
 
Net income
 
$
180

 
$
206

Adjustments to reconcile net income to net cash provided by operating activities
 
 

 
 

Depreciation expense and amortization of intangible assets
 
771

 
737

Amortization of debt discount and other costs
 
32

 
33

Stock-based compensation
 
46

 
46

Equity in net (income) loss of equity method investees
 
2

 
(59
)
Change in operating assets and liabilities
 
 

 
 

Receivables
 
(401
)
 
297

Inventories
 
139

 
(95
)
Accounts payable and accrued expenses
 
299

 
2

Deferred income taxes, net
 
64

 
(1
)
Other
 
6

 
(46
)
Net cash provided by operating activities
 
1,138

 
1,120

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Expenditures for property, plant, and equipment
 
(1,264
)
 
(990
)
Payments to settle hedging activities
 
(173
)
 
(46
)
Purchases of available-for-sale securities
 
(84
)
 
(510
)
Proceeds from sales and maturities of available-for-sale securities
 
567

 
1,044

Other
 
64

 
(158
)
Net cash provided by (used for) investing activities
 
(890
)
 
(660
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Repayments of debt
 
(188
)
 
(197
)
Payments on equipment purchase contracts
 
(24
)
 
—

Cash paid to acquire treasury stock
 
(13
)
 
(135
)
Proceeds from issuance of stock under equity plans
 
29

 
15

Proceeds from issuance of debt
 
16

 
174

Contributions from noncontrolling interests
 
—

 
37

Other
 
(32
)
 
(34
)
Net cash provided by (used for) financing activities
 
(212
)
 
(140
)
 
 
 
 
 
Effect of changes in currency exchange rates on cash and equivalents
 
(37
)
 
(2
)
 
 
 
 
 
Net increase (decrease) in cash and equivalents
 
(1
)
 
318

Cash and equivalents at beginning of period
 
4,140

 
2,287

Cash and equivalents at end of period
 
$
4,139

 
$
2,605










See accompanying notes to consolidated financial statements.

4


MICRON TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in millions except per share amounts)
(Unaudited)

Business and Basis of Presentation

We are 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, multi-chip 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 consolidated financial statements include the accounts of Micron and our 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 September 1, 2016. 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.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Fiscal years 2017 and 2016 each contain 52 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 September 1, 2016.


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: Prior to our acquisition of the remaining interest in Inotera on December 6, 2016, Inotera was a VIE because of the terms of its supply agreement with us. We had determined that we did not have the power to direct the activities of Inotera that most significantly impacted its economic performance, primarily due to limitations on our governance rights that required 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 did not consolidate Inotera and we accounted 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. We do not have an equity interest in SCHE. SCHE is a VIE due to the nature of its tolling agreements with us and our option to purchase SCHE's assets. 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.

5



PTI Xi'an: Powertech Technology Inc. Xi'an ("PTI Xi'an") is a wholly-owned subsidiary of Powertech Technology Inc. ("PTI") and was created to provide assembly services to us at our manufacturing site in Xi'an, China. We do not have an equity interest in PTI Xi'an. PTI Xi'an is a VIE because of the terms of its service agreement with us and its dependency on PTI to finance its operations. We have determined that we do not have the power to direct the activities of PTI Xi'an that most significantly impact its economic performance, primarily because we have no governance rights. Therefore, we do not consolidate PTI Xi'an.

Consolidated VIE

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


Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09 – Improvements to Employee Share-Based Payment Accounting, which simplified several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification within the statement of cash flows. We adopted this ASU as of the beginning of our first quarter of 2017 and elected to account for forfeitures when they occur, on a modified retrospective basis. As a result of the adoption of this ASU, we recognized deferred tax assets of $325 million for the excess tax benefits that arose directly from tax deductions related to equity compensation greater than amounts recognized for financial reporting and also recognized an increase of an equal amount in the valuation allowance against those deferred tax assets. The adoption did not have any other material impacts on our financial statements.

In April 2015, the FASB issued ASU 2015-05 – Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provided additional guidance to customers about whether a cloud computing arrangement included a software license. Under ASU 2015-05, cloud computing arrangements that contain a software license should be accounted for in a manner consistent with the acquisition of other software licenses, otherwise customers should account for the arrangement as a service contract. ASU 2015-05 also removed the requirement to analogize to ASC 840-10 – Leases, to determine the asset acquired in a software licensing arrangement. We adopted this ASU as of the beginning of our first quarter of 2017 on a prospective basis. The adoption of this ASU did not have a material impact on our financial statements.

In February 2015, the FASB issued ASU 2015-02 – Amendments to the Consolidation Analysis, which amended the consolidation requirements in Accounting Standards Codification 810 – Consolidation. ASU 2015-02 made targeted amendments to the consolidation guidance for VIEs. We adopted this ASU as of the beginning of our first quarter of 2017 under a modified-retrospective approach. The adoption of this ASU did not have an impact on our financial statements.


Recently Issued Accounting Standards

In November 2016, the FASB issued ASU 2016-18 – Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This ASU will be effective for us beginning in our first quarter of 2019 with early adoption permitted and requires retrospective adoption. We are evaluating the timing and effects of our adoption of this ASU on our financial statements.

In October 2016, the FASB issued ASU 2016-16 – Intra-Entity Transfers Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU will be effective for us beginning in our first quarter of 2019 with early adoption permitted and requires modified retrospective adoption. We are evaluating the timing and effects of our adoption of this ASU on our financial statements.

6



In June 2016, the FASB issued ASU 2016-13 – Measurement of Credit Losses on Financial Instruments, which requires a financial asset (or a group of financial assets) measured on the basis of amortized cost to be presented at the net amount expected to be collected. This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This ASU requires that credit losses of debt securities designated as available-for-sale be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost. We are required to adopt this ASU beginning in our first quarter of 2021; however, we are permitted to adopt this ASU as early as our first quarter of 2020. This ASU is required to be adopted using a modified retrospective approach, with prospective adoption for debt securities for which an other-than-temporary impairment had been recognized before the effective date. We are evaluating the timing and effects of our adoption of this ASU on our financial statements.
  
In February 2016, the FASB issued ASU 2016-02 – Leases, which amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. This ASU will be effective for us beginning in our first quarter of 2020 with early adoption permitted and is required to be adopted using a modified retrospective approach. We are evaluating the timing and effects of our adoption of this ASU on our financial statements.

In January 2016, the FASB issued ASU 2016-01 – Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for us beginning in our first quarter of 2019 and requires modified retrospective adoption. We are evaluating the effects of our adoption of this ASU on our financial statements.

In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the U.S. The core principal of this ASU, as amended, 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. We are required to adopt this ASU beginning in our first quarter of 2019; however, we are permitted to adopt this ASU as early as our first quarter of 2018. This ASU allows for either full retrospective or modified retrospective adoption. We expect that, as a result of the adoption of this ASU, the timing of recognizing revenue from sales of products to our distributors will be generally earlier than under the existing revenue recognition guidance. We are evaluating the timing, method, and effects of our adoption of this ASU on our financial statements.


Acquisition of Inotera

On December 6, 2016, subsequent to the end of our first quarter of 2017, we acquired the 67% interest in Inotera not owned by us for an aggregate of $4.1 billion in cash (the "Inotera Acquisition"), funded with proceeds from the 2021 Term Loan (defined below), the sale of shares of our common stock to Nanya, and cash on hand. Prior to December 6, 2016, we held a 33% ownership interest in Inotera, Nanya and certain of its affiliates held a 32% ownership interest, and the remaining ownership interest was publicly held.

Inotera manufactures DRAM products at its 300mm wafer fabrication facility in Taoyuan City, Taiwan, and sold such products exclusively to us through supply agreements. As a result of the Inotera Acquisition, we expect to experience greater operational flexibility to drive new technology in products manufactured by Inotera, optimize the deployment of the cash flows of Inotera across our operations, and enhance our ability to adapt our product offerings to changes in market conditions.

We are evaluating the fair values of the accounting consideration transferred, assets acquired, and liabilities assumed. Our accounting for the Inotera Acquisition will include the fair value of our previously-held noncontrolling equity interest in Inotera as of the acquisition date as consideration, which differs from the per share amount paid to acquire the controlling interest in Inotera. We will recognize a gain or loss to the extent of the difference between the fair value and the carrying value as of the acquisition date. We expect to complete the provisional purchase price allocation for the Inotera Acquisition in our second quarter of 2017.




7


Acquisition Financing

2021 Term Loan: On December 6, 2016, we drew 80 billion New Taiwan dollars (equivalent to $2.5 billion) under a collateralized, five-year term loan that bears interest at a variable rate equal to the three-month or six-month TAIBOR, at our option, plus a margin of 2.05% per annum (the "2021 Term Loan"). Principal under the 2021 Term Loan is payable in six equal semi-annual installments, commencing in June 2019, through December 2021. The 2021 Term Loan is collateralized by certain assets including a real estate mortgage on Inotera's main production facility and site, a chattel mortgage over certain equipment of Inotera, all of the stock of our MSTW subsidiary, and the 82% of stock of Inotera owned by MSTW.

The 2021 Term Loan contains affirmative and negative covenants, including covenants that limit or restrict our ability to create liens in or dispose of collateral securing obligations under the 2021 Term Loan, mergers involving MSTW and/or Inotera, loans or guarantees to third parties by Inotera and/or MSTW, and MSTW's distribution of cash dividends (subject to satisfaction of certain financial conditions). The 2021 Term Loan also contains financial covenants as follows, which are tested semi-annually:

•
MSTW must maintain a consolidated ratio of total debt to adjusted EBITDA not higher than 5.5x in 2017 and 2018, and not higher than 4.5x in 2019 through 2021;
•
MSTW must maintain adjusted consolidated tangible net worth of not less than 4.0 billion New Taiwan dollars (equivalent to $125 million) in 2017 and 2018, not less than 6.5 billion New Taiwan dollars (equivalent to $203 million) in 2019 and 2020, and not less than 12.0 billion New Taiwan dollars (equivalent to $374 million) in 2021;
•
on a consolidated basis, we must maintain a ratio of total debt to adjusted EBITDA not higher than 3.5x in 2017, not higher than 3.0x in 2018 and 2019, and not higher than 2.5x in 2020 and 2021; and
•
on a consolidated basis, we must maintain adjusted tangible net worth not less than $9.0 billion in 2017, not less than $12.5 billion in 2018 and 2019, and not less than $16.5 billion in 2020 and 2021.

If one or more of the required financial ratios is not maintained at the time the ratios are tested, the interest rate will be increased by 0.25% until such time as the required financial ratios are maintained. In addition, if MSTW fails to maintain a required financial ratio for two consecutive semi-annual periods, such failure will constitute an event of default that could result in all obligations owed under the 2021 Term Loan being accelerated to be immediately due and payable. Our failure to maintain a required consolidated financial ratio will only result in an increase to the interest rate and will not constitute an event of default. The 2021 Term Loan also contains customary events of default and is guaranteed by Micron.

Micron Shares: In connection with the Inotera Acquisition, subsequent to the end of our first quarter of 2017, we sold 58 million shares of our common stock to Nanya for $981 million (the "Micron Shares"), of which 54 million were issued from treasury stock. The sale of the Micron Shares was exempt from the registration requirements of the Securities Act of 1933, as amended, and the Micron Shares are subject to certain restrictions on transfers. Our accounting for the Inotera Acquisition will include the fair value of the Micron Shares as of the acquisition date as consideration.

Technology Transfer and License Agreements with Nanya

Beginning effective December 6, 2016, under the terms of technology transfer and license agreements, Nanya has options to require us to transfer to Nanya for Nanya's use certain technology and deliverables related to the next DRAM process node generation after our 20nm process node (the "1X Process Node") and the next DRAM process node generation after the 1X Process Node. Under the terms of the agreements, Nanya would pay royalties to us for a license to the transferred technologies based on revenues from products utilizing the technologies, subject to specified caps, and we would also receive an equity interest in Nanya upon the achievement of certain milestones.











8


Cash and Investments

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

As of
 
December 1, 2016
 
September 1, 2016
 
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments(1)
 
Total Fair Value
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments(1)
 
Total Fair Value
Cash
 
$
3,923

 
$
—

 
$
—

 
$
3,923

 
$
2,258

 
$
—

 
$
—

 
$
2,258

Level 1(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
82

 
—

 
—

 
82

 
1,507

 
—

 
—

 
1,507

Level 2(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
134

 
3

 
—

 
137

 
373

 
33

 
—

 
406

Corporate bonds
 
—

 
14

 
71

 
85

 
—

 
142

 
235

 
377

Government securities
 
—

 
13

 
63

 
76

 
2

 
62

 
82

 
146

Asset-backed securities
 
—

 
—

 
21

 
21

 
—

 
12

 
97

 
109

Commercial paper
 
—

 
—

 
—

 
—

 
—

 
9

 
—

 
9

 
 
$
4,139

 
$
30

 
$
155

 
$
4,324

 
$
4,140

 
$
258

 
$
414

 
$
4,812

(1) 
The maturities of long-term marketable securities range from one to four years.
(2) 
The fair value of Level 1 securities is measured based on quoted prices in active markets for identical assets.
(3) 
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. No adjustments were made to such pricing information as of December 1, 2016.

Proceeds from sales of available-for-sale securities for the first quarters of 2017 and 2016 were $512 million and $407 million, respectively. Gross realized gains and losses from sales of available-for-sale securities were not material for any period presented. As of December 1, 2016, there were no available-for-sale securities that had been in a loss position for longer than 12 months. As of December 1, 2016 and September 1, 2016, we also had certificates of deposit classified as restricted cash (included in other noncurrent assets) of $2 million and $59 million, respectively, valued using Level 2 fair value measurements.


Receivables

As of
 
December 1,
2016
 
September 1,
2016
Trade receivables
 
$
2,162

 
$
1,765

Income and other taxes
 
135

 
119

Other
 
156

 
184

 
 
$
2,453

 
$
2,068


As of December 1, 2016 and September 1, 2016, other receivables included $58 million and $53 million, respectively, due from Intel for amounts related to product design and process development activities under cost-sharing agreements for NAND Flash and 3D XPointTM memory.






9


Inventories

As of
 
December 1,
2016
 
September 1,
2016
Finished goods
 
$
787

 
$
899

Work in process
 
1,722

 
1,761

Raw materials and supplies
 
241

 
229

 
 
$
2,750

 
$
2,889



Property, Plant, and Equipment

As of
 
September 1,
2016
 
Additions
 
Retirements and Other
 
December 1,
2016
Land
 
$
145

 
$
3

 
$
(3
)
 
$
145

Buildings
 
6,653

 
183

 
(8
)
 
6,828

Equipment(1) 
 
25,910

 
1,282

 
(96
)
 
27,096

Construction in progress(2)
 
475

 
(90
)
 
3

 
388

Software
 
422

 
6

 
—

 
428

 
 
33,605

 
1,384

 
(104
)
 
34,885

Accumulated depreciation
 
(18,919
)
 
(744
)
 
99

 
(19,564
)
 
 
$
14,686

 
$
640

 
$
(5
)
 
$
15,321

(1) 
Included costs related to equipment not placed into service of $1.11 billion and $1.47 billion as of December 1, 2016 and September 1, 2016, respectively.
(2) 
Included building-related construction and tool installation costs for assets not placed into service.

Depreciation expense was $744 million and $706 million for the first quarters of 2017 and 2016, respectively.


Equity Method Investments

As of
 
December 1, 2016
 
September 1, 2016
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera
 
$
1,360

 
33
%
 
$
1,314

 
33
%
Tera Probe
 
25

 
40
%
 
36

 
40
%
Other
 
16

 
Various

 
14

 
Various

 
 
$
1,401

 
 

 
$
1,364

 
 


Equity in net income (loss) of equity method investees, net of tax, included the following:

Quarter ended
 
December 1,
2016
 
December 3,
2015
Inotera
 
$
9

 
$
52

Tera Probe
 
(12
)
 
3

Other
 
1

 
4

 
 
$
(2
)
 
$
59






10


Inotera

We partnered with Nanya in Inotera, a Taiwan DRAM memory company, through December 6, 2016, at which time we acquired the remaining 67% interest in Inotera. As a result, we will consolidate Inotera's operating results beginning December 6, 2016. (See "Acquisition of Inotera" note.)

As of December 1, 2016, the market value of our equity interest in Inotera was $2.00 billion based on the closing trading price of 29.80 New Taiwan dollars per share in an active market. As of December 1, 2016 and September 1, 2016, there were losses of $9 million and $44 million, respectively, in accumulated other comprehensive (loss) for cumulative translation adjustments from our equity investment in Inotera.

From January 2013 through December 2015, we purchased all of Inotera's DRAM output under supply agreements at prices reflecting discounts from market prices for our comparable components. After December 2015, the price for DRAM products purchased by us was based on a formula that equally shared margin between Inotera and us. We purchased $504 million and $379 million of DRAM products from Inotera in the first quarters of 2017 and 2016, respectively.

Tera Probe

We have a 40% interest in Tera Probe, which provides semiconductor wafer testing and probe services to us and others. In the first quarter of 2017, we recorded an impairment charge of $16 million within equity in net income (loss) 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 1, 2016, our proportionate share of Tera Probe's underlying equity exceeded our investment balance by $52 million, which is expected to be accreted to earnings over a weighted-average period of seven years. We incurred manufacturing costs for services performed by Tera Probe for us of $16 million and $21 million in the first quarters of 2017 and 2016, respectively.


Intangible Assets and Goodwill

As of
 
December 1, 2016
 
September 1, 2016
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Amortizing assets
 
 
 
 
 
 
 
 
Product and process technology
 
$
757

 
$
(421
)
 
$
757

 
$
(402
)
Other
 
1

 
—

 
1

 
—

 
 
758

 
(421
)
 
758

 
(402
)
Non-amortizing assets
 
 
 
 
 
 
 
 
In-process R&D
 
108

 
—

 
108

 
—

 
 
 
 
 
 
 
 
 
Intangible assets
 
$
866

 
$
(421
)
 
$
866

 
$
(402
)
 
 
 
 
 
 
 
 
 
Goodwill(1)
 
$
104

 
 
 
$
104

 
 
(1) 
Included in other noncurrent assets.

During the first quarters of 2017 and 2016, we capitalized $8 million and $9 million, respectively, for product and process technology with weighted-average useful lives of nine years. Amortization expense was $27 million and $31 million for the first quarters of 2017 and 2016, respectively. The expected amortization expense is $82 million for the remainder of 2017, $94 million for 2018, $46 million for 2019, $30 million for 2020, and $26 million for 2021.








11


Accounts Payable and Accrued Expenses

As of
 
December 1,
2016
 
September 1,
2016
Accounts payable
 
$
1,304

 
$
1,186

Property, plant, and equipment payables
 
1,583

 
1,649

Salaries, wages, and benefits
 
351

 
289

Related party payables
 
340

 
273

Customer advances
 
156

 
132

Income and other taxes
 
60

 
41

Other
 
361

 
309

 
 
$
4,155

 
$
3,879


As of December 1, 2016 and September 1, 2016, related party payables included $329 million and $266 million, respectively, due to Inotera primarily for the purchase of DRAM products. As of December 1, 2016 and September 1, 2016, related party payables also included $11 million and $7 million, respectively, due to Tera Probe for probe services.

As of December 1, 2016 and September 1, 2016, customer advances included $130 million and $108 million, respectively, and other noncurrent liabilities also included $85 million and $107 million, respectively, for amounts received from Intel in 2016 under a Trade Non-Volatile Memory supply agreement.


Debt

 
 
 
 
 
 
December 1, 2016
 
September 1, 2016
Instrument
 
Stated Rate(1)
 
Effective Rate(1)
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
MMJ creditor installment payments
 
N/A

 
6.52
%
 
$
156

 
$
588

 
$
744

 
$
189

 
$
680

 
$
869

Capital lease obligations(2)
 
N/A

 
N/A

 
338

 
925

 
1,263

 
380

 
1,026

 
1,406

1.258% notes
 
1.258
%
 
1.97
%
 
87

 
132

 
219

 
87

 
131

 
218

2022 senior notes
 
5.875
%
 
6.14
%
 
—

 
591

 
591

 
—

 
590

 
590

2022 senior secured term loan B
 
4.360
%
 
4.77
%
 
5

 
729

 
734

 
5

 
730

 
735

2023 senior notes
 
5.250
%
 
5.43
%
 
—

 
990

 
990

 
—

 
990

 
990

2023 senior secured notes
 
7.500
%
 
7.69
%
 
—

 
1,237

 
1,237

 
—

 
1,237

 
1,237

2024 senior notes
 
5.250
%
 
5.38
%
 
—

 
546

 
546

 
—

 
546

 
546

2025 senior notes
 
5.500
%
 
5.56
%
 
—

 
1,139

 
1,139

 
—

 
1,139

 
1,139

2026 senior notes
 
5.625
%
 
5.73
%
 
—

 
446

 
446

 
—

 
446

 
446

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

 
206

 
206

 
—

 
204

 
204

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

 
155

 
155

 
—

 
154

 
154

2033E convertible senior notes(3)
 
1.625
%
 
4.50
%
 
170

 
—

 
170

 
—

 
168

 
168

2033F convertible senior notes(3)
 
2.125
%
 
4.93
%
 
273

 
—

 
273

 
—

 
271

 
271

2043G convertible senior notes
 
3.000
%
 
6.76
%
 
—

 
661

 
661

 
—

 
657

 
657

Other notes payable
 
2.513
%
 
2.65
%
 
126

 
145

 
271

 
95

 
185

 
280

 
 
 
 
 
 
$
1,155

 
$
8,490

 
$
9,645

 
$
756

 
$
9,154

 
$
9,910

(1) As of December 1, 2016.
(2) 
Weighted-average imputed rate of 3.4% and 3.3% as of December 1, 2016 and September 1, 2016, respectively.
(3) 
Since the closing price of our common stock exceeded 130% of the conversion price per share for at least 20 trading days in the 30 trading day period ended on September 30, 2016, these notes were convertible by the holders during the calendar quarter ended December 31, 2016. The closing price of our common stock also exceeded the thresholds for the calendar quarter ended December 31, 2016; therefore, these notes are convertible by the holders through March 31, 2017. The 2033 Notes were classified as current as of December 1, 2016 because the terms of these notes require us

12


to pay cash for the principal amount of any converted notes and holders of these notes had the right to convert their notes as of that date.

Capital Lease Obligations

In the first quarter of 2016, we recorded capital lease obligations aggregating $51 million at a weighted-average effective interest rate of 6.5% and a weighted-average expected term of 12 years.

Convertible Senior Notes

As of December 1, 2016, the trading price of our common stock was higher than the initial conversion prices of our 2032 Notes and our 2033 Notes. As a result, the conversion values for these notes exceeded the principal amounts by $683 million as of December 1, 2016.

2022 Senior Secured Term Loan B Repricing Amendment

On October 27, 2016, we amended our 2022 Term Loan B, substantially all of which was treated as a debt modification, to reduce the margins added to the base rate from 5.00% to 2.75% and to the adjusted LIBOR rate from 6.00% to 3.75%.

Other Facilities

On November 18, 2016, we entered into a five-year variable-rate facility agreement to obtain up to $800 million of financing, collateralized by certain production equipment, which may be utilized in multiple draws until June 10, 2017. Interest is payable quarterly at a rate equal to three-month LIBOR plus 2.4% per annum. Principal is payable in 16 equal quarterly installments beginning in March 2018. The facility agreement contains covenants which are customary for financings of this type, including negative covenants that limit or restrict our ability to create liens or dispose of the equipment securing the facility agreement. The facility also contains a covenant that the ratio of the outstanding loan to the fair value of the equipment collateralizing the loan not exceed 0.8. If such ratio is exceeded, we are required to grant a security interest in additional equipment and/or prepay the loan in an amount sufficient to reduce such ratio to 0.8 or less. The facility agreement also contains customary events of default which could result in the acceleration of all amounts to be immediately due and payable and cancellation of all commitments under the facility agreement. On December 2, 2016, subsequent to the end of our first quarter of 2017, we drew $450 million under this facility.


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-tech 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 November 21, 2014, Elm 3DS Innovations, LLC ("Elm") filed a patent infringement action against Micron, MSP, 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 Micron 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.

On June 24, 2016, the President and Fellows of Harvard University filed a patent infringement action against Micron in the U.S. District Court for the District of Massachusetts. The complaint alleges that a variety of our DRAM products infringe two U.S. patents and seeks damages, injunctive relief, and other unspecified relief.

13



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, 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.

Qimonda

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda insolvency proceedings, filed suit against Micron 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 18% of Inotera's outstanding shares as of December 1, 2016, 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 Micron 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 canceled. 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.

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.

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 governing the 2033 Notes, upon conversion, we would be required to pay cash equal to the lesser 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 closing price of our common stock met the thresholds for conversion for the calendar quarter ended September 30, 2016; therefore, the 2033 Notes were convertible by the holders during the calendar

14


quarter ended December 31, 2016. As a result, the 2033 Notes were classified as current debt and the aggregate difference between the principal amount and the carrying value of $31 million was classified as redeemable convertible notes in the accompanying consolidated balance sheet. The closing price of our common stock did not meet the thresholds for the calendar quarter ended June 30, 2016; therefore, the 2033 Notes were not convertible by the holders as of September 1, 2016. Therefore, as of September 1, 2016, the 2033 Notes had been classified as noncurrent debt and the aggregate difference between the principal amount and the carrying value had been classified as additional capital.


Equity

Micron Shareholders' Equity

Treasury Stock: As of December 1, 2016, we held 54 million shares of treasury stock. All 54 million shares of treasury stock were included as part of the sale of the Micron Shares to Nanya subsequent to the end of our first quarter of 2017.

Outstanding Capped Calls: Our capped calls are intended to reduce the effect of potential dilution from our convertible notes and provide for our receipt of cash or shares, at our election, from our counterparties if the trading price of our stock is above strike prices on the expiration dates. As of December 1, 2016, the dollar value of cash or shares that we would receive from our outstanding capped calls upon their expiration dates range from $0, if the trading price of our stock was below strike prices for all capped calls, to $719 million, if the trading price of our stock was at or above the cap prices for all capped calls.

Expiration of Capped Calls: A portion of our 2032C and 2032D Capped Calls expired in the first quarter of 2017. We elected share settlement and in the second quarter of 2017 received 4 million shares of our stock, equal to a value of $67 million, based on the volume-weighted trading stock prices at the expiration dates. The shares received were recorded as treasury stock.

Accumulated Other Comprehensive (Loss): Changes in accumulated other comprehensive (loss) by component for the quarter ended December 1, 2016 were as follows:

 
 
Cumulative Foreign Currency Translation Adjustments
 
Gains (Losses) on Derivative Instruments, Net
 
Gains (Losses) on Investments, Net
 
Pension Liability Adjustments
 
Total
As of September 1, 2016
 
$
(49
)
 
$
2

 
$
—

 
$
12

 
$
(35
)
Other comprehensive income (loss)
 
37

 
(9
)
 
(1
)
 
(1
)
 
26

Tax effects
 
—

 
2

 
—

 
—

 
2

Other comprehensive income (loss)
 
37

 
(7
)
 
(1
)
 
(1
)
 
28

As of December 1, 2016
 
$
(12
)
 
$
(5
)
 
$
(1
)
 
$
11

 
$
(7
)

Noncontrolling Interests in Subsidiaries

As of
 
December 1, 2016
 
September 1, 2016
 
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
IMFT
 
$
832

 
49
%
 
$
832

 
49
%
Other
 
16

 
Various

 
16

 
Various

 
 
$
848

 
 
 
$
848

 
 

IMFT: Since IMFT's inception in 2006, we have owned 51% of IMFT, a joint venture between us and Intel that manufactures NAND Flash and 3D XPoint memory products exclusively for the members. The members share the output of IMFT generally in proportion to their investment. 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. Through December 2018, Intel can put to us, and from January 2019 through December 2021, we can call from Intel, Intel's interest in IMFT, in either case, for an amount equal to the

15


noncontrolling interest balance attributable to Intel at such time either member exercises its right. If Intel exercises its put right, 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. Creditors of IMFT have recourse only to IMFT's assets and do not have recourse to any other of our assets. In the first quarter of 2016, we and Intel contributed $38 million and $37 million, respectively, to IMFT.

IMFT manufactures memory products using designs and technology we develop with Intel. We generally share with Intel the costs of product design and process development activities for NAND Flash and 3D XPoint memory at IMFT and our other facilities. Our R&D expenses were reduced by reimbursements from Intel of $56 million and $46 million for the first quarters of 2017 and 2016, respectively.

Our sales include Non-Trade Non-Volatile Memory, which primarily consists of products sold to Intel through our IMFT joint venture at long-term negotiated prices approximating cost. Non-Trade Non-Volatile Memory sales to Intel were $123 million and $126 million for the first quarters of 2017 and 2016, respectively.

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

As of
 
December 1,
2016
 
September 1,
2016
Assets
 
 
 
 
Cash and equivalents
 
$
77

 
$
98

Receivables
 
83

 
89

Inventories
 
91

 
68

Other current assets
 
4

 
6

Total current assets
 
255

 
261

Property, plant, and equipment, net
 
1,748

 
1,792

Other noncurrent assets
 
47

 
50

Total assets
 
$
2,050

 
$
2,103

 
 
 
 
 
Liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
131

 
$
175

Deferred income
 
6

 
7

Current debt
 
53

 
16

Total current liabilities
 
190

 
198

Long-term debt
 
41

 
66

Other noncurrent liabilities
 
92

 
94

Total liabilities
 
$
323

 
$
358

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

Restrictions on Net Assets

As a result of the corporate reorganization proceedings the MMJ Companies initiated in March 2012, and for so long as such proceedings continue, 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 1, 2016 were $3.13 billion for the MMJ Group and $895 million for IMFT, which included cash and equivalents of $684 million for the MMJ Group and $77 million for IMFT.

As of December 1, 2016, our retained earnings included undistributed earnings from our equity method investees of $290 million.





16


Fair Value Measurements

All of our marketable debt and equity investments (excluding equity method investments) were classified as available-for-sale and carried at fair value. 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 (excluding the carrying value of the equity and mezzanine equity components of our convertible notes) were as follows:

As of
 
December 1, 2016
 
September 1, 2016
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes and MMJ creditor installment payments
 
$
7,139

 
$
6,917

 
$
7,257

 
$
7,050

Convertible notes
 
2,548

 
1,465

 
2,408

 
1,454


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 values of our other debt instruments were estimated based on discounted cash flows using 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 notes, when available, and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).


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 do not use derivative instruments for speculative purpose.

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives: To hedge our exposures of monetary assets and liabilities to changes in currency exchange rates, we generally utilize a rolling hedge strategy with currency forward contracts that mature within 35 days. In addition, to mitigate the risk of the yen strengthening against the U.S. dollar on MMJ creditor installment payments due in December 2017 and 2018, we entered into forward contracts to purchase 18 billion yen on December 1, 2017 and 28 billion yen on December 3, 2018. At the end of each reporting period, monetary assets and liabilities denominated in currencies other than the U.S. dollar are remeasured into 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).

In connection with the Inotera Acquisition, we borrowed 80 billion New Taiwan dollars. To hedge our currency exposure of this borrowing, in December 2016, subsequent to the end of our first quarter of 2017, we entered into a series of currency forward contracts to purchase an aggregate of 80 billion New Taiwan dollars under a rolling hedge strategy. The forward contracts expire at various dates through June 2017.















17


The following summarizes our derivative instruments without hedge accounting designation, which consisted of forward contracts to purchase the noted currencies as a hedge of our net position in monetary assets and liabilities:

 
 
Notional Amount (in U.S. Dollars)
 
Fair Value
Current Liabilities(1)
 
Noncurrent Liabilities(2)
As of December 1, 2016
 
 
 
 
 
 
Yen
 
$
1,396

 
$
(18
)
 
$
(4
)
Singapore dollar
 
204

 
(1
)
 
—

Euro
 
175

 
—

 
—

Other
 
48

 
(1
)
 
—

 
 
$
1,823

 
$
(20
)
 
$
(4
)
As of September 1, 2016
 
 
 
 
 
 
Yen
 
$
1,668

 
$
(10
)
 
$
—

Singapore dollar
 
206

 
—

 
—

Euro
 
93

 
—

 
—

Other
 
85

 
(1
)
 
—

 
 
$
2,052

 
$
(11
)
 
$
—

(1) 
Included in accounts payable and accrued expenses – other.
(2) 
Included in other noncurrent liabilities.

Realized and unrealized gains and losses on derivative instruments 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), net. Net losses for foreign exchange contracts without hedge accounting designation were $178 million and $21 million for the first quarters of 2017 and 2016, respectively.

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 rates, and credit-risk spreads (Level 2).

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 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 notional amounts and gross fair values for derivative instruments with cash flow hedge accounting designation were as follows:

 
 
Notional Amount (in U.S. Dollars)
 
Fair Value
 
 
Current Assets(1)
 
Current Liabilities(2)
As of December 1, 2016
 
 
 
 
 
 
Yen
 
$
62

 
$
—

 
$
(6
)
Euro
 
10

 
—

 
(1
)
 
 
$
72

 
$
—


$
(7
)
As of September 1, 2016
 
 

 
 
 
 

Yen
 
$
107

 
$
2

 
$
(1
)
Euro
 
65

 
—

 
(1
)
 
 
$
172

 
$
2


$
(2
)
(1) 
Included in receivables – other.
(2) 
Included in accounts payable and accrued expenses – other.


18


For the first quarters of 2017 and 2016, we recognized losses of $9 million and $4 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 recognized in other non-operating income (expense) were not material in the first quarters of 2017 and 2016. For the first quarter of 2016, we reclassified gains of $1 million from accumulated other comprehensive income (loss) to earnings. As of December 1, 2016, $2 million of net gains from cash flow hedges included in accumulated other comprehensive income (loss) is expected to be reclassified into earnings in the next 12 months.


Equity Plans

As of December 1, 2016, 84 million shares were available for future awards under our equity plans.

Stock Options

Quarter ended
 
December 1,
2016
 
December 3,
2015
Stock options granted
 
2

 
2

Weighted-average grant-date fair value per share
 
$
7.66

 
$
7.99

Average expected life in years
 
5.7

 
5.6

Weighted-average expected volatility
 
46
%
 
46
%
Weighted-average risk-free interest rate
 
1.4
%
 
1.5
%
Expected dividend yield
 
0
%
 
0
%

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

Quarter ended
 
December 1,
2016
 
December 3,
2015
Restricted stock award shares granted
 
3

 
3

Weighted-average grant-date fair value per share
 
$
18.22

 
$
18.52


Stock-based Compensation Expense

Quarter ended
 
December 1,
2016
 
December 3,
2015
Stock-based compensation expense by caption
 
 
 
 
Cost of goods sold
 
$
19

 
$
18

Selling, general, and administrative
 
15

 
17

Research and development
 
12

 
11

 
 
$
46

 
$
46

 
 
 
 
 
Stock-based compensation expense by type of award
 
 

 
 

Stock options
 
$
17

 
$
20

Restricted stock awards
 
29

 
26

 
 
$
46

 
$
46


As of December 1, 2016, $369 million of total unrecognized compensation costs for unvested awards was expected to be recognized through the first quarter of 2021, resulting in a weighted-average period of 1.2 years. Stock-based compensation expense in the above presentation does not reflect any significant income tax benefits, which is consistent with our treatment of income or loss from our U.S. operations.





19


Restructure and Asset Impairments

Quarter ended
 
December 1,
2016
 
December 3,
2015
2016 Restructuring Plan
 
$
29

 
$
—

Other
 
—

 
15

 
 
$
29

 
$
15


In the fourth quarter of 2016, we initiated a restructure plan in response to business conditions and the need to accelerate focus on our key priorities (the "2016 Restructuring Plan"). The 2016 Restructuring Plan includes the elimination of certain projects and programs, the permanent closure of a number of open headcount requisitions, workforce reductions in certain areas of the business, and other non-headcount related spending reductions. In connection with the plan, we incurred charges of $29 million in the first quarter of 2017 and $58 million in the fourth quarter of 2016 and do not expect to incur additional material charges. As of December 1, 2016 and September 1, 2016, we had accrued liabilities of $17 million and $24 million, respectively, related to the 2016 Restructuring Plan. For the first quarter of 2017, the restructure and asset impairment charges related primarily to our CNBU and MBU operating segments.


Other Non-Operating Income (Expense), Net

Quarter ended
 
December 1, 2016
 
December 3, 2015
Loss from changes in currency exchange rates
 
$
(12
)
 
$
(3
)
Other
 
(2
)
 
(1
)
 
 
$
(14
)
 
$
(4
)

Losses from changes in currency exchange rates for the first quarter of 2017 included net losses for foreign exchange contracts without hedge accounting designation of $178 million offset by revaluations of our monetary assets and liabilities.


Income Taxes

Our income tax (provision) benefit included the following:

Quarter ended
 
December 1, 2016
 
December 3, 2015
Utilization of and other changes in net deferred tax assets of MMJ and MMT
 
$
(13
)
 
$
(22
)
U.S. valuation allowance release resulting from business acquisition
 
—

 
41

Other, primarily non-U.S. operations
 
(18
)
 
(15
)
 
 
$
(31
)
 
$
4


We have a full valuation allowance for our net deferred tax asset associated with our U.S. operations. The amount of the deferred tax asset considered realizable could be adjusted if significant positive evidence increases. Income taxes on U.S. operations in the first quarters of 2017 and 2016 were substantially offset by changes in the valuation allowance.

We operate in tax jurisdictions, including Singapore and Taiwan, where our earnings are indefinitely reinvested and are taxed at lower effective tax rates than the U.S. statutory rate and in a number of locations outside the U.S., including Singapore, where we have tax incentive arrangements that are conditional, in part, upon meeting certain business operations and employment thresholds. The effect of tax incentive arrangements, which expire in whole or in part at various dates through 2030, reduced our tax provision for the first quarters of 2017 and 2016 by $40 million (benefitting our diluted earnings per share by $0.04) and $12 million ($0.01 per diluted share), respectively.




20


Earnings Per Share

Quarter ended
 
December 1,
2016
 
December 3,
2015
Net income available to Micron shareholders – Basic and Diluted
 
$
180

 
$
206

 
 
 
 
 
Weighted-average common shares outstanding – Basic
 
1,040

 
1,035

Dilutive effect of equity plans and convertible notes
 
51

 
50

Weighted-average common shares outstanding – Diluted
 
1,091

 
1,085

 
 
 
 
 
Earnings per share
 
 
 
 
Basic
 
$
0.17

 
$
0.20

Diluted
 
0.16

 
0.19


Antidilutive potential common shares that could dilute basic earnings per share in the future were 64 million and 66 million for the first quarters of 2017 and 2016, respectively.


Segment Information

Segment information reported herein is consistent with how it is reviewed and evaluated by our chief operating decision maker. We have the following four business units, which are our reportable segments:

Compute and Networking Business Unit ("CNBU"): Includes memory products sold into compute, networking, graphics, and cloud server markets.
Mobile Business Unit ("MBU"): Includes memory products sold into smartphone, tablet, and other mobile-device markets.
Storage Business Unit ("SBU"): Includes memory products sold into enterprise, client, cloud, and removable storage markets. SBU also includes products sold to Intel through our IMFT joint venture.
Embedded Business Unit ("EBU"): Includes memory products sold into automotive, industrial, connected home, and consumer electronics markets.

Certain operating expenses directly associated with the activities of a specific segment are charged to that segment. Other indirect operating expenses (income) are generally allocated to segments based on their respective percentage of cost of goods sold or forecasted wafer production. In the first quarter of 2017, we revised the measure of segment profitability reviewed by our chief operating decision maker and, as a result, certain items are no longer allocated to our business units. Items not allocated are identified in the table below. Comparative periods have been revised to reflect these changes.

We do not identify or report internally our assets or capital expenditures by segment, nor do we allocate gains and losses from equity method investments, interest, other non-operating income or expense items, or taxes to segments. 


21


Quarter ended
 
December 1,
2016
 
December 3,
2015
Net sales
 
 
 
 
CNBU
 
$
1,470

 
$
1,139

MBU
 
1,032

 
834

SBU
 
860

 
884

EBU
 
578

 
479

All Other
 
30

 
14

 
 
$
3,970

 
$
3,350

 
 
 
 
 
Operating income
 
 

 
 

CNBU
 
$
204

 
$
40

MBU
 
89

 
148

SBU
 
(45
)
 
(14
)
EBU
 
178

 
121

All Other
 
12

 
3

 
 
438

 
298

 
 
 
 
 
Unallocated
 
 
 
 
Stock-based compensation
 
(46
)
 
(46
)
Restructure and asset impairments
 
(29
)
 
(15
)
Other
 
(4
)
 
(5
)
 
 
(79
)
 
(66
)
 
 
 
 
 
Operating income
 
$
359

 
$
232



Certain Concentrations

Customer concentrations included net sales to Apple of 11% and Intel of 11% for the first quarter of 2017.



22



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made regarding benefits from the Inotera Acquisition; changes in future depreciation expense; our pursuit of additional financing and debt restructuring; the sufficiency of our cash and investments, cash flows from operations, and available financing to meet our requirements for at least the next 12 months; capital spending in 2017; and the timing of payments for certain contractual obligations. We are under no obligation to update these forward-looking statements. Our actual results could differ materially from our historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in "Part II Other Information – Item 1A. Risk Factors." This discussion should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended September 1, 2016. All period references are to our fiscal periods unless otherwise indicated. Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Our fiscal 2017 and 2016 each contain 52 weeks. All production data includes the production of IMFT and Inotera. All tabular dollar amounts are in millions except per share amounts.

Our Management's Discussion and Analysis is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. This discussion is organized as follows:

•
Overview: Overview of our operations, business, and highlights of key events.
•
Results of Operations: An analysis of our financial results consisting of the following:
◦
Consolidated results;
◦
Operating results by business segment;
◦
Operating results by product; and
◦
Operating expenses and other.
•
Liquidity and Capital Resources: An analysis of changes in our balance sheet and cash flows and discussion of our financial condition and liquidity.
•
Recently Adopted and Issued Accounting Standards


Overview

We are 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, multi-chip packages, and other system solutions. Our memory solutions enable the world's most innovative computing, consumer, enterprise storage, networking, mobile, embedded, and automotive applications. We market our products through our internal sales force, independent sales representatives, and distributors primarily to original equipment manufacturers and retailers located around the world. We face intense competition in the semiconductor memory market and in order to remain competitive we must continuously develop and implement new technologies and decrease manufacturing costs. Our success is largely dependent on market acceptance of our diversified portfolio of semiconductor products, efficient utilization of our manufacturing infrastructure, successful ongoing development of advanced product and process technologies, and generating a return on R&D investments.

Acquisition of Inotera

On December 6, 2016, subsequent to the end of our first quarter of 2017, we acquired the 67% interest in Inotera not owned by us for an aggregate of $4.1 billion in cash (the "Inotera Acquisition"), funded with 80 billion New Taiwan dollars (equivalent to $2.5 billion) of proceeds from the 2021 Term Loan, the sale of shares of our common stock to Nanya, and cash on hand. Prior to December 6, 2016, we held a 33% ownership interest in Inotera, Nanya and certain of its affiliates held a 32% ownership interest, and the remaining ownership interest was publicly held.

Inotera manufactures DRAM products at its 300mm wafer fabrication facility in Taoyuan City, Taiwan, and sold such products exclusively to us through supply agreements. As a result of the Inotera Acquisition, we expect to experience greater operational flexibility to drive new technology in products manufactured by Inotera, optimize the deployment of the cash flows of Inotera across our operations, and enhance our ability to adapt our product offerings to changes in market conditions.


23


We are evaluating the fair values of the accounting consideration transferred, assets acquired, and liabilities assumed. Our accounting for the Inotera Acquisition will include the fair value of our previously-held noncontrolling equity interest in Inotera as of the acquisition date as consideration, which differs from the per share amount paid to acquire the controlling interest in Inotera. We will recognize a gain or loss to the extent of the difference between the fair value and the carrying value as of the acquisition date. We expect to complete the provisional purchase price allocation for the Inotera Acquisition in our second quarter of 2017.


Results of Operations

Consolidated Results

 
 
First Quarter
 
Fourth Quarter
 
 
2017
 
% of Net Sales
 
2016
 
% of Net Sales
 
2016
 
% of Net Sales
Net sales
 
$
3,970

 
100
 %
 
$
3,350

 
100
 %
 
$
3,217

 
100
 %
Cost of goods sold
 
2,959

 
75
 %
 
2,501

 
75
 %
 
2,638

 
82
 %
Gross margin
 
1,011

 
25
 %
 
849

 
25
 %
 
579

 
18
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
159

 
4
 %
 
179

 
5
 %
 
157

 
5
 %
Research and development
 
470

 
12
 %
 
421

 
13
 %
 
411

 
13
 %
Restructure and asset impairments
 
29

 
1
 %
 
15

 
—
 %
 
51

 
2
 %
Other operating (income) expense, net
 
(6
)
 
—
 %
 
2

 
—
 %
 
(8
)
 
—
 %
Operating income (loss)
 
359

 
9
 %
 
232

 
7
 %
 
(32
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
 
(132
)
 
(3
)%
 
(85
)
 
(3
)%
 
(126
)
 
(4
)%
Other non-operating income (expense), net
 
(14
)
 
—
 %
 
(4
)
 
—
 %
 
(10
)
 
—
 %
Income tax (provision) benefit
 
(31
)
 
(1
)%
 
4

 
—
 %
 
(3
)
 
—
 %
Equity in net income (loss) of equity method investees
 
(2
)
 
—
 %
 
59

 
2
 %
 
1

 
—
 %
Net income attributable to noncontrolling interests
 
—

 
—
 %
 
—

 
—
 %
 
—

 
—
 %
Net income (loss) attributable to Micron
 
$
180

 
5
 %
 
$
206

 
6
 %
 
$
(170
)
 
(5
)%

Net Sales

 
First Quarter
 
Fourth Quarter
 
2017
 
% of Total
 
2016
 
% of Total
 
2016
 
% of Total
CNBU
$
1,470

 
37
%